Cross border distribution of funds - CSSF FAQ guidance on marketing communications
Introduction
The CSSF published the CSSF FAQ – Cross Border Distribution of Funds – GUIDANCE ON MARKETING COMMUNICATIONS (the “CBDF FAQ”) on 20 September 2022. The CBDF FAQ brings further clarity about the supervisory expectations of the CSSF relating to the application of Regulation (EU) 2019/1156 of the European Parliament and of the Council of 20 June 2019 on facilitating cross-border distribution of collective investment undertakings (the “CBDF Regulation”) and the Guidelines of ESMA on marketing communication (ESMA34-45-1272) (the “ESMA Guidelines”). In particular, the CBDF FAQ deals with marketing communications as mentioned in section 1 of the ESMA Guidelines and article 4 of the CBDF Regulation (the “MCs”).
On an indicative basis, article 4 of the CBDF Regulation requires that MCs are identifiable and describe the risks and rewards of purchasing units or shares of the fund in an equally prominent manner. Moreover, all information included in MCs shall be fair, clear and not misleading. If an AIF publishes a prospectus according to Regulation (EU) 2017/1129 of the European Parliament and the Council on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, as amended (commonly referred to as the ‘Prospectus Regulation’), its MCs must not contradict or diminish the significance of the information contained in the prospectus but must indicate that a prospectus exists and provide hyperlinks to or a web address for it.
Q.1 Which Luxembourg entities are in the scope of article 4 of the CBDF Regulation?
The following managers are in the scope of article 4 of the CBDF Regulation and of the ESMA Guidelines concerning the funds they manage:
- management companies incorporated under Luxembourg law and subject to Chapter 15 of the Law of 17 December 2010 relating to undertakings for collective investment, as amended from time to time (“2010 Law”);
- management companies incorporated under Luxembourg law and subject to Article 125-2 of Chapter 16 of the 2010 Law;
- investment companies which did not designate a management company within the meaning of Article 27 of the 2010 Law;
- alternative investment fund managers authorised under Chapter 2 of the Law of 12 July 2013 on alternative investment fund managers, as amended from time to time (“2013 Law”);
- internally managed alternative investment funds (“AIFs”) within the meaning of point (b) of Article 4(1) of the 2013 Law;
- managers of European qualifying venture capital funds (“EuVECA”) within the meaning of Regulation (EU) No 345/2013;
- managers of European qualifying social entrepreneurship funds (“EuSEF”) within the meaning of Regulation (EU) No 346/2013 (all together referred to as the “IFMs”).
However, article 4 of the CBDF Regulation shall not apply to IFMs when they act as distributors or intermediaries for funds they do not manage, although they may be impacted by such an article (see Q.3 below).
Q.2 Which funds are in the scope of article 4 of the CBDF Regulation?
MCs addressed to investors or potential investors of regulated and non-regulated funds managed by an IFM are in scope, as well as MCs addressed to investors or potential investors of Luxembourg and non-Luxembourg funds managed on a national, respectively, cross-border basis by an IFM.
Therefore, all UCITS and AIFs, including when they are set up as EuVECAs, EuSEFs, European long-term investment funds (the “ELTIFs”)1 and money market funds (the “MMFs”)2 managed by an IFM, are in the scope of article 4 of the CBDF Regulation.
But MCs addressed to investors or potential investors who are not residents of the European Economic Area are not in the scope of article 4 of the CBDF Regulation.
Q.3 Are the distributors or intermediaries involved in the distribution of funds managed by the IFM impacted by article 4 of the CBDF Regulation?
“Fund managers are responsible for the compliance with Article 4 of CBDF Regulation, irrespective of who is the actual entity marketing the fund, and of the relationship it has with the third-party distributor (whether it is contractual or not).”3
Q.4 Are MCs in relation to a Luxembourg or non-Luxembourg EU fund which is managed by a Luxembourg IFM and distributed only in Luxembourg in the scope of article 4 of the CBDF Regulation?
Yes. Article 4 of the CBDF Regulation does not limit the scope to funds which have been solely notified for distribution on a cross-border basis but also include funds which are distributed in Luxembourg.
Q.5 Are MCs targeting professional investors in the scope of article 4 of the CBDF Regulation?
Yes, MCs addressed to all types of investors or potential investors of UCITS and AIFs, including when they are set up as EuVECAs, EuSEFs, ELTIFs and MMFs, are in the scope.
