Investment Funds Cross Border Distribution in 2021
The European landscape for investment funds Cross Border Distribution is set for a small revolution in 2021. Following the adoption in mid-2019 of both a new directive and a regulation, part of a broader endeavour of the European Commission on the Capital Markets Union, the time has now come for implementation across member states in Europe.
Luxembourg is at the forefront, with a very recent proposal for a law implementing the provisions of the Investment Funds Cross Border Distribution Directive. The law will amend its existing internal legal framework implementing both the UCITS and the AIFM directive.
The authorities in Luxembourg seem to have adopted a very conservative approach, with straight implementation of the provisions contained in the new directive without gold-plating. The new Luxembourg law will be applicable as of the beginning of August 2021.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with Investment Funds Cross Border Distribution.
Not only Premarketing under AIFMD
The Investment Funds Cross Border Distribution directive has been known mostly for the introduction of a definition of premarketing under AIFMD. Rightly or not, the introduction of additional formalities in the context of marketing of alternative investment funds has not been received without criticism. Whilst EU AIFMs will have no other option than grasp the new requirement of a premarketing notification, with sensible reduction of the ability to claim reverse solicitation, this is not the main issue in our view.
On the topic of premarketing, the directive clearly states that the treatment reserved to AIFMs established in third countries should not be more favorable than the one granted to EU domiciled AIFMs. This said, the project of Luxembourg law implementing the Investment Funds Cross Border Distribution Directive does not include additional premarketing provisions for non-EU AIFMs. Whilst traditionally Luxembourg always had a very welcoming approach on premarketing, it may be an exception in Europe. We expect that certain member states will have a different and more strict approach.
Overall, we take the view that limiting the scope of reverse solicitation should be less of a concern for EU domiciled full scope authorised AIFMs with EU domiciled alternative investment funds. In those cases, we see that the immediate consequence of the new provisions for managers will be to have more robust processes to document their marketing activities. Also, obtaining a marketing authorisation under the passport is not a major endeavor or cost within the AIFMD ecosystem. More challenging the situation for non-EU AIFMs, which should in our view restrict even more the scope of their marketing efforts to those EU domiciles where being authorised under the local national private placement regime is a realistic effort.
However, there is more to the Investment Funds Cross Border Distribution directive than the mere premarketing.
What Changes for UCITS marketing
Too much attention on the provisions on premarketing risks to obliterate the importance of some of the other provisions introduced by the directive. The Investment Funds Cross Border Distribution directive will change the way governance surrounding fund distribution is currently structured and related obligations are discharged. The new provisions will impose some necessary adjustments on how managers deal with some of the commercial aspects of their European distribution endeavors.
The current rule is that in order to maintain marketing authorisation a UCITS receives in an EU domicile other than its home state, any such host state regulatory authority has to be kept informed of all the changes happening in the life cycle of that UCITS. Changes that require notification are of different sorts, ranging from amendments to offering documentation and marketing arrangements to notification of mergers and other corporate events.
Whilst the nature of corporate events is such that those might require consent of shareholders, hence most typically those are always notified in advance, changes made to the offering documentation, for instance, would be notified to host state regulators only ex-post. The provisions introduced by the Investment Funds Cross Border Distribution directive will require going forward that also those changes made to the fund offering documentation are notified before these are adopted, with at least one-month advance notice. The idea behind this new requirement is in principle to ensure that local authorities can check compliance with the UCITS directive of any such change.
The same one-month advance notice will also apply to the so-called marketing arrangements and any changes made thereto. The decision to commence marketing a new share class of a fund already authorised in a domicile requires currently a notification made with little to no advance notice. Under the new rules, also this notification shall be made at least a month before it is planned to commence marketing of the new share class. Whilst this might seem a very minor change, the repercussion for distribution and sales teams will be real. Whether in-house or outsourced, sales and distribution teams will be required to plan in greater details their marketing and sales endeavors. An even more systematic approach towards approaching clients will be required to discharge the new advance notification formalities related to creating and making available new share classes for new clients in line with the provisions of the new directive.
New provisions will also be introduced in relation to the process of denotification of UCITS authorised for marketing across Europe. This is for sure a welcome introduction. So far, the process did not enjoy any type of homogenization at European level and was being governed at local level by local practices and rules, most of the times rather obscure and difficult to access. The new provisions in part receive some of the most common practices adopted across Europe but also introduce a change in the dynamics of the denotification process. Whilst a request for denotification under the current regime was to be made directly to the host state authority of the domicile concerned, according to the new provisions such notification will have to be made to the home state authority of the UCITS requesting denotification, for that authority to liaise directly with the authorities of the host states concerned by the request.
Also, the new provisions will change the way existing investors are notified and communicate about the option to redeem their units as part of the denotification process. Where expensive publications in local newspapers are still required in certain EU domiciles, representing one main hurdle and cost of the denotification process, the new rules will introduce more extensive reliance on the internet for publication of the notices and communication with existing investors.
Premarketing and Gold-Plating
We expect that the rest of the EU member states will follow Luxembourg in implementing the new directive in their internal laws in rapid succession during the course of 2021. Whilst there remains room for some gold plating for all the provisions introduced by the directive, we expect that the area of premarketing will be the most sensitive, with some of the most conservative member states across Europe implementing the directive with additional provisions on premarketing for non-EU AIFMs.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with Investment Funds Cross Border Distribution.