In our latest update, our Global Registration Services team write about the important new EU developments relating to the cross-border distribution of investment funds under the Capital Markets Union ("CMU").
Important new EU developments relating to the cross-border distribution of investment funds under the Capital Markets Union ("CMU") are imminent. The EU is about to finalise new rules to facilitate and encourage cross-border fund distribution by removing regulatory barriers and improving cost efficiency. It is also intended to allow EU AIFMs to test market interest in an EU jurisdiction before incurring the expense of passporting an AIF into that jurisdiction. This note discusses the main changes and examines how they may affect your business when distributing UCITS or AIFs cross-border.
The proposals consist of a:
- Directive amending Directives 2009/65/EC and 2011/61/EU with regard to cross-border distribution of collective investment undertakings (the "New Directive");
- Regulation on facilitating cross-border distribution of collective investment undertakings amending Regulations (EU) No 345/2013, (EU) No 346/2013 and (EU) No 1286/2014 (the "New Regulation").
On 24 May 2019, the European Council published the final texts of the New Directive and the New Regulation. They are due to be adopted by the European Council on 14 June and will enter into force 20 days after their publication in the Official Journal of the EU which is expected in the coming weeks. The New Regulation will be directly effective across the EU, although certain important provisions will not apply until two years after it enters into force. Similarly, Member States will have a two year period in which to transpose the New Directive into national law. Overall, this means the changes are likely to take effect by circa Q3 2021.
Provision of Facilities
Directive 2009/65/EC (the "UCITS Directive") gave EU Member States discretion over whether to require the appointment of a local agent by a UCITS to provide facilities to local investors, e.g. facilities for payment of subscriptions and redemptions, availability of fund documents, etc. In many cases, EU Member States exercised this discretion and require a local agent to be appointed; thereby increasing the costs associated with passporting a UCITS fund into those jurisdictions. In proposing the New Directive, the European Commission noted that the local agent requirements are burdensome and of limited value in practice, given that local facilities are rarely used by investors in the manner intended by the UCITS Directive.
Against this background, the New Directive will amend the UCITS Directive and harmonise EU rules on the provision of facilities. In summary, the following requirements will apply:
- A UCITS will be required to provide certain facilities in all Member States where its shares are registered for marketing, e.g. facilities for processing of subscriptions and redemptions; handling of investor complaints; making available fund documents; and acting as a point of contact for competent authorities.
- Crucially, Member States will not be permitted to require a UCITS to have a physical presence in the provision of such facilities, meaning it should be possible to provide the facilities remotely from another Member State.
- A UCITS must ensure that the facilities are provided in the official language (or one of the official languages) of a Member State where its shares are marketed, or in another language which is approved by that Member State's national competent authority ("NCA").
- The UCITS may appoint a third party to perform some or all of the tasks concerned; however, such appointment must be in writing.
In order to ensure a level playing field between UCITS and AIFs, the New Directive will amend Directive 2011/61/EU ("AIFMD") and impose similar requirements for the provision of facilities in Member States where AIFs are marketed to retail investors.
Whilst Member States will no longer be permitted to require a physical presence in the provision of facilities to local investors, it remains to be seen how this will work in practice, especially where marketing to retail investors in certain Member States is concerned. For example, in France or Italy where it is common for retail investors to arrange for subscription or redemption of shares through their local bank, market practice may dictate that local agents will continue to be appointed. In addition, the requirement to provide facilities in the official language of a Member State may result in the appointment of multiple local agents, unless Member State NCAs expressly accept the provision of facilities through English, or unless specialist facilities agent service providers emerge who have coverage across a range of languages.
Although time is needed to see how facilities agent services will be provided in practice, it appears likely that the harmonisation of requirements will reduce the burden of appointing local agents for fund managers who market UCITS in multiple EU jurisdictions. In this regard, we would note that the role currently played by local agents in many EU jurisdictions is largely passive in nature, meaning that unless there is a commercial reason to do so, it should not be necessary to appoint a separate local agent in each jurisdiction once this is no longer legally required.
The New Directive also changes the process by which certain update notifications are filed with host Member State NCAs, e.g. filing of updated fund documents or notifying changes to the entities which carry out marketing activities. The current requirement is for such changes to be notified promptly to each individual host Member State NCA after they have taken effect. The New Directive states that these changes must be notified to both the UCITS home and host Member State NCAs at least one month before implementing the change. This will also apply to the registration of new share classes, meaning that both the home and host Member State NCAs must be notified at least one month in advance of the new share classes being marketed.
