Proposed changes to the AIFM and UCITS Directives

The European Commission (“EC”) has published a proposed directive and a proposed regulation amending Directive 2011/61/EU on Alternative Investment Fund Managers (“AIFMs”) and Directive 2009/65/EC on Undertakings for Collective Investment in Transferable Securities (“UCITS”) to facilitate cross-border marketing of funds, including pre-marketing under the AIFM Directive.

The EC has adopted a package of measures to deepen the Capital Markets Union (“CMU”), along with publishing the Communication “Completing Capital Markets Union by 2019 – time to accelerate delivery“.  The EC is committed to put in place all building blocks of the CMU by mid-2019. The measures presented here and the remaining CMU proposals that will be presented by May 2018 make it possible that legislation can be adopted before European Parliament elections in mid-2019.

The package includes:

• proposals on facilitating the cross-border distribution of collective investment funds, which also amends European Union (“EU”) Regulation No 345/2013 on European venture capital funds (“EuVECAs”) and Regulation No 346/2013 on European social entrepreneurship funds (“EuSEFs”);
• a proposal for an enabling EU framework on covered bonds;
• a proposal for an enabling framework on European crowdfunding service providers for businesses;
• a proposal on the law applicable to the third-party effects of assignments of claims; and
• a Communication on the applicable law to the proprietary effects of transactions in securities.

This article will concentrate on the first bullet point; please contact Complyport should you require further information on the other four bullet points.  We note there is no mention of the Markets in Financial Instruments Directive (“MiFID”) in the package.

Summary of Proposals

• AIFMs will need to facilitate subscriptions and redemptions by retail investors;
• marketing communications should present the risks and rewards of investing in alternative investment funds (“AIFs”) and UCITS;
• fund marketing rules must be published by national regulators and maintained centrally by the European Securities and Markets Authority (“ESMA”);
• verification of compliance with national provisions, if required, must be decided within 10 working days;
• local levies, fees or charges must be proportionate to supervisory tasks carried out and published on regulators’ websites;
• ESMA must maintain a central database on all AIFMs, UCITS management companies, AIFs and UCITS;
• the EuVECA and EuSEF Regulations will allow managers to test investors’ appetite for opportunities or strategies through pre-marketing.

Proposals on facilitating the cross-border distribution of collective investment funds

The EU have recognised that regulatory barriers, namely EU Member States’ marketing requirements, regulatory fees and administrative and notification requirements, currently represent a significant disincentive to the cross-border distribution of investment funds in the EU.

The proposed Directive amends certain provisions in the AIFM Directive and the UCITS Directive with the purpose of reducing those barriers. The new measures are expected to reduce the cost for fund managers of operating cross-border and should support more cross-border marketing of investment funds.

The EC also recognise that such provisions have been identified as burdensome or insufficiently clear and allowed the creation of additional requirements (‘gold plating’) when transposed by Member States. These amendments are consistent with the objectives of the AIFM Directive and the UCITS Directive, which aim to establish a single market for investment funds and facilitate the cross-border distribution of investment funds. The proposal also aligns the rules between the different legislative frameworks for investment funds. The EC believes consistency with existing policy provisions is therefore safeguarded and that increased competition will help to give investors more choice and better value, while safeguarding a high level of investor protection.

The EC states that investment funds are an important tool to channel private savings into the economy and increase funding possibilities for companies; the EU investment funds market amounts totals EUR 14.3 trillion. However, the EC believes this market has not yet achieved its full potential.

Only just over a third (37%) of UCITS funds and around 3% of AIFs are registered for sale in more than three Member States. This appears to be due to regulatory barriers that currently hinder the cross-border distribution of investment funds.

The proposed changes aim to remove these barriers for all kinds of investment funds; making cross-border distribution simpler, quicker and cheaper.

Amendments to the AIFM Directive

A pre-marketing definition is added to Article 4(1): ‘a direct or indirect provision of information on investment strategies or investment ideas by an AIFM or on its behalf to professional investors domiciled or registered in the Union in order to test their interest in an AIF which is not yet established’.

