Why Reverse Solicitation Is Becoming Obsolete 

If you ever considered expanding your fund operations in Europe, at some point you had a conversation about reverse solicitation. That’s for sure. Likely, the newer to Europe, with a less structured local operation and licensing in place, the more it was presented to you as an option for your European distribution endeavours.  

We already discussed this practice in details from the angle of investment products. That is the case when investment funds are offered to European investors without a local marketing authorisation. In a nutshell, as the concept of marketing evolved in Europe relative to fund products, from a patchwork of national local regimes to a more homogeneous Union affair, we have witnessed a progressive reduction in the grey areas traditionally exploited for this purpose.  

For what concerns the offer of investment activities and services, which comes into play when soliciting investments from European investors, the phenomenon is similar. Data shows that recourse to reverse solicitation in this area is also becoming rapidly obsolete. The process accelerated with the onset of Brexit.  

Reverse Solicitation is Not About You 

Multiple are the misconceptions surrounding this practice. The most frequent is the one pertaining to its actors. It seems to be common wisdom, at least so far, that reverse solicitation is something that fund managers or their for-hire marketing entities can do. If you sit in the US planning to venture in Europe and offer your fund products for the first time, most often than not you will hear that you can also do reverse solicitation.  

If you are a fund manager or promoter, rest assured that reverse solicitation is not about you. The same applies if you are offering investment services from outside of Europe to European investors. The reason is technical in nature. The entire European financial services regulatory infrastructure contains references to reverse solicitation. More namely, both AIFMD and MiFID contain specific provisions to cater for it. In both cases though – and that is by no means a coincidence – it is construed as the ability of investors in alternative investment funds or else clients of investment services and activities to reach out unsolicited to fund managers and investment firms based outside of Europe. The financial services regulatory framework in Europe is indeed designed to allow for European investors to be able to buy at their own initiative financial products and services outside of their geographical borders. This choice was never precluded and it hardly ever will be. European investors are the ones doing reverse solicitation. This is one of the ways Europe retains its openness to international business. But it is unidirectional. The system is not designed to allow non-European fund managers and investment firms to offer their products or services – be it occasionally and even less so on a systematic manner – to European investors without a local authorisation or some sort of recognition. When approaching European investors without a license, these marketing entities might be doing so unlawfully.  

This is already one good reason why next time you hear the words you should be sceptical. But there is more.  

From AIFMD to Brexit 

AIFMD in 2011 introduced for the first time the definition of marketing for alternative investment funds at European level. Until then, the concept of marketing was only governed at national level in the various member states across Europe. More importantly, in the ecosystem of alternative investment funds, marketing practices were historically much more relaxed until then. It was common practice to visit European clients from abroad and offer them investments in alternative investment funds established in offshore jurisdictions. There were no formalities to abide to when doing so.  

It is understandable that at least in the immediate aftermath of AIFMD there might have been a lag for marketing participants to adjust to the new reality. Living in the past has been acceptable and accepted not for long though. More than a decade down the line from the first iteration of AIFMD, with the second version of the directive coming into effect, the music has definitively changed. Many managers from outside of Europe have already given up on the idea of placing non-European funds with European investors, either via reverse solicitation or national private placement regimes. They find it much easier to establish or rent fund structures directly in Europe.  

From the angle of the offer of investment services instead, the picture changed completely with Brexit. Until then, anybody from the US who was remotely serious about being able to raise capital in Europe could have established a presence in the UK. From there, it was easy to venture across the entire European Union. It was not necessary either to establish a proprietary investment firm. Becoming a representative of a UK licensed investment firm, with permissions already passported across Europe, would have sufficed. Reverse solicitation was not an issue then.   

Where Brexit signed the end of European passporting rights for UK firms, the practice started to appear more frequently also in the investment service ecosystem. And so the warnings from European authorities on the misuse of this practice.  

AIFMD II 

AIFMD II signs the beginning of a new era, extending its consequences also to the realm of investment services. Market participants will have to adapt now to the new realities of Europe. As discussed into more details here, the newly introduced delegation rules for the distribution function under AIFMD and UCITS will pierce the veil on all practices where entities without an EU license for investment services are delegated the marketing and distribution function. In other words, it will become increasingly more difficult to hire marketing entities for your funds that can do reverse solicitation. From being a mere regulatory or commercial risk for fund promoters, it will also become a reputational risk for independent management companies.  

The reason for this tightening is extremely simple in our view. The recent evolution witnessed after Brexit saw the introduction of a leasing model in the investment services space in Europe via the so-called Tied Agent arrangements under MiFID. Where this model experienced some bumps on the road of its first implementation, the newly introduced rules under AIFMD are a clear testament to the fact that European authorities see it as a necessary evil. If nothing else, the flourishing of an industry of MiFID principal firms in Europe, dedicated to lease their license via Tied Agents arrangements, will create a new induct of jobs across Europe. That is what Brexit was also about. Repatriation of intellectual capital and job creation in Europe.  

Conclusions 

Reverse solicitation as such might have made sense when it was the only alternative to setting up a proprietary MiFID firm in Europe. Now it is no longer the case. Fund houses and product manufacturers, especially the ones sitting in the UK, have started to screen out marketing entities without licensing coverage of sort for their activities across Europe.  

The MiFID Tied Agents arrangement has become an accepted model. This significantly weakens the case for reverse solicitation to offer financial services in Europe. This is clearly the direction suggested by recent reform of the AIFMD regulation.  

It made sense to use the fax to send information in writing to a counterpart in a nearly instantaneous fashion when that was the only option available. Now you have the email. You get the gist