Q.6 What kind of information should be provided to the CSSF upon request?
There is no periodic reporting to the CSSF in relation to the MCs.
IFMs in the scope of Circular CSSF 22/795 of 31 January 2022 on the application of ESMA Guidelines (the “Circular 22/795”) shall, as of 16 September 2022, be ready to provide the following information with regards to the MCs used in relation with the funds under their management:
- types of MC used;
- country(ies) of dissemination of the MC (European Economic Area only); and
- targeted investors.
Furthermore, as of 1 April 2023, IFMs in the scope of Circular 22/795 must be able to link the above information to their relevant Fund(s) (respectively sub-funds) and identify if the MC entails information with regards to ESG in the context of the application of article 13 of Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector, as amended (commonly referred to as ‘SFDR’), and of the ESMA Supervisory briefing on Sustainability risks and disclosures in the area of investment management (ESMA34-45-1427).
Luxembourg - New rules on pre-marketing and marketing of investment funds
Luxembourg’s legislation of July 21, 2021 on cross-border distribution of investment funds has come into force on August 2 following its publication in the Mémorial, Luxembourg’s official gazette, on July 26.
The legislation, which transposes into Luxembourg law Directive (EU) 2019/1160 on Cross-Border Distribution of Collective Investment Schemes, the so-called CBDF Directive, amends Luxembourg’s investment fund law of December 17, 2010 and its law on alternative investment fund managers of July 12, 2013.
The legislation, along with the directly applicable CBDF Regulation, which also took effect on August 2, aims to enhance the cross-border distribution of UCITS and alternative investment funds by harmonising rules governing the launch and discontinuation of marketing, retail marketing and the content and supervisory review of marketing communications.
It notably creates a new harmonised regulatory regime defining and implementing a notification process for pre-marketing of AIFs throughout the EU. Pre-marketing was not defined in the original AIFMD and was left to rules and guidance applicable in individual member states, leading to inconsistencies and uncertainty.
The legislation – which is not being implemented by the UK – restricts third-party pre-marketing to certain authorised EU financial institutions comprising MiFID-authorised firms and their tied agents, banks, UCITS management companies and other EU AIFMs, restricting the possible use of non-EU distributors or placement agents.
Any subscription made within 18 months of pre-marketing activity will be considered to be the result of marketing, which requires marketing notification, effectively barring reliance on reverse solicitation for that period.
The CBDF legislation requires EU managers to notify their home regulator within two weeks of starting pre-marketing, a notification to its home member state, specifying the member states and the periods during which pre-marketing is taking place and a brief description including information on investment strategies. This is separate from the notification procedure required to use the AIFMD marketing passport.
ESMA guidelines issued on May 27, 2021 require AIFMs to ensure that all marketing communications aimed at EU investors in the EU can be identified as such, describe prominently the risks and rewards of investing in an AIF and contain information that is fair, clear and not misleading. They will become applicable six months after their publication in all EU languages.
How the CBDF rules apply to non-EU AIFMs is down to the implementation of the directive by member states, which should ensure that especially the pre-marketing requirements should not disadvantage EU AIFMs, including in the event that passporting rights are extended to non-EU managers through revision of the AIFMD.
In Luxembourg, the CSSF has published Circular 21/778, updating its Circular 11/509 to incorporate amendments relating to the CBDF legislation, notably the process of de-notification of Luxembourg-domiciled UCITS.
The regulator has also published on its website a frequently-asked questions document detailing changes in notification rules and procedures for management companies of UCITS and AIFs as a result of implementation of the CBDF Regulation. It has also created a new dedicated web page regarding the pre-marketing notifications of AIFMs.
For more information, please contact the investment management team.
Cross-border distribution of funds: ESMA finalises rules on standardised information (technical standards)
The European Securities and Markets Authority has issued on February 1 its final report on implementing technical standards under the EU’s regulation on cross-border distribution of funds.
The cross-border distribution regulation and its accompanying directive were adopted as of June 20, 2019. The regulation has been directly applicable from August 1, 2019, apart from provisions on marketing communications requirements and European social entrepreneurship funds, which take effect as of August 2, 2021. That date is also the deadline for adopting the directive into national law by EU member states.
The implementing technical standards deal with the publication of information by national regulators on their websites and their notification of information to ESMA and the publication of information by ESMA on its website.