A new Article 30a lays down the conditions under which an EU AIFM can engage in pre-marketing activities as the EC considers it important to provide sufficient safeguards against potential circumvention of the requirements of the AIFM Directive that apply when marketing AIFs in the home Member State or across a border in another Member State. An AIFM is therefore allowed to test an investment idea or an investment strategy with professional investors but may not, as prescribed by the new Article 30a, promote an established AIF without notification. Moreover, when professional investors revert to the AIFM following their pre-marketing activities, a subscription to the units or shares of an AIF that is ultimately established or of a similar AIF managed by that AIFM will be considered the result of marketing.

Article 32a is inserted to complement the notification procedures with the procedure and conditions for AIFMs who wish to discontinue their marketing activities in a particular Member State. An AIFM can be authorised to de-notify the marketing of an EU AIF it manages only if there are a maximum of 10 investors who hold up to 1% of assets under management of this AIF in an identified Member State. The AIFM must notify competent authorities of its home Member State how it fulfils the conditions for de-notification and for a public notice of the de-notification. The AIFM must also notify the authorities of the offers presented to the investors to repurchase units and shares of the AIF that is no longer going to be marketed in their Member State. All transparency requirements that investors must fulfil pursuant to the AIFM Directive will continue to apply to investors who retain their investment after de-notification of the marketing activities in the selected Member State.

Article 43a is inserted to ensure a consistent treatment of retail investors regardless of the type of fund in which they decide to invest. Where Member States allow AIFMs to market units or shares of AIFs in their territories to retail investors, those AIFMs should also make facilities available to retail investors to serve situations such as making subscriptions, making payments or repurchasing or redeeming units. For this purpose, AIFMs will be able to use electronic or other means of distance communication.

Amendments to the UCITS Directive

Article 77 to be deleted as the enhanced requirements for the marketing communication are laid down in the proposed Regulation on facilitation of cross-border distribution of funds. The principles established for marketing communications will apply to all asset managers who market their funds, irrespective of their type; thus ensuring a level playing field and the same level of investor protection across all Member States.

Article 91(3) to be deleted as the proposed Regulation provides for specific rules on the transparency of national laws and requirements applicable to marketing communications with respect to all collective investment funds, thereby ensuring comprehensive, clear and up-to date information is collected and published by ESMA.

Article 92 to be amended. The current Article 92 does not impose the obligation on UCITS to have local facilities in each Member State where UCITS are marketed but many Member States require facilities on their territory for ‘making payments to unit-holders, repurchasing or redeeming units and making available the information which UCITS are required to provide’. A few Member States also require these local facilities to perform additional tasks, like handling complaints or serving as a local distributor or being the legal representative (including dealing with the national competent authority).

Requirements to have local facilities are costly and have limited added value given the use of digital technology. Therefore, this proposal bans the imposition of physical presence. While requiring that facilities are established in each Member State where marketing activities are carried out and which serve situations such as making subscriptions, making payments or repurchasing or redeeming units, this proposal allows fund managers to use electronic or other means of distance communication with investors and the information and means of communication should be available to investors in the official language(s) of the Member State where the investor is located.

The insertion of new paragraph 8a in Article 17 and replacement of paragraph 8 in Article 93 aim to align notification procedures for UCITS across funds types and across Member States by introducing a precise time frame for communicating the competent authorities’ decisions. A precise time frame is also deemed necessary to ensure that procedures governing changes to the information provided by AIFMs in the notification process are aligned with the AIFM Directive.

A new Article 93a is added to complement the notification procedures with the conditions for UCITS who decide to stop their marketing activities in a Member State. Asset managers are allowed to de-notify the marketing of their UCITS only if a maximum of 10 investors who hold up to 1% of assets under management of the UCITS have invested in the UCITS in an identified Member State. The competent authorities of the home Member State of the UCITS will verify the compliance with this requirement, including the transparency and publication requirement for investors and the repurchase offer. All obligations to inform will continue to apply to remaining investors after de-notification of the marketing activities in a Member State.