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.

The post Proposed changes to the AIFM and UCITS Directives first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .

From the outset the Guidance makes it clear that whilst the FCA does not want to prevent their use – and indeed acknowledges that they can be powerful channels of communication – it does want firms to remember that although they may be in a digital format they can be ‘customer communications’ and, potentially, ‘financial promotions’.  The Guidance emphasises that “a promotion is a promotion”. This is not the first time that the Regulator has raised the issue of ‘digital media’ e.g.  a speech in 2012 (see Regulatory Roundup 45) reminded us that the financial promotion rules are media-neutral i.e. the rules focus on the content regardless of the medium used to communicate that content.

For those firms considering using social media the Guidance provides several illustrated examples of compliant and non-compliant tweets and banners and suggests the use of image insertion to overcome any problems that might be associated with character limitation. It also provides guidance when such communications are forwarded, for instance a tweet intended for another authorised person which is retweeted to a retail customer.

However, despite its title, firms that have no immediate plans to use such media will find the Guidance a useful addition to their reference material.  By way of example, the discussion on the use of (compliant) links to websites within a tweet (para 1.13) can be equally relevant to a firm’s website which contains links to other pages of the site.  Elsewhere the Guidance provides commentary on the meaning of, and the relevance of, “in the course of business“; the benefits of image advertising (e.g. it is exempt from most of COBS 4) and the importance of balance in terms of risk and reward.

The post Financial Promotions – Social Media first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .

By 22 July 2015 ESMA has to provide the European Commission with an opinion on both the functioning of the EU passport and to issue advice on whether the passporting regime should be extended to non-EEA AIFMs and to EEA AIFMs marketing non-EEA AIFs. The Articles covering these activities already exist in the AIFMD but by virtue of Article 67 they are not ‘switched on’ until ESMA has provided its advice to the EC. Should the input from ESMA be positive the EC has three months in which to adopt a delegated act specifying the date when these Articles become applicable in all Member States

With this in mind ESMA has published a ‘Call for Evidence’ paper (2014/1340) inviting comments from stakeholders on the matters raised within by 8 January 2015.

The post AIFMD Passport first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .

One particular requirement under the UK AIFMD Regulations 2013 (Regulation 50) is that a full-scope UK AIFM is not permitted to market an AIF in the UK unless it has received approval from the FCA (where a UK or EEA AIF) or notified the FCA (where a non-EEA AIF or where it is a UK AIF/EEA AIF but is a feeder fund, the master fund of which is either managed by a non-EEA AIFM or the feeder itself is non-EEA). The former is in keeping with AIFMD requirements whereas the latter represents marketing under the national private placement regime (‘NPPR’). For the record there are similar requirements for full-scope EEA and third country AIFMs in Regulation 50.

This will probably have been addressed as part of the AIFMD authorisation process but, of course, any AIFs that may be launched following authorisation will not have been included. Firms should therefore ensure that they are compliant with Regulation 50 and that their operational procedures capture these requirements where relevant.

The post AIFMD: Marketing Reminder first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .

The latest to suffer the Regulator’s wrath are John Leslie and Jeffrey Bennett. In addition to each having a £28,000 financial penalty imposed upon them they have also had their respective Approved Person status withdrawn and, by means of Prohibition Orders, they are both banned from performing any significant influence function (basically any Controlled Function except for the CF30 customer function).

At the core was a failure to ensure that there were proper systems and processes in place to prevent the promotion of UCIS to approximately 2,900 retail investors without an adequate assessment having been made of their eligibility to receive such material.

It didn’t help the cases of Mr Leslie and Mr Bennett that the approximately 880 investors who decided to invest €38m in the three property development UCIS on a non-advised basis are now probably holding worthless investments.

The current rules on the promotion of UCIS are set out in COBS 4.12 (the reference in the Final Notices to ‘COB’ reflects the fact that the transgressions occurred back in 2005) but are due for a shake-up.

This serves as a timely reminder to firms that the revised rules on the distribution of UCIS and ‘close substitutes’ (‘non-mainstream pooled investments’) take effect from 1 January 2014. In addition to UCIS the rules, which also include record keeping requirements, will also capture vehicles such as certain securities issued by SPVs and Qualified Investor Schemes.

It is therefore important that relevant firms should have reviewed their current processes and procedures to ensure that they will remain compliant. A summary of the new regime can be found in Regulatory Roundup 49 from which it will be noted may also have an impact on discretionary portfolio managers.

The post UCIS: FCA Actions first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .

The basic message was that the financial promotion rules are media-neutral i.e. the rules focus on the content and as such they will apply regardless of the medium used to communicate the content (see also PERG 8.30). Promotions should be standalone compliant so, for instance, it is not acceptable to omit important information or a risk statement just because it is intended to be provided at a later stage of the sales process. Roll-over risk warnings on website banner adverts are not sufficient. The audience was also reminded that whilst image advertising (see e.g. COBS 4.5) may be exempt from many of the financial promotion rules, it is important to bear in mind the limited areas covered by that term (basically restricted to name, logo, contact details and types of activities).

Mr Gordon gave the audience five points to take away with them: ensure that digital media information is kept up-to-date; consider the suitability of the medium for the product e.g. advertising a complex product on Twitter would not be fit for purpose; ensure promotions are standalone compliant; ensure risk information is clear and prominently displayed; and if you cannot make the promotion compliant within the allocated space then do not advertise. In the words of the speaker “digital media is very much on our radar”.

We are reminded that the FSA monitors advertising in all media and contacts firms if they see problems. The regulator also welcomes consumers and firms reporting non-compliant promotions to them and will investigate all complaints received.

The post Digital Financial Promotions first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .

The proposal stems from the Jumpstart Our Business Startups Act (‘JOBS Act’), the aim of which is to increase the ability of small businesses and startups to raise capital.

The statement explains that the JOBS Act directs the SEC to lift certain prohibitions. As such, the Commission is seeking public comment on the proposed rules for 30 days, after which time the Commission will consider whether to adopt the proposed rules. However it shouldn’t result in a free for all as it will be a requirement for an issuer to take ‘reasonable steps’ to verify that the purchasers of the securities are accredited investors (Rule 506 refers) or qualified institutional buyers (Rule 144A refers).

The SEC has produced a fact sheet which can be accessed via the link provided.

The post Soliciting in the US first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .

The FSA’s Conduct Risk Outlook 2012 that was published in March (see Regulatory Roundup 39) listed 15 broad risk categories: UCIS were included under ‘complexity in retail investment products and services’. Whilst it was acknowledged that the majority of UCIS are designed for institutional investors the Regulator was finding that more of these schemes were being sold to retail investors “for whom this product is unsuitable”. We were put on warning that the Regulator was intending to conduct a review of the rules relating to UCIS to improve consumer protection so the publication of CP12/19 “Restrictions on the retail distribution of unregulated collective investment schemes and close subjects” will not come as a surprise. Arguably this is an example of the new regulatory approach under which the Regulator will intervene at an earlier stage.

Strictly speaking, and in keeping with the paper’s title, CP12/19 concerns itself with the distribution of ‘non-mainstream pooled investments’ so not only includes UCIS but also includes traded life policy investments, securities issued by special purpose vehicles and qualified investor schemes. The latter are, of course, authorised funds governed by COLL 8.

The current restrictions on the promotion of UCIS can be found in COBS 4.12. Under this, it is a requirement that a potential investor/scheme participant must fall into one of the eight categories listed therein before a UCIS can be promoted to them. It is proposed to remove three of those categories: category 1 (existing participants in a UCIS); category 2 (where a firm has deemed the UCIS as being suitable for them); and category 8 (where an adequate assessment has been made, written warnings provided and the necessary statement made). The purpose of these changes is not to discourage the promotion of UCIS per se but rather to restrict their promotion to ‘ordinary retail investors’ (see glossary on page 6 of CP12/19). The remaining five categories in COBS 4.12 continue, including category 7 which permits promotion to persons that are a professional client or an eligible counterparty.

The category 8 exemption was of use to firms that were intending to promote a UCIS to a retail client i.e. an investor that did not fall into category 7. Although this category will be lost, firms can still make use of exemptions in the CIS Exemptions Order e.g. certified sophisticated investors (article 23). However it must be remembered that for MiFID business a firm must still follow the MiFID communication provisions as implemented in COBS 4 even if COBS 4.12 exemptions are not being used.

SPVs are of concern to the FSA as they can be used as a means to pool investments but, because of their structure, would not be subject to the current protections under the UCIS regime: there will be a carve out for investment trusts and covered bonds. The FSA will consider waiver requests from providers under certain circumstances – see 3.28 of CP12/19.

In a similar manner to the possible use of the CIS Exemption Order (see above), firms can also consider the use of the Financial Promotions Order where the non-mainstream pooled investment is not a UCIS. Note the obligation placed upon the CF10 (COBS 4.11.4) and the need for a firm to make and retain a record of why it is satisfied that a particular exemption applies (COBS 4.11.5).

For the avoidance of doubt, the table in COBS 4.12.1 that we are all currently familiar with still relates to the promotion of UCIS. Restrictions on the promotion to retail clients of other investments, apart from UCIS, that will be classified as non-mainstream pooled investments, will be addressed by way of expansion of COBS 4.12. The guidance on the classification of investors as ‘sophisticated’ or ‘high net worth’ can be read as a warning to firms that such classification must be done with due care and even then to carefully consider whether such a promotion would be appropriate – note the use of “the firm should consider” and “for example” in (2) in each of COBS 4.12.7G to COBS 4.12.9G inclusive. For good measure firms are also reminded of their obligations under the Principles and the ‘client’s best interest rule’ (COBS 2.1.1).