ESMA says the final report and draft standards, which follow an industry consultation, largely reflect its original proposals for the information to be published on regulators’ websites regarding national rules setting out funds’ marketing requirements and the regulatory fees and charges imposed on fund managers relating to their cross-border business.
The draft standards also include provisions on national regulators’ communication of information to develop and update a central database on ESMA’s website listing UCITS and alternative investment funds marketed on a cross-border basis.
Following reception of the draft implementing technical standards, the European Commission must decide whether to adopt them within three months.
The ESMA final February 1 report on implementing technical standards under the regulation on cross-border distribution of funds available here.
For more information, please get in touch with Olivier Sciales at oliviersciales@cs-avocats.lu
Cross-border distribution of funds I ESMA consultation paper
The European Securities and Markets Authority has launched a consultation on guidelines on marketing communications under the Regulation on Cross-Border Fund Distribution. The proposed guidelines set out the requirements for communications sent to investors to promote UCITS and AIFs, including EuSEFs, EuVECAs and ELTIFs. ESMA proposes that the communications should be identifiable as marketing material, set out the risks and rewards of investment equally prominently, and ensure that the information provided is fair, clear and not misleading.
The consultation is open until February 8. The ESMA consultation paper, guidelines on marketing communications under the regulation on cross-border distribution of funds is available here.
For more information, please contact Olivier Sciales at oliviersciales@cs-avocats.lu
UCITS IV cross-border distribution - general overview
The simplified notification procedure is designed to remove bottlenecks in the procedure for cross-border distribution of Ucits funds. Power to grant the ‘passport’ is held by the fund’s home state regulator, while the regulators of member states into which the fund is to be marketed have no power of veto or delay, nor of review of marketing arrangements in advance of authorisation.
Once notification of marketing in another EU state has been submitted to the regulator of the fund domicile, it has a maximum of 10 working days to review it. Marketing of the fund may begin as soon as the fund domicile’s regulator has transmitted the notification (electronically) to the regulator of the state where the fund is to be marketed.
The new arrangement will involve regulators dealing directly with each other. At present, the fund manager has to complete a notification procedure involving the submission of numerous documents (in some cases translated) to the regulator of the target market, which then has up to two months to respond. The time taken by target market regulators to approve distribution for funds from other states currently ranges from just one day to the full two months.
Any changes to the marketing arrangements for a fund distributed in one or more other member state must be notified in advance to the target market regulator(s). The Ucits must ensure its marketing arrangements are compliant with the rules of the target market before asking its home regulator to launch the notification procedure.
These arrangements cover areas such as information to investors on fund ranges and prices, the appointment of local paying agents, representatives or distributors and the use of nominee structures, and any special information requirements designated by the target market regulator for local investors. Member states must publish full information on their local laws, regulations and other rules relating to the marketing of foreign Ucits “in a clear and unambiguous manner” and by electronic means (i.e. on a web site).
Investment Funds - From UCITS III to UCITS IV
Undertakings for Collective Investment in Transferable Securities (UCITS III) were introduced by the law of 20 December 2002 (the “2002 Law”), and benefit from a European Passport enabling them to be freely marketable throughout the EU countries. However, unsatisfactory elements relating to the current state of the Law paved the way to discussions about a possible ‘mutation’ from UCITS III to UCITS IV.
Those include, inter alia, details in the cross border distribution, in the simplified prospectus, and in the management company passport. In this context, the European Commission on 16 July 2008 published proposals to enhance the efficiency of the current legislative framework for UCITS. This could create, more than 20 years after the enactment of the first UCITS Directive, a genuine pan-European single market for investment funds, which would improve market efficiency and investor protection. Two types of legislative changes are contemplated: some aiming to enhance the working of existing provisions (in particular in relation to the notification procedure, the management company passport and the simplified prospectus), and others intended to introduce new single market freedoms (by creating inter alia a facilitating framework for fund mergers).
Cross Border Distribution
The first proposal aims at simplifying the procedures enabling the cross-border distribution of UCITS. In the current regime, detailed documentation must be filed on behalf of the UCITS with the regulator in the host Member State, which has theoretically two months to confirm compliance with the host Member State’s advertising laws. However, in practice, this process usually takes much longer and it is therefore unnecessarily time-consuming and costly. Consequently, it impedes greatly cross-border distribution and calls into question the concept of a single market to its very roots.
