New rules on pre-marketing and cross-border distribution of AIFs and UCITS in the European Union

In April this year, the European Parliament voted to adopt a new directive and a new regulation with regard to cross-border distribution of alternative investment funds (“AIFs”) and undertakings for collective investments in transferable securities (“UCITS”). The regulatory package has now been finalised and published in the Official Journal of the European Union.
The new directive and regulation will amend Directive 2009/65/EC (“UCITS Directive”) and Directive 2011/61/EU (“AIFMD”) as well as Regulations (EU) No. 345/2013, (EU) No. 346/2013 and (EU) No. 1286/2014, the latter known as the PRIIPs Regulation. The changes will unify and thus simplify cross-border and pre-marketing activities within the European Union (“EU”).

What is it about?

While the AIFMD and the UCITS Directive entered into force several years ago, there are different approaches with regard to the demarcation between the terms ‘marketing’ and ‘pre-marketing’ of funds, and the approaches to marketing requirements in general in the member states of the EU (“Member States”) – thus hindering asset managers in the EU to distribute their products in Member States other than their own domestic market. The new directive and the new regulation are about to change that. The final texts include not only an implementation of a definition in the AIFMD of the much-discussed term ‘pre-marketing’, but they also harmonise further fund marketing requirements in the EU.

What are the amendments in detail?

According to the final texts “‘pre-marketing’ means

• provision of information or communication, direct or indirect 
• on investment strategies or investment ideas 
• by an EU [Alternative Investment Fund Manager] AIFM or on its behalf 
• to potential professional investors domiciled or with a registered office in the Union 
• in order to test their interest in an [Alternative Investment Fund] AIF or a compartment which is not yet established, or which is established, but not yet notified for marketing in accordance with Article 31 or 32, in that Member State where the potential investors are domiciled or have their registered office, and
• which in each case does not amount to an offer or placement to the potential investor to invest in the units or shares of that AIF or compartment”.

Pre-marketing cannot be assumed “where the information presented to potential professional investors:

• is sufficient to allow investors to commit to acquiring units or shares of a particular AIF 
• amounts to subscription forms or similar documents whether in a draft or a final form, or 
• amounts to constitutional documents, a prospectus or offering documents of a not-yet-established AIF in a final form”.
  
  

The new provisions also include disclaimer requirements for draft fund documents provided to potential investors.

Furthermore, with regard to cross-border distribution rules, the new regulation package will align national marketing requirement and regulatory processes for the verification of marketing material, including the fees in connection with those processes. For one thing, the new rules determine that Member States shall not require a local physical presence for the provision of local facilities for investors, which presumably will simplify and encourage cross-border activities significantly.

What does that mean?

On one hand, the changes signify that pre-marketing will be possible in all Member States under the same rules. On the other hand, the new rules include restrictions of the current pre-marketing practices in some Member States.

Furthermore, the new rules will mostly only apply to EU-authorised AIFMs and those acting on their behalf. Non-EU AIFMs will still need to rely on national private placement regimes.

In general, the changes will lead to more courageous pre-marketing activities by the EU AIFMs across the European Union in two ways. Firstly, it will be possible to test new waters across the EU without having the costs of setting up a new fund. Secondly, the unified pre-marketing rules will enable an EU AIFM to test a market with an existing AIF without the need to passport the AIF first. Both effects lead to a cost-efficient and more diverse fund market offering investors more and better options, without losing sight of the investor protection.

Moreover, it is expected that the entire marketing process within the EU will become more transparent and less complex. Therefore, the new regulation package is very welcome from the point of view of the fund industry as well as from the investor’s point of view, as unnecessary costs can be avoided in the future.

What’s next?

The new directive and the new regulation were published in the Official Journal of the EU on 12 July 2019 and entered into force 20 days later.

EU regulations are generally directly applicable in all Member States, whereas the directive must be implemented into national law within two years. All in all, the decided changes will fully enter into force by mid-end of 2021.