EU Directive 2019/1160 (the “Directive”) and Regulation 2019/1156 (the “Regulation”), both on the cross-border distribution of collective investment funds, were published on the Official Journal of the European Union on the 12th July 2019. The European Commission issued a report which showed that the EU investment funds market has not been exploited to its full potential, especially in respect of cross-border distribution. The Directive and the Regulation are therefore aimed at improving transparency and removing complex and burdensome requirements whilst harmonising diverging national legislation, to ultimately enable a better functioning Single Market and economies of scale.
The Regulation will be applicable as from the 1st August 2019 and Member States will need to transpose the Directive into national law by 2nd August 2021.
Changes implemented by Regulation 2019/1156
Overview of changes
The Regulation improves transparency through the alignment of national marketing requirements and regulatory fees. It also introduces consistency in the way which regulatory fees are determined. The process and requirements for the verification of marketing material by national competent authorities are also harmonised by the Regulation and the European Securities and Markets Authority (ESMA) is provided with further resources to effectively monitor investment funds.
- Marketing communications – investors’ interests will be safeguarded by ensuring that marketing communications from AIFM and UCITS management companies describe both the risks and rewards in investing in an AIF and UCITS, and that they do so in a way which is fair, clear and not misleading.
- A pre-marketing definition for EuVECA/EuSEF – this is now defined for both of these schemes thus allowing pre-marketing activities in order to establish a level playing field with other types of funds.
- Transparency on national laws – competent authorities are required to publish national provisions for requirements governing AIFMs and UCITS on their websites to increase transparency and investor protection.
- Fees and charges – any fees and charges which are levied by competent authorities for supervision of cross-border activities should be proportionate to the tasks carried out and publicly disclosed as well as the calculation methodology.
- ESMA’s central database – the centralised database will contain summaries of national requirements for marketing communications for AIFs and UCITS.
- ESMA: Technical Standards – ESMA will be responsible for the development of implementing technical standards which will be adopted by the Commission.
Changes implemented by Directive 2019/1160
Overview of changes
Under the Directive the conditions in which investment funds may exit a national market are harmonised, also creating the possibility for asset managers to stop marketing an investment fund in defined cases in one or several host Member States. European asset managers are also permitted to test the appetite of potential professional investors for new investment strategies through pre-marketing activities.
- Pre-marketing for AIFMs – The definition which the Directive provides only allows for pre-marketing to be addressed to potential professional investors and which concern an investment idea or strategy to test their interest in an AIF or a compartment which is not yet established. The conditions in place specify that it should not be possible for investors to subscribe to any of the units of the AIF.
- Discontinuation of marketing – Conditions are provided for the circumstances under which de-notification of arrangements can be made for marketing of AIFs.
- Facilities to be made available to retail investors (AIFMs & UCITS)
The European Commission found that 70% of the total assets currently under management are held by investment funds authorised or registered for distribution only in their domestic market. Only 37% of UCITS and about 3% of alternative investment funds (AIFs) are registered for distribution in more than 3 Member States. Following the implementation of this legislation, the current regulatory barriers will be eliminated, and cross-border distribution will be cheaper. It is expected that approximately €440 million will be saved in costs for current cross-border distribution and that its’ facilitation will accelerate growth of the Single Market for investment funds and boost competition between asset managers.
Written by Caroline Lane, Trainee Barrister (email@example.com)