In the current regulatory landscape, a UCITS that implements changes to its fund documents or adds a new share class, will generally focus on its home state obligations at the outset and complete the filing / approval process. It is only once the update with the home Member State NCA has occurred that the UCITS will undertake the necessary filings with the host Member State NCAs. Given the new requirement to notify changes at least one month in advance, we believe that UCITS will need to take a more coordinated and simultaneous approach to fulfilling their home and host state obligations when establishing new share classes or filing updates with their home Member State NCA.
De-registration for marketing
The New Directive harmonises the procedure when a UCITS, including any of its share classes, are de-registered for marketing in a host Member State. It was noted by the European Commission that the process for de-registering a UCITS varied between EU Member States due to a regulatory gap at EU level. The new provisions are designed to fill this gap and to align the procedure for de-registering a UCITS with the de-registration process for AIFs.
The New Directive requires that certain conditions are fulfilled in order to de-register a UCITS, including:
- There must be a blanket offer to repurchase or redeem, free of any charges, all shares held by investors in the host Member State. The offer must be publicly available for at least 30 working days and addressed individually to all investors whose identity is known;
- The intention to de-register must be
made public at least by electronic means and in a medium which is
suitable for a typical UCITS investor;
Note: The information in 1) and 2) above must be provided in the official language (or one of the official languages) of the host Member State, or in a language approved by that state's NCA.
- Contractual arrangements with financial intermediaries or delegates must be modified or terminated with effect from the date of de-registration in order to prevent any further offering of shares.
While notifications to de-register are currently notified directly to the host Member State NCA, the New Directive requires notifications to be filed with the UCITS home Member State NCA for onward transmission to the host member state NCA and the European Securities and Markets Authority ("ESMA").
Notably, the New Directive will not impose any pre-conditions for de-registration relating to the number of investors in a Member State who remain invested in the UCITS. Provided the UCITS is no longer being marketed / offered in the Member State in question, it should be possible to de-register. Where investors from that Member State remain invested in the UCITS, however, the UCITS must continue to provide them with any updated information and fund documentation as required by the UCITS Directive, e.g. updated prospectus, constitution, KIIDs, annual and interim financial statements, etc.
As noted above, the New Directive also amends AIFMD and introduces a similar process for de-registering AIFs which have been registered under Article 32 of AIFMD.
The harmonisation and certainty to be introduced by the New Directive must be welcomed. As the requirements for de-registration currently vary between certain jurisdictions, it can be difficult and time consuming to satisfy the conditions for de-registration in all jurisdictions where a fund is marketed. In addition, certain jurisdictions require that there are no investors (or a maximum number of investors) remaining in a fund in that jurisdiction before it can be de-registered. In the context of ETFs, or where investors invest in a fund through nominee arrangements, it can be challenging for a fund manager to evidence these requirements. The New Directive will remove this link between the number of investors remaining in a fund and the requirements for de-registration, so that the most important determining factor in whether a fund can be de-registered, is whether it continues to be marketed / offered in a particular jurisdiction.
Article 77 of the UCITS Directive contains obligations on UCITS marketing communications e.g. that marketing communications should be identifiable as such, and should be fair, clear and not misleading. Given that these only apply to UCITS, the European Commission decided to introduce a level playing field between UCITS and AIFs in order to safeguard investor protection across the board. Thus, the New Regulation imposes obligations with regard to marketing communications which will apply to UCITS managers and AIFMs (as well as managers of qualifying social entrepreneurship funds – "EuSEF managers" and managers of qualifying venture capital funds – "EuVECA managers").
Article 4 of the New Regulation requires UCITS managers and AIFMs to ensure that marketing communications meet certain standards, including the following:
- All marketing communications addressed to investors must be identifiable as such;
- The risks and rewards of investing must be described in an equally prominent manner;
- All information must be fair, clear and not misleading;
- Marketing communications of a UCITS must not contradict or diminish the significance of information contained in the prospectus or KIID, and must indicate the existence and availability of these documents; b) Marketing communications of an AIF must not contradict the information disclosed in accordance with Article 23 of AIFMD (or in the prospectus in certain circumstances);
- Marketing communications of a UCITS must state where, how and in which language investors or potential investors can obtain a summary of investor rights and the summary should be accessible via hyperlink in the communication; and
- Marketing communications of UCITS or AIFs must contain clear information on the possibility that arrangements for marketing may be terminated.
The New Regulation envisages that ESMA will issue guidelines on the application of these requirements.
While the above requirements will apply at EU level in all Member States, it must be noted that individual Member States may continue to impose separate national law requirements. In addition, marketing communications issued by MiFID investment firms may also be subject to the general "fair, clear and not misleading" requirement in Article 24(3) of MiFID II and Article 44 of Commission Delegated Regulation (EU) 2017/565.
