The New Process for UCITS and AIF De-registration
Summer 2021 marked the entry into force in Europe of the Cross-Border Distribution Directive and, with it, also of a new – more streamlined – process for UCITS and AIF de-registration.
So far governed exclusively by local national rules and practices, imposing expensive publication requirements in certain European domiciles, the process for UCITS and AIF de-registration gets now a complete overhaul. Under the new regime, requirements are imposed at European level and the process becomes regulator vis-à-vis regulator, as opposed to the previous regime, where interaction was exclusively and directly with the authorities of the host member states.
Whilst requirement for both UCITS and AIF de-registration are the same under the new regime, there are additional implications for AIFs de-registration, with a whopping 36 months pre-marketing ban imposed on de-registered AIFs, as well as similar investment strategies or investment ideas.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with UCITS and AIF De-registration.
Commercial considerations behind UCITS and AIFs de-registration
Various are the reasons behind the decision to withdraw the marketing authorisation of a UCITS or AIF in specific EU member states – in jargon de-registration. Most frequently, despite marketing efforts carried out by its promoter, a fund does not reach the level of traction desired in a specific local market or no traction at all. Most often than not, in these cases, funds might also be liquidated or terminated. However, UCITS and AIF de-registration does not necessarily take place when no investors are left in the funds. There might be instances where investors might still be invested in a specific domicile, yet for the strategy having reached its maximum capacity the fund is then closed to new subscriptions, hence no more marketing necessary or required.
Irrespective of the specific commercial reasons, the immediate consequence stemming from UCITS and AIF de-registration is that de-registered funds can no longer be lawfully marketed in that specific domicile (and AIF also no longer be pre-marketed as mentioned above). The flipside though is that, as of the moment of the completed de-registration, national competent authorities of the host member states can no longer require to demonstrate compliance of those UCITS and AIFs with national laws, regulations and administrative provisions governing the marketing. That also means no longer supervisory or notification fees applicable. However, in cases where local investors remain invested in the de-registered funds, updated fund prospectuses and KIIDs will have still to be provided to both local regulators and investors.
Process and Requirements for UCITS and AIF de-registration
The Cross-Border Distribution Directive was introduced as part of the broader paradigm of the Capital Markets Union, whose aim is to reduce barriers and obstacles to cross-border distribution in Europe. The creation of a homogeneous process and the introduction of requirements at the EU level for UCITS and AIF de-registration aims at limiting gold-plating practices at national level, which represent the unnecessary costs and operational inefficiencies which the Capital Markets Union seeks to eliminate.
A brand-new article under both the UCITS and AIFMD governing de-registration was so introduced and the new process for UCITS and AIF de-registration will be applicable not only to so called sub-funds or compartments but also in cases of withdrawal of marketing authorisation in relation to specific share classes.
From a more practical perspective, below the conditions introduced by the new article on UCITS and AIF de-registration:
- Make public for at least 30 business days and address individually to all known investors in the specific EU domicile at issue a blanket offer to repurchase or redeem units held by those investors;
- Publish, also by electronic means, a notice of the intention to terminate marketing of such units in the Member State;
- Modify or terminate all existing agreements for distribution or placement of the specific units or shares, to ensure that no distribution or placement takes place after denotification has been completed.
Once these steps have been completed, a notification will have to be made to the Home State authority of the fund at issue, requesting de-registration for the specific EU domicile. This part of the process is very similar to a notification of a marketing passport, with a notification letter to be filled in as well as attachments to be provided in certain cases. Whilst some EU domiciles have released a specific notification letter to be used for UCITS and AIF de-registration, some others rely on the general templates of notification letters issued at European level. In practice, there is some general reliance on confirmations made by the fund promoter or management company in the notification letter that the conditions are met and it is required that a link is provided in the letter to the web-address where the notice has been published. It doesn’t hurt the process also to provide copies of the notice, which should be translated in the local language of the EU domicile where de-registration is sought.
In a manner very similar to a marketing passport notification, the Home State Authority has no more than 15 business days from receipt of a complete notification to make the transmission to the competent authorities of the Host State at issue and provide confirmation to the fund promoter.
As of the date of receipt of the confirmation, the funds will be no longer under obligation to comply with the local rules, regulation and administrative practices on marketing in that specific domicile, save for the obligation to keep providing fund information both to the competent authority and local investors in cases where any are left in the funds after the UCITS and AIF de-registration.
Conclusions
Whilst the introduction of the new rules and process is welcome, there are a few considerations to make about the ability of these to contribute to the overarching goal of making Cross-border distribution in Europe more streamlined.
On the one hand, the fact that requirements have been uniformed at European level and that there is leverage on digitalisation to make the process more cost effective is very positive. However, the fact that this same process, entailing nevertheless that a notification letter is completed and provided to a Home State authority, will be applicable also to mere de-registration of share classes seems to conflict with the intention to make Cross-border Distribution in Europe overall less complicated and bureaucratic.
It is also noteworthy to mention that the interpretation of the new rules coming from certain national competent authorities gives unexpected avenues for making the process of de-registration simpler and more efficient in certain situations. This is the case of Germany for instance where, in case of liquidation of funds, there is an assumption that the marketing will be terminated anyhow, hence requiring only an amendment notice, rather than the entire process of UCITS and AIF de-registration via the home state of the funds.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with UCITS and AIF De-registration.