National Implementation of the EU Directive on Cross-border Distribution of Funds - Key Issues for Alternative Investment Funds
18 June 2021
Author: Sanna Boow
As discussed in our previous blog here, the EU’s new regulatory framework facilitating the cross-border distribution of investment funds was published in 2019 and comprises the Directive (EU) 2019/1160 regarding the cross-border distribution of collective investment undertakings (the “Directive”) and Regulation (EU) 2019/1156 on facilitating cross-border distribution of collective investment undertakings (the “Regulation”). The deadline for the implementation of the Directive by the EU Member States is 2 August 2021.
The Finnish Ministry of Finance has published a draft Government Proposal (in Finnish: hallituksen esitys) (the “Proposal”) for consultation. The consultation sets out the Ministry’s proposal for the implementation of the Directive into the Finnish Act on Alternative Investment Fund Managers (in Finnish: laki vaihtoehtorahaston hoitajista, the “AIFM Act”) and the Finnish Mutual Funds Act (in Finnish: sijoitusrahastolaki).
The consultation ended on 17 June 2021 and, according to the published timetable, the Government Bill is planned to be presented in the Parliament on the week starting 2 August 2021. Finland will therefore be late in the implementation of the Directive.
We have set out below the key issues in the Proposal for the cross-border marketing of AIFs to investors in Finland.
A New Definition of “Pre-Marketing”
As discussed in our previous blog post, the amendments will introduce a new definition of “pre-marketing” into the AIFM Act. The definition broadly follows the wording of the Directive with some national differences as explained in more detail below.
Under the AIFM Act, “pre-marketing” means:
- the provision of information or communication, direct or indirect, on investment strategies or investment ideas by an AIFM or on its behalf;
- to potential investors in order to test their interest in an AIF which is not yet, established, or which is established, but not yet notified for marketing in accordance with the AIFM Act; and
- which in each case does not amount to an offer or placement to the potential investor to invest in the units or shares of that AIF.
General Brand Marketing Would Not Be Covered Under Pre-Marketing
According to the Proposal, pre-marketing must relate a particular AIF. Therefore, an activity where the AIFM is merely to demonstrate the AIFM’s track record to a potential investor without a connection to a particular AIF’s investment strategy or investment idea would not constitute “pre-marketing”.
Only the AIFM or Another Authorised Entity Could Pre-Market
Under the Proposal, a third party (i.e. other than the AIFM) can engage in pre-marketing on behalf of the AIFM provided that it is authorised as an investment firm, a credit institution, a UCITS management company, or an AIFM in accordance with the relevant Finnish legislation or equivalent legislation in another EU Member State, or as a tied agent (as defined in the Finnish Investment Services Act).
Therefore, a non-EU firm would not be able to engage in pre-marketing in Finland.
The current wording of the Proposal also excludes from pre-marketing UK firms that hold a cross-border investment services licence granted by the FIN-FSA. In our view, there is no reason why a cross-border licence holder should not be able to pre-market when such entity holds the appropriate permissions. It is therefore possible that this will be amended in the final Government Bill.
How Does the Finnish Implementation Differ from the Directive?
According to the Proposal:
- Pre-marketing would not be restricted to only professional investors, but an EEA AIFM would be able to pre-market to also retail investors. However, any investment by the retail investor in the AIF would continue to be subject to the marketing rules under Chapter 13 of the AIFM Act. Given that non-EEA AIFMs cannot market AIFs to retail investors, pre-marketing by a non-EEA AIFM would be restricted to professional investors only.
- Pre-marketing rules would not be restricted to authorised AIFMs only, but also registered (i.e. sub-threshold) AIFMs would be able to pre-market the AIFs they manage.
- Non-EEA AIFMs would be in scope of the pre-marketing regime. Therefore, a non-EEA AIFM that wants to pre-market an AIF in Finland would need to submit a pre-marketing notification to the FIN-FSA. Restrictions on reverse solicitation would also apply (see below for more detail).
What Documents Can Be Given to Potential Investors During Pre-Marketing?
The rules regarding documentation would follow the wording of the Directive. If the AIF is not yet established, potential investors can be given draft form offering documents, such as a prospectus or an LPA, as part of the pre-marketing.
If the AIF is already established, no draft offering documents (even in draft form) can be given.
The Proposal does not provide guidance on when an AIF is considered to be “established”. In our view, one would need to consider issues such as (a) whether the vehicle is legally established and (b) whether it is possible for an investor to acquire interests in the vehicle.
Distribution of any of the following would not be permitted, but would constitute “marketing” triggering the notification requirement:
- documentation that enables investors to commit to investing in a particular AIF;
- subscription forms or similar documents (whether in a draft or a final form); or
- final form constitutional documents, a prospectus or offering documents.
New Disclaimer Requirements
Where a draft form prospectus, LPA, or other offering document is provided to a potential investor, it must clearly state that:
- the document does not constitute an offer or an invitation to subscribe to units or shares of the AIF and
- the information presented in the document should not be relied upon because it is incomplete and may be subject to change.
Also, the AIFM must ensure any pre-marketing is