Under the New Regulation, there will be no general requirement for prior notification of marketing communications in order to ensure compliance with Article 4. Notwithstanding this, Article 7 of the New Regulation will permit Member State NCAs to require prior notification of marketing communications of a UCITS (or retail AIF), solely for the purpose of verifying that they comply with the New Regulation and national law provisions. This is in keeping with the current regulatory landscape whereby certain Member State NCAs require marketing communications which are used in that jurisdiction, to be submitted for prior approval. As the requirements and procedures around this vary between Member States, however, Article 7 of the New Regulation seeks to introduce a harmonised procedure in all Member States that require prior notification. Once marketing communications are notified to the NCA in question, the NCA should inform the UCITS manager or AIFM within 10 working days of any request to amend its marketing communications. NCAs that require prior notification must also publish information on their website on how such prior notification should occur. These measures should help to introduce greater certainty for UCITS managers or AIFMs (of retail AIFs) who use marketing communications, as well as to minimise delays in having marketing communications approved for use.
Pre-marketing – AIFMD
In an AIFMD context, the New Directive will introduce a definition of "pre-marketing" to enable EU AIFMs to test market interest before establishing an AIF or registering it under Article 31 or Article 32 of AIFMD. The current position on pre-marketing, whether it is permitted and, if so, the conditions under which it is permitted, vary considerably between Member States and are often unclear. In practice, this can make it difficult for EU AIFMs to pose an investment strategy and gauge market appetite on a cross-jurisdictional basis before launching an AIF. The New Directive harmonises the definition of "pre-marketing" across the EU and will introduce clear parameters within which EU AIFMs can engage in pre-marketing activities to professional investors. In circumstances where the cost of initial registration can act as a barrier to marketing AIFs cross-border, the harmonised rules on pre-marketing should assist EU AIFMs to target only specific markets where investor interest has been established.
EU AIFMs will be permitted to engage in pre-marketing of an AIF (or a sub-fund of an AIF) which is not yet established, or if established, which has not yet been notified for marketing under Article 31 or Article 32 of AIFMD in the Member State where the potential investors are domiciled. There are certain conditions that will apply to pre-marketing including that: the information must not be sufficient to allow investors to commit to acquiring shares in an AIF and must not constitute an offer or invitation to subscribe for shares in an AIF; the information must not amount to subscription forms or similar documents in draft or final form; an EU AIFM shall be required to notify its home Member State NCA within two weeks of having commenced pre-marketing outlining certain details e.g. regarding the Member States where pre-marketing is being conducted, investment strategies presented and a list of the AIFs which form part of the pre-marketing activities (if relevant); and an EU AIFM must ensure that pre-marketing is adequately documented.
Any subscription made by an investor within 18 months of the commencement of pre-marketing of shares of an AIF referred to in the context of pre-marketing (or established as a result of pre-marketing), shall be considered the result of marketing, and as such, shall be subject to the AIFMD registration requirement under Article 31 or Article 32. In essence, this means an AIFM cannot rely on reverse solicitation after carrying out pre-marketing activities.
Where a third party is appointed by an EU AIFM to conduct pre-marketing activities on its behalf, the third party must be authorised as an investment firm under Directive 2014/65/EU ("MiFID II").
Finally, it is important to note that pre-marketing under the New Directive will be available to EU AIFMs only. The provisions on pre-marketing do not apply to non-EU AIFMs, who must continue to operate within the rules applicable in each individual jurisdiction. In addition, there will be no harmonised pre-marketing regime for UCITS, despite this being contemplated in the initial consultations on CMU.
The New Directive and New Regulation contain welcome enhancements in the area of cross-border distribution of investments funds, particularly in the context of pre-marketing of AIFs and the requirements for de-registration. The increased harmonisation should result in greater certainty for UCITS managers and AIFMs with a distribution footprint across the EU, as well as removing barriers for those managers planning to distribute in new EU markets. While these developments should help to improve the flow of capital and increase choice for investors, they arguably do not represent the silver bullet that many managers had hoped for at the outset of the CMU project. In particular, the new requirements regarding update notifications for UCITS will require special forward planning most notably in the context of new share class launches. In addition, depending on how the requirements regarding the provision of facilities evolve in practice, further work may be required here to reduce the burden for managers.
How the Maples Group can help
Maples Group Global Registration Services ("Maples Group GRS") supports UCITS1 and AIFMs1 in their multi-market distribution strategies by providing an integrated global network of experts coordinated by a dedicated central team supporting all legal and regulatory aspects governing the cross border marketing of investment funds on both a private placement and public offer basis.
1. Domiciled in Ireland and Luxembourg.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.