Although Luxembourg decided not to “gold plate” the EU Cross-Border Distribution Directive for funds, other member states have moved to add their own local requirements when transposing the legislation. What should asset managers be looking for as these rules are rolled out?
The deadline for the transposition of the directive was August 2 and so far, only a handful of member states have fully implemented the changes. Yet already there are early signs of how this text might be interpreted locally across the EU. The reform, passed in 2019 through an EU regulation and a directive, aims to achieve a more homogenous fund distribution environment. Also, some of these moves will make it harder for players based in non-member-states to access the single market, which is potentially a Brexit effect.
Main change
The main change is that alternative investment fund (AIF) promoters will be able to use a pre-marketing process. This will enable them to talk to investors without the cost of having to make a formal application for a regulatory passport. Rather, the supervisor will need to be notified by the AIF manager (AIFM) or a third party and this will give an 18-month window for these prospection activities.
End of reverse solicitation
This will have a knock-on effect for so-called reverse solicitation. This is the process by which EU-based clients have been able to request a business relationship with service providers from outside the EU that do not have EU authorisation. However, under the new rules, the pre-marketing process will mean any fund subscription made during the 18-month period will be deemed to have resulted from that process. This will require a full notification to be made to the relevant host regulator. “For us, this pretty much means the end of reverse solicitation,” said Robert James Glover, Global Fund Distribution Partner at PwC Luxembourg.
No direct provision has been made regarding private placements in the legislation. Yet in an accompanying text it states that this regime should not be used to disadvantage EU AIFMs. Private placement is when assets are sold to pre-selected investors rather than on the open market and inherent in this is the risk of favouring non-EU AIFs, as they don’t have to comply with a range of regulations applicable within the single market. Could this text leave the door open to local regulators to make changes that will limit access to private placement?
Simplification for UCITS
For UCITS there will be a useful simplification as there will no longer be a need for physical local facilities agents being required to provide basic information to investors. Henceforth this can now be done remotely online. “This is an area where I see the greatest impact for managers in terms of reducing operational complexity and making cost savings,” said Glover.
“The requirement for local facilities agents has been money for old rope. Several thousand euros per year per entity in each country. It’s pretty rare that somebody walks off the street asking for a prospectus or subscription form,” he added. Nevertheless, he pointed out that in some markets, such as Spain and Italy, these agents play a significant role in the distribution chain, so a one-size-fits-all approach would not be appropriate.
Glover said he has been surprised that some countries have added local language requirements to this measure. It had been assumed that having this information in English online would suffice, but already the Belgian legislator has insisted on Dutch, French and German versions, with the Danish government also taking a similar option.
The new rules also tighten up requirements around marketing communications, which now must be clearly identifiable as such. Also, the standard that communication must be fair, clear and not misleading now applies not only just for retail communications but for alternatives clients. “Managers are waking up to the fact that they are now fully responsible for the marketing documents that are being used,” Glover said.
Overall, the regulation and directive have made some improvements, but nevertheless cross border fund distribution remains a relatively complex business, and time will tell how these rules bed down and be interpreted. “Until the directive is transposed into each individual member state, it’s all a little in the lap of the gods,” said Glover.