To cope with this problematic deficiency, it is proposed to replace the current regime with a simple, electronic, regulator-to-regulator notification procedure by which a UCITS seeking to market its units in another Member State informs its own regulator of its intention to do so and sends to it the necessary notification documents. Those documents shall consist of a Key Investor Information Document (see below) - which the UCITS is in the obligation to translate into the local language of the host Member State -, the full prospectus, the constitutive documents and the latest annual and any subsequent half yearly reports. A consequence of the new regime is that the marketing of units in the funds will be possible within three days of the file’s transmission from home to host regulator.
The home regulator reviews that information, and, if complete, transmits them within one month of receipt of the documents to the host regulator with an attestation confirming that the UCITS fulfils its obligations, and the UCITS may commence inward marketing in the host Member State from the date of transmission. The transmission of that information should take place electronically (see point II of this newsletter).
Key Investor Information
The concept of simplified prospectus is deemed to be another failure of the UCITS III regime. Originally, it was intended to provide investors with all basic information relating to the UCITS, in order to enable them to make an informed investment choice. In practice, the simplified prospectus failed to meet those expectations, as it is often very lengthy, and implemented differently across the EU.
It is therefore suggested to replace this simplified prospectus by a ‘key investor information’ document, which will provide key facts to investors before the conclusion of a contract. It will have to be set out in a common format in all Member States, thereby allowing for effective comparison, and shall be presented in a brief manner and in non-technical language, likely to be understood by retail investors. Key information shall include a short description of the investment objectives and policies of the UCITS, past performance, costs and associated charges and risk/award profile of the investment including appropriate risk warnings. Investors should note that this document is considered as pre-contractual information and hence liability should not be imposed solely on the document itself unless it is misleading or inaccurate.
Fund Mergers
Pursuing its general aim of promoting a single market, the European Commission proposed to remove barriers to amalgamation of funds which would, inter alia, cope with the proliferation of small and inefficient funds.
In this context, the proposal provides a framework for domestic and cross-border mergers of UCITS, introducing a basic principle that all UCITS are entitled to merge, regardless of the structure (e.g. corporate, unit trust or contractual). It should be pointed out that approval by investors is only necessary if required by national law. However a maximum threshold ceiling of 75% of the votes cast by unit holders is envisaged and this will be especially significant in Luxembourg since 100% unit holder approval is currently required to merge a Luxembourg UCITS with another UCITS. The proposals are however silent as to whether merging funds must have similar investment objectives and policies.
Master-Feeder Structures
The European Commission also innovated by proposing to introduce the ability to establish limited master-feeder structures. This could result in significant economies of scale and a reduction of charges for investors. The feeder UCITS and the master UCITS must enter into a legally binding agreement in which the feeder fund will be required, inter alia, to have at least 85% of its assets in a single master fund. Additionally, the feeder fund will have to act in the best interests of its investors and to monitor effectively the master UCITS.
Management Company Passport
The most controversial element introduced by the UCITS III regulation was undoubtedly the management company passport, originally designed to enable a manager that managed UCITS in a number of jurisdictions to centralise its activities within a single jurisdiction. The rationale being that this would result in significant economies of scale and better control as all activities would be carried out in a single company. However, the lack of EU-wide consensus on what the passport entailed resulted in different opinions when it came to interpreting the meaning of the management company passport concept. Opponents to a full cross-border passport point out that the regulator of a UCITS having a management company not regulated in the same jurisdiction could deprive the UCITS regulator of the means to monitor and enforce compliance with regulatory provisions in force in the UCITS domicile. Others are concerned with the fact that such a measure would be likely to create problematic regulatory and tax issues. The Commission has therefore requested CESR to provide advice on how to operate by 1 November 2008. On 31 October 2008, CESR had completed their work on the management company passport issues and published their advice to the European Commission. For more information, we refer to the CESR advice that can be found at the following address: http://www.cesr.eu/popup2.php?id=5367. It mainly followed the draft paper that was issued in September 2008 containing advice on issues relating to definition of domicile, applicable law and supervisory responsibilities, authorisation procedures for UCITS funds whose management company is established in another Member State, on-going supervision of the management of the fund, and finally on how to deal with breaches of rules governing the management of the fund.
The controversy over the management company passport shows how much the mutation from UCITS III to UCITS IV is far from being achieved. The UCITS proposals will however be presented to the EU council of Ministers and the European Parliament for approval. If they are adopted by mid 2009, it is contemplated that these provisions will come into force in mid 2011.
