Despite the European Parliament adopting new rules on the cross-border distribution of funds, the ultimate goal of a single European market for investment funds remains, in spite of the availability of marketing passports, far from complete.
The new legislative framework – which covers Ucits and alternative investment funds (AIFs) including EuVECAs, EuSEFs and ELTIFs – has two components: a directive and a regulation.
The aim is to address problems that have been raised by the industry over the past three decades and not been solved by the Ucits and the Alternative Investment Fund Managers Directive (AIFMD) regimes. Marketing funds across EU borders has often proved a nightmare of disparate local marketing rules, legal uncertainty, gold-plating and high registration fees.
To tackle these issues, policy-makers have reached agreement after intense discussion. The framework covers five topics: harmonised rules on pre-marketing; de-notification; the pre-approval of marketing documentation; local facilities for retail investors and EU databases on national marketing rules, regulatory fees and funds marketed cross-border.
The pre-marketing of AIFs is a serious issue for fund sponsors. Investor testing is an essential precondition for the launch of an AIF. The AIFMD remains silent on this important element in the fundraising process, so each EU member state has defined its own pre-marketing rules. This has led to legal uncertainty, a substantial administrative burden and cost, and a considerable compliance risk, including the possibility of sanctions.
The new rules will apply across Europe in a harmonised manner – they explicitly prohibit national gold-plating. Compared with the requirements currently applied in EEA countries, the new conditions are stricter than some and more tolerant than others. They define the documents and contents that can or cannot be shared with potential investors, and they impose an (‘informal’) notification procedure on national regulators. However, they possess the great merit of being harmonised across Europe and of confirming beyond any doubt that investor testing is permitted. Another change is the de-notification of funds from cross-border distribution. This new option is good news, but it is important to note the conditions and legal consequences. De-notification entails various formalities, and for AIFs it triggers a three-year period during which a similar (e.g. successor) product cannot be pre-marketed in the market in question. Fund sponsors should therefore weigh the benefits of de-notification against any possible constraints.
The legislation incorporates rules on pre-approval of marketing documentation, which will require compliance with certain content-related requirements. Whether regulators review marketing documents is left to their discretion, but if they do, they must observe a defined (short) response deadline. It remains to be seen how the market evolves and whether a regulatory pre-check becomes common practice.
Although some provisions will create additional burden and constraints, the new framework has the potential to bring closer a true pan-European fund distribution market. This is good news – even if it comes with a price to pay.
By Silke Bernard, partner with Linklaters Luxembourg
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