Cross-Border Distribution Directive and Regulation: A Mixed Bag?

The  EU’s new directive and regulation on the cross-border distribution of investment funds have been formally published for a while now. The key provisions will take effect from 2 August 2021, at the latest. The overall aim and objective of the Cross-Border Distribution Directive and Regulation is to address existing barriers to efficient cross-border distribution of investment funds throughout the EU.

The directive and regulation amend AIFMD and the UCITS Directive to improve the harmonisation of cross-border fund distribution and reduce the different practices adopted by various EU Member States.

The Cross-Border Distribution Directive covers the following:

• a new harmonised pre-marketing regime for AIFs under AIFMD.
• provision of facilities for UCITS and AIFs marketed to retail investors;
• alignment of the de-notification process for AIFs and UCITS in a host Member State; and
• alignment of certain notifications in respect of marketing an EU AIF or UCITS in a host Member State.

 The Cross-Border Distribution Regulation covers the following

• requirements around marketing communications;
• verification of marketing communications;
• the creation of central databases for the publication of:
  •  national marketing requirements;
  •  fees and charges; and
  •  a list of AIFs, UCITS and their managers.

Advantages of the Regulation and Directive include:

• Pre-marketing of AIFs:

With regard to the new provisions around pre-marketing of AIFs, EU AIFMs should be pleased with the harmonisation of the rules across the EU.  It is important to continue to keep in mind the current diverse rules across the EU around what is and is not defined as marketing.

• Provision of facilities for UCITS and AIFs marketed to retail investors:

At the moment, UCITS have had to make local facilities available to investors in certain jurisdictions where the UCITS is registered for marketing in the EU. This was facilitated via the appointment of a local agent (information agent, paying agent, facilities agent etc). This has largely been considered a low value service and an additional cost within the asset management industry as these local agents did not provide much of a value added service in most cases.

The new provisions will allow UCITS to provide the facilities themselves or through a central agent rather than by appointing several local agents in different jurisdictions or setting up a physical presence themselves.

• Alignment of the de-notification process for AIFs and UCITS:

Largely,  this is a positive move. First of all, it harmonises the de-notification process across EU member states instead of the fragmented approach applicable across EU member states at the moment. Secondly, the removal of achieving a minimum level of investors certainly makes it easier to de-notify.

• Verification of marketing communications:

The new provisions will add some much needed transparency in the jurisdictions that require prior verification of marketing communications.

• Creation of central databases:

The databases will likely to be a helpful source of information for AIFMs and UCITS looking at cross-border distribution and assessing the feasibility and costs.

Disadvantages of the Regulation and Directive include:

• Pre-marketing of AIFs:

If an EU AIFM decides to pre-market an AIF under the new provisions, it will become much tougher to rely on reverse solicitation and avoid registering under Article 32 of AIFMD. The AIFM would have to ensure that that the relevant investor did not receive information about the AIF as part of pre-marketing efforts.

• Provision of facilities for UCITS and AIFs marketed to retail investors:

The requirement to provide facilities for certain AIFs that are marketed to retail investors introduces an additional cost for AIFMs.

• Alignment of the de-notification process for AIFs and UCITS:

The 36-month black-out period for the pre-marketing of the denotified AIF or of AIFs with similar strategies may lead to issues with de-notification. Fund promoters should not de-notify closed- ended AIFs at the end of a fund-raising cycle without thinking about any future pre-marketing of subsequent AIFs before the end of the 36 month period.

Most fund managers may choose not to denotify any funds to facilitate the pre-marketing of successor funds. The ongoing regulator fees may be a cost that they are willing to bear.

• Alignment of certain notifications in respect of marketing an EU AIF or UCITS in a host Member State:

There are more operational and logistically challenges to consider. For example, to coordinate between internal teams and external teams to be able to notify regulator one month in advance. This will likely require changes to workflows and processes that asset managers have in place currently.

Open questions that remain:

There also several open questions that will be answered as we get more insight into the various national legislations in each EU member state. For example, will the ability to pre-market an AIF be available to non-EU AIFMs? This will depend on the view each respective regulator takes.

Furthermore, it will be interesting to see how the directive will be applied practically in certain jurisdictions. For example, will the requirement to appoint an Italian Paying Agent truly fall away?

At the moment, the paying agents in Italy are heavily engrained in the distribution chain and have close ties with the local banks. If the directive is implemented in its true spirit, this requirement should fall away. It remains to be seen if this will be as straight forward.

To surmise, the Directive and Regulation contain provisions that should improve and simplify (to some degree) cross-border distribution of investment funds in the EU. However, a lot will depend on the actual implementation of the directive in each EU member state. As we all know, EU member states have a tendency to engage in “gold plating” and not implementing directives in their true spirit. We already seeing that certain member states will be late to implement the directive (for example, Finland).

To get an a comprehensive overview of the Cross-Border Distribution Directive in under 10 minutes, listen to the Zeidler’s Legal Zeidgeist Cross-Border Distribution Directive podcast episode as our experts share their insights and expertise on how firms can best prepare ahead of its arrival.