The distribution of funds on a cross-border basis within the European Union is the next important topic of the year for EU fund managers. The relatively new CBDF framework, which will come into force on August 2, will impact alternative investment fund managers (AIFMs) and UCITS management companies (UCITS ManCos) as they will have to ensure that marketing communications produced for funds under their management are compliant with this new framework.
This article is aimed at: (i) providing a brief overview of the CBDF framework; and (ii) discussing the main challenges that AIFMs and/or UCITS ManCos may face once the framework is brought into effect.
Overview of the CBDF framework
The CBDF framework is an EU legislative framework intended to facilitate the cross-border distribution of funds in the EU by removing barriers to create a more competitive EU investment landscape. It is made up of two main legislative instruments − Directive (EU) 2019/1160 and Regulation (EU) 2019/1156 supplemented by a Commission Delegated Regulation 2021/955 and guidelines issued by the European Securities and Markets Authority (ESMA) published on May 27. Most of the substantial provisions will apply as of August 2.
As a framework, it forms part of the capital markets union, a flagship initiative of the European Commission intended to strengthen the European capital markets, which seeks to harmonise national processes for the verification of marketing material by competent authorities and enables ESMA to monitor investment funds more closely.
It allows managers to test the market and assess potential investors’ appetite for new investment strategies. Consistency over the way regulatory fees are set will also be introduced.
The CBDF framework’s main provisions can be grouped under the following five headings:
(1) Broad principles: the regulation and directive lay out general principles to be followed by fund managers when drafting marketing communications. To mention a few, these include that: marketing communications must be identifiable as such, they must describe the risk and rewards of purchasing units of alternative investment funds (AIFs) and UCITS funds, and that the information included in such communications must be fair, clear and not misleading.
EU policymakers may need to revisit the rules
(2) Prior notification of marketing communications and discontinuation of marketing: national competent authorities (such as the Malta Financial Services Authority) have the discretion under the directive to decide whether to impose a prior notification requirement on marketing communications. The directive also sets out conditions under which a fund may cease to be marketed in a particular host member state.
(3) Transparency requirements: the regulation obliges competent authorities to publish online information about applicable national laws, regulations and rules governing marketing of AIFs and UCITS funds and their summaries in a language customary in the sphere of international finance to be maintained by ESMA in a centralised online database.
(4) Pre-marketing: the CBDF framework introduces ‘pre-marketing’ as an EU harmonised concept. This is the provision of information on investment strategies, or ideas, by an EU fund manager to professional investors to test their interest in an AIF or in a fund or sub-fund which has not yet been established, or established but not yet notified for marketing purposes, to the relevant competent authorities and which in each case does not amount to an offer or placement to the potential investor to invest in the units of that fund or sub-fund.
(5) Fees and charges: the regulation requires competent authorities to publish up-to-date information on the fees or charges levied to process marketing notifications on their websites. ESMA will also publish links to this information on its website and also intends to develop an interactive tool allowing users to perform online calculations.
Main challenges
The CBDF framework is helpful to managers in certain respects, yet particular provisions require further clarification. The new rules will compel managers to decide whether to actively promote a new fund to potential investors or to rely on the reverse solicitation rule, but not to depend on both.
The new framework indirectly imposes an 18-month ban on reverse solicitation if fund managers decide to pre-market a fund or sub-fund as a subscription within an 18-month period after the pre-marketing start date will automatically be deemed to be marketing, triggering notification requirements.
This is quite an unfavourable provision for fund managers. It is also unclear whether this automatic rule applies only within the member state where pre-marketing takes place or whether it bans reverse solicitation anywhere within the EU.
Another provision which may be an issue for certain fund managers is the 36-month ban on pre-marketing of a denotified fund within the member state. Managers interested in launching successor/continuation funds, which increased in popularity in the private equity space over the pandemic, may be hit by this avoidable harsh rule.
All the above could cause confusion and potentially damage EU investment. The industry hopes that national legislators and regulators tasked with the job of transposing the directive into their respective national laws, by August 2, clarify the challenges highlighted above by adopting narrow interpretations on the bans.
This may, however, result in differing views being adopted by different member states which goes against the spirit of the CBDF framework.
Eventually, EU policymakers may need to revisit the rules to resolve the issues altogether, as otherwise barriers within the EU will continue to be present, compelling the EU to regress in its progress towards expanding the EU single market and creating a capital markets union.
Ria Micallef, Associate, Investment Services and Funds team, Ganado Advocates