New cross-border distribution rules for EU AIFs

This is a reminder that, as part of wider set of new rules relating to cross-border distribution of funds (CBDF), new rules on the cross-border distribution of alternative investment funds in the EU⁽¹⁾ are due to take effect on 2 August this year, subject to national implementation in each EU state. As at today, some jurisdictions are significantly more progressed than others in terms of their domestic implementation process.

One key issue which, post Brexit, is likely to be of relevance to many AREF members relates to whether the new rules will be applied to non-EU AIFMs or only to EU AIFMs. The only requirement in the Directive is that EU AIFMs should not be disadvantaged vis-à-vis non-EU AIFMs, but it is up to the national implementing legislation to interpret how to meet this requirement.  At this stage, indications are that not all EU states are going to take the same approach. If so, this may give rise to some challenges for non-EU AIFMs – including UK AIFMs and Channel Islands AIFMs - to navigate if they want to market their real estate and other alternative investment funds in the EU using national private placement regimes after 2 August.

At present, whether promotional activity that is directed into a particular EU state qualifies as ‘premarketing’ or as ‘marketing’ varies from jurisdiction to jurisdiction. With the upcoming changes in August, it is possible (depending on how the relevant national legislation is drafted) that, for some jurisdictions, the same type of promotional activity might qualify as ‘premarketing’ if the activity emanates from an EU AIFM but as ‘marketing’ if the activity emanates from a UK (or other non-EU) AIFM. Where that is not the case (i.e. where the approach for EU and non-EU AIFMs will be fully aligned) there is an important open question as to how the new regime will be applied to non-EU AIFMs in practice. Currently this is unclear.

As a reminder for AREF members, one of the core concepts in the new rules is a harmonised definition of what constitutes “premarketing” (i.e. investor-facing promotional activity that an AIFM can engage in without needing to register under national private placement rules, or activate the AIFMD marketing passport (as applicable)). While the new rules will broadly represent the status quo in some jurisdictions, they will represent a significant relaxation in others. However, two important aspects of the new rules are (i) that the local regulator must be notified when premarketing occurs, and (ii) limits on the ability to use reverse solicitation.

AREF recommends that members looking to promote their real estate and other alternative investment funds in the EU play close attention to how the process of national implementing legislation develops in the coming weeks/months.

Linked to this, as part of the overall package of CBDF rules, on 27th May the European Securities and Markets Authority (ESMA) published Guidelines on marketing communications. These guidelines cover topics such as:

• identifying marketing materials as such,
• describing risks and rewards in an equally prominent manner.
• fair, clear and not misleading marketing communications.
• information on past performance and expected future performance.

AREF members are strongly encouraged to seek legal advice on all of these issues, if they have not already done so.