Investment Management Update
The European Commission has issued legislative proposals on the cross-border distribution of investment funds, including some amendments to the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD) and the UCITS Directive (2009/65/EC). The proposals are the latest in the Commission’s drive to remove barriers to the cross-border distribution of funds. The current deadline for feedback on the proposals is 9 May 2018. The Commission expects the proposals to be adopted before the European Parliament elections in 2019. The Commission proposes a Directive (which would need to be implemented by member states) and a Regulation (which would be directly applicable).
Key provisions in the proposed Directive include:
- Adding a definition of “pre-marketing” to the AIFMD and setting out when an authorised EU alternative investment fund manager (AIFM) could conduct pre-marketing without needing to make a passporting notification. The proposed definition of pre-marketing is “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”. Essentially, an authorised EU AIFM may test an investment idea or an investment strategy with professional investors but cannot provide information relating to or referring to an established AIF, nor can it provide information enabling investors to commit to acquiring interests in an AIF. For AIFs that are not yet established, the EU AIFM cannot provide any information that amounts to draft or final form constitutional documents, prospectuses, offering documents, subscription forms or similar documents.
- Introducing a requirement for all member states to ensure that a UCITS manager establishes “local facilities” in each member state where a UCITS is marketed. While UCITS managers do not need to have a physical presence for these purposes, they may use electronic or other distance communication means to perform the required tasks. These include making available copies of the fund rules or instruments of incorporation to investors and processing investors’ subscription, payment and repurchase orders.
Some member states already impose requirements on local facilities for UCITS managers but the new requirement is broader in scope and harmonises the position for all member states. The proposed Directive also adds this requirement for all member states into which AIFMs market alternative investment funds (AIFs) to retail investors.
- Specifying the conditions that a UCITS manager and AIFM must each meet if they wish to cease marketing a UCITS or EU AIF in a member state. UCITS managers and AIFMs may only “de-notify” such marketing activities if there are no more than 10 investors from the relevant member state who hold up to 1 per cent of the assets under management of the UCITS or EU AIF.
- Aligning the cross-border notification procedures for UCITS managers across all fund types and across all member states.
- Deleting provisions in the UCITS Directive that harmonised provisions in the proposed Regulation will supersede.
Key provisions in the proposed Regulation include:
- Amending the European Venture Capital Funds Regulation (Regulation 345/2013) (EuVECA Regulation) and the European Social Entrepreneurship Funds Regulation (Regulation 346/2013) (EuSEF Regulation) by adding a similar concept of pre-marketing to the proposed Directive above.
- Requiring UCITS managers and AIFMs to ensure that all marketing communications are identifiable as such and to present the risks and rewards of purchasing units or shares of UCITS and AIFs in an equally prominent manner. All information included in marketing communications must be fair, clear and not misleading. In addition, marketing communications must not contain any information about a UCITS or AIF that contradicts or diminishes the significance of the information contained in the applicable prospectus, key investor information document (KIID) or other offering documentation.
- Giving competent authorities the ability to require UCITS managers or AIFMs marketing to retail investors to make “systematic notifications” of the marketing communications that such managers intend to use, to verify that these communications comply with the applicable marketing requirements. Competent authorities must notify the UCITS manager or AIFM within 10 working days if a marketing communication needs amending.
- Requiring competent authorities to publish online all applicable national laws, regulations and administrative provisions governing marketing rules for AIFs and UCITS. ESMA must also maintain a central database on its website containing this information.
- Specifying that fees or charges by competent authorities must be proportionate to the supervisory tasks they carry out for authorisation or registration.
The FCA has placed on its website a statement regarding closet tracker funds and closet constrained funds - those which are managed in a similar way to passive funds, but which charge fees more akin to actively managed funds.
The statement reports that FCA had reviewed 84 funds by the end of 2017. Of these, only 20 were adequately describing how investors’ money was being managed. Of the remaining 64 funds, FCA is working with firms on 42. 22 funds have already made improvements. Fund disclosure changes were in many cases not material and more by way of clarification. £34m in compensation has been paid to funds and investors. An enforcement investigation is ongoing against one firm.
The statement emphasises that fund managers are expected to communicate fund investment objectives and policies clearly. Investors must have clear information and the best possible understanding of funds. Improved disclosures can help investors compare funds more easily.