When the Alternative Investment Fund Managers Directive (“AIFMD”) came into force back in the heady days of 2013, it brought into the financial lexicon terms that are now well-worn phrases such as “Article 42” or “Article 36” and of course “reverse solicitation”. Ever since, the question has lingered as to when “marketing” of a fund under AIFMD actually begins, with almost every jurisdiction enforcing their own distinct boundaries.
Six years on, and with a complete review of AIFMD looming, the European Council has adopted a Directive on the Cross-Border Distribution of Collective Investment Funds (the “CBDF Directive”) and an amending regulation. Collectively these documents, referred to as “the Omnibus Proposals” as they amend both AIFMD and the UCITS directive, seek to give some much needed clarification on how pre-marketing and AIFMD-marketing interact and when pre-marketing actually starts and ends.
Having been adopted by the council on the 14th of June 2019, each jurisdiction will have the usual 24 months from publication in the Official Journal of the European Union to implement the proposals.
So, is the definition of pre-marketing changing?
Pre-marketing, or soft marketing, was always something of a vague concept with variations across different jurisdictions (some arguing that it simply didn’t exist!). Now, under the Omnibus Proposals, pre-marketing will be defined as follows:
- “…provision of information or communication, direct or indirect, on investment strategies or investment ideas by an EU AIFM or on its behalf, to potential investors … in order to test their interest in an AIF or a compartment, which is not yet established or which is established, but not yet notified marketing in accordance with Article 31 or 32…”
A new Article 30a of the AIFMD will be added setting out the conditions for this pre-marketing detailing what must not be done in order to avoid triggering articles 31 and 32 of AIFMD and thus be considered marketing. Essentially, the information provided must NOT:
- Allow investors to commit to acquiring units or shares in a particular AIF
- Be subscription forms (or similar) whether in draft or final form
- Be considered as constitutional documents, prospectus or offering documents of the unestablished AIF
Any draft prospectus or equivalent provided must be clearly labelled as “draft” and any information contained within should be subject to enough change, or be so incomplete, that it would not allow potential investors to make investment decisions based upon them. This means that simply putting a “draft” watermark across documents will not be sufficient to be classified as pre-marketing.
AIFMs will be required to notify their home regulator within two weeks of any pre-marketing taking place, along with the following details:
- How long pre-marketing is expected to take place
- In which jurisdictions it is expected to take place
- What strategies are being presented
- What information is being provided
- A list of AIFs and compartments being pre-marketed (where applicable)
The home regulator will then notify the other jurisdictions where pre-marketing is expected to occur.
Does this have an impact on reverse solicitation?
If the concept of “pre-marketing” gave people pause to think, then reverse solicitation could be said to have caused real headaches both for investment firms and regulators. It is hardly surprising that, with the clarification on pre-marketing, the Omnibus Proposals also address reverse solicitation.
Whereas it should be clear that an investor provided with pre-marketing material can only then invest in the AIF subject to compliance with the full AIFMD Marketing restrictions (i.e. Articles 31 and 32 of AIFMD), the Omnibus Proposals go a step further and state an investment in an AIF within 18 months of pre-marketing must be “considered the result of marketing”. This would appear to mean that where an AIF pre-markets in a jurisdiction any investment in the AIF within 18 months would require the AIFM to comply with the AIFMD Marketing restrictions thereafter regardless of if the investor received any pre-marketing material. In other words, the already limited ability to claim reverse inquiry has been curtailed even further.
Anything else to be concerned about?
In addition to the pre-marketing and reverse solicitation clarifications, the Omnibus Proposals also amend AIFMD to restrict which third-parties can be appointed to engage in pre-marketing activities. Although many AIFMs will either be marketing the AIFs themselves, or working with existing AIFMs as delegated managers to market the AIFs, there is obviously a large capital introduction market in place across the globe. Once the Omnibus Proposals come into effect however, only MiFID authorised firms, Capital Requirement Directive Credit Institutions, UCITS management companies, and other EU AIFMs may be appointed to engage in pre-marketing across the EU. For some, this may require a material rethink of their marketing and distribution strategies.
Additional items include an amendment prescribing a standard procedure for de-notification of an AIF for marketing purposes and rules on marketing communications requiring the description of the risks and rewards for investing in an AIF being in an equally prominent manner.
The Omnibus Proposals also bring in a requirement to have in place “facilities” when marketing to retail investors. Those facilities must support certain processes including subscriptions and redemption of orders and allow for the provision of information, including the latest annual report and governing documents of the AIF. Where the facilities are provided by a third party, the appointment should be via written contract (with the AIFM). Thankfully, electronic or other means of distance communication may be employed, and thus assuaging concerns that a local, physical presence (in jurisdiction of the retail investors) would be required. These requirements mirror pre-existing obligations (and changes made thereto) in the UCITS directive.
Are there any implications for non-EEA AIFMs?
The Omnibus proposals apply only to EEA AIFMs marketing EEA AIFs. Non-EEA AIFMs or EEA AIFM marketing a non-EEA AIF, will still need to make use of the National Private Placement Regimes (“NPPRs”) for the time being. One might suggest that it is likely, however, that those NPPRs may be amended to ensure a level playing field. We would suggest that all AIFMs, regardless of jurisdiction of either the manager or the AIFs, consider the pre-marketing definitions and reverse solicitation aspects, in preparation for changes to the various NPPRs.
It has taken some time, but it is nevertheless reassuring to see the EU taking notice of the issues AIFMs have had with pre-marketing and that these proposals are being brought in ahead of the aforementioned review of AIFMD expected later this year. Precisely how each member state chooses to implement these changes will be interesting to see but the hope is that this will allow for more harmonising of the pan-European marketing landscape.
How ACA Can Help
ACA has extensive experience in the review of marketing material and offers a marketing review assistance solution that allows your firm to significantly reduce the amount of time and resources devoted to the marketing and investor communication review process. ACA’s skilled compliance professionals can step in during periods of high volume or assist your firm on an ongoing basis with a variety of communication review.
For More Information
Should you have any questions related to the above, or wish to enquire further about these services, please contact Andrew Poole, Louis Ward or your usual compliance consultant on +44 (0)20 7042 0560.