The proposed changes to the Handbook, including enhanced record keeping requirements (COBS 4.11); the restrictions on the promotion of UCIS and non-mainstream pooled investments (COBS 4.12); and suitability guidance (COBS 9.3) can be found in Appendix 1 of CP12/19.

The consultation period finishes on 14 November 2012 and, interestingly, the FSA invites feedback from overseas regulators, the EU Commission and any other interested regulatory bodies.

The post New Restrictions on UCIS first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .

Final Notices in respect of P3 Wealth Management and Patrick O’Donnell , its sole director, evidence further FSA action over UCIS misdemeanours. In this particular instance the firm’s Part IV permission was cancelled by the FSA whilst Mr O’Donnell suffered a penalty of £60,000 and has been prohibited from performing any functions in relation to any regulated activity.

Although there is an overlap with the concept of ‘suitability’ (COBS 9), at the heart of the FSA action was Mr O’Donnell’s lack of understanding of the regulatory restrictions surrounding the promotion of UCIS.

Firms are reminded that the promotion of UCIS is subject to the recipient meeting one of the categories in COBS 4.12 – and the need to maintain adequate records to substantiate such categorisation.

Firms may also be able to use one of the exemptions in the Promotion of Collective Investment Schemes (Exemptions) Order 2001 (PCISO) but these can be tricky so it is essential to follow the requirements precisely e.g.:

• the exemption for ‘certificated high net worth individuals’ only applies in respect of UCIS that invest ‘wholly or predominantly in the shares or debentures of one or more unlisted companies’;
• warnings must be given in ‘black, bold type’ and ‘surrounded by a black border’ etc.

One further important aspect to bear in mind is that the UK restrictions on the promotion of UCIS have to be considered in the light of MiFID requirements which take precedence. As such the PCISO cannot be used in connection with MiFID business and the relevant MiFID-derived rules in COBS 4 will always apply.

This can pose problems for MiFID firms as, whilst on the one hand marketing is not a regulated activity, the effect of recital 82 of the MiFID Implementing Directive, means that it will be considered MiFID business if it is deemed ‘preparatory to the provision of an investment service …’ e.g. advising a client to invest or receiving and transmitting orders to the manager/operator of the scheme.

As such, the firm would have to follow the COBS rules and categorise the clients under MiFID.

Complyport clients should feel free to get in touch with their normal contact should they have any particular financial promotion queries.

The post UCIS Marketing Woes first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .

‘Financial Promotions , Fund Performance and Image Advertising’ is probably self-explanatory from its title.

For most investment firms, the performance rules (COBS 4.6) will only be relevant where the recipient is likely to be a retail client. Having said that, the ‘fair, clear and not misleading’ requirements of COBS 4.2 will apply with respect to all clients regardless of categorisation (on the basis that COBS 4 applies to both ‘communications’ and to ‘financial promotions’). As such, and bearing in mind the FSA’s views on unregulated collective investment schemes (see article ‘Conduct Risk Outlook 2012’), firms without retail clients may wish to use the performance rules as a guide in order to demonstrate compliance with the spirit of COBS 4.2. Note that COBS 4.6.2, ‘past performance’, requires the use of complete 12-month periods. Therefore if figures are only available for a shorter period, say a recently established fund, then actual past performance cannot be shown at all (see also Note 2 in the table in COBS 4.6.4A).

We are reminded that the FSA does not pre-vet or approve promotions. As such, even though non-compliant promotions are in circulation this does not exonerate other firms from seeking to comply (any firm (or consumer) spotting an unfair, unclear or misleading advert can bring it to the FSA’s attention – see link).

Image advertising is exempt from most of the COBS 4 rules – but firms need to ensure that they are clear on what does, and does not, constitute ‘image advertising’: please see the guidance for further information.

‘Financial Promotions – Advertising ISAs & Adverts for Investment Professionals’ will be of interest even to firms that have no involvement with ISAs.

The FSA has seen a number of adverts for fund managers etc. stating that they are for ‘investment professionals’ but it’s not always clear that this is the case. We are reminded that whilst ‘investment professional’ may appear in the Handbook Glossary (which is not the same as ‘professional client’ in COBS 3.5), it is a term that is normally associated with the Financial Promotion Order (which is usually relevant for unauthorised firms) or the Promotion of Collective Schemes (Exemptions) Order (which is relevant for unregulated collective investment schemes). The message from the FSA is to be clear about who the investment is aimed at and provides suggestions such as stating that a promotion is not for retail clients.

The post Financial Promotions first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .