WHAT ARE THE PROPOSED CHANGES AND HOW WILL THEY AFFECT UK ASSET MANAGERS AND DISTRIBUTORS?
What do the New Rules Cover and When will they be coming into Effect?
On 2 August 2021, revised rules (the “Rules”) in relation to marketing under the AIFMD will come into effect[1]. The Rules will focus predominantly on “pre-marketing” activities.
What is Pre-Marketing?
The idea behind pre-marketing rules is to allow managers to “test the market” and “gauge interest” prior to committing to the costs incurred to launch a Fund or register a notification to market in a specific EU state. Currently, there is no universal definition of pre-marketing with each individual country free determine their own definition and the ability to conduct marketing activities prior to a Fund being open to investment. The Rules will provide a harmonised definition which is expected to cover the following (the “Pre-Marketing Conditions”):
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The proposed Fund must not yet be available to the targeted investor base. In practice, this means the Fund has not yet been legally incorporated or not yet notified to be marketed to the regulator applicable EU Member State;
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The communication is limited to investment ideas and/or strategy which will form the mandate of the investment vehicle;
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The Fund must be managed by an EU AIFM;
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The Fund must only be marketed to professional investors within the EU; and
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The communication must not amount to an offer or placement (as defined under the AIFMD) to investors.
The below conditions will amount to marketing and therefore NOT fall under pre-marketing under the Rules:
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The information provided amounts to a prospectus, subscription documents or constitutional documents or similar documents (irrespective of being in final or draft form)[2];
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The information provided is sufficient to facilitate an investment by the recipient.
Requirements in order to conduct Pre-Marketing
Provided the pre-marketing conditions are met, the AIFM must submit a notification (the “Notification”) to their home regulator within two weeks of the commencement of pre-marketing in any EU Member State[3].
The Notification may take the form of an “informal letter” and must clearly state:
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The EU Member States where pre-marketing will be conducted;
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The dates between which pre-marketing will be conducted; and
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A brief description on the investment strategies and where applicable a Schedule of the AIF or AIF compartments being pre-marketed.
Proposed Amendments to Rules Relating to Reverse Solicitation
Many asset managers are partially reliant on subscriptions from investors where the provision of marketing materials and the commencement of the subscription process is instigated by the investor (“Reverse Solicitation”).
Under the Rules, in the event a professional investor in a EU member state subscribes into a Fund within 18 months of a Notification being submitted in that EU member state, it will be deemed that the subscription has been induced by active marketing which requires the use of an AIFMD Marketing Passport.
There remains uncertainty as to whether the Rules will be applied on a “Member State basis” or a “specific investor basis.” The consequence being that under a Member State basis, following a Notification of pre-marketing in a Member State, the Fund would be unable to accept a subscription from an investor from such Member State under Reverse Solicitation.
How Will the Implementation of the Rules Affect UK Asset Managers Marketing and Pre-Marketing Funds in the EU?
Following the Brexit, UK Asset Managers are no longer classified as EU AIFM’s and are therefore outside the scope of the Rules.[4] As such, UK AIFM’s marketing Funds under the National Private Placement Rules (“NPPR”) will be unaffected.
It would however be prudent for UK Asset Managers marketing and pre-marketing Funds in the EU to anticipate similar rules to be applied by each EU Member State regulator as it is an underlying principle of AIFMD that EU Member States should not adopt regulations which place EU AIFM’s at a disadvantage in comparison with their non-EU counterparts.
Considering the tools EU Member State regulators have at their disposal there is a strong probability that the requirements under which Funds can be marketed under NPPR will be amended to mirror the Rules.
Brooklands would recommend that UK AIFM’s are additionally vigilant in monitoring amendments to the NPPR in each EU Member State where they market an AIF under NPPR and to prepare draft amendments to their marketing strategies and documents which are compliant with the Rules.
How Will the Implementation of the Rules Affect UK Distributors and Intermediaries Conducting Marketing and Pre-marketing Activities in the EU?
The Rules will apply directly to EU domiciled third party distributors[5] acting on behalf of EU AIFM’s to conduct pre-marketing. As a result, UK third party distributors will not be able to conduct pre-marketing on behalf of EU AIFM’s. Further to this, there is no proposed exemption for UK AIFM’s or UK MiFID Firms performing portfolio management services delegated by EU AIFM’s.
UK domiciled third party distributors who intend to act on behalf of EU AIFM’s marketing under the Rules may consider establishing an EU entity to act as a Tied Agent to conduct such activities provided that entity is capable of meeting the eligibility requirements to act as a Tied Agent under Article 35(2)[6] of the MiFID. Tied Agents must have sufficient substance which UK Authorised Firms should consider prior to adopting the Tied Agent route as a solution. Potential costs which should be considered include the establishment of the entity, the registered office and service providers required to operate the entity, compliance with local corporate law and tax regulations and employee related costs. Tied Agents of UK Authorised Firms should only expect this scrutiny to increase as a consequence of Brexit.
How Will the Implementation of the Rules Affect Asset Managers Marketing and Pre-Marketing Funds in the UK?
The FCA will not be required to adopt the Rules and has not indicated that it is considering implementing the conditions of the Rules under new regulation or legislation.
EU and non-EU AIFM’s conducting marketing activity in the UK under NPPR can therefore be relatively comfortable in maintaining their existing compliant marketing strategies and documents in the UK.
If you have any question relating to the content of this Article please do not hesitate to contact a member of the Brooklands Compliance Team by email at compliance@brooklandsfund.com.
[1] Source Regulations:
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019R1156&from=EN
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019L1160&from=EN
[2] Save that, draft documentation is permitted where there is insufficient information for a recipient to facilitate an investment and the documents include the requisite disclaimers.
[3] The home regulator will proceed to notify the EU Member State where pre-marketing is being conducted.
[4] The Rules will not apply to UK AIFM’s irrespective of whether the AIF is domiciled within or outside the EU.
[5] EU Third Party Distributors includes EU authorised AIFM’s, EU investment firms, EU tied agents, EU authorised credit institutions and EU UCITS managers.
[6] MiFID Article 35(2): https://www.esma.europa.eu/databases-library/interactive-single-rulebook/clone-mifid-ii/article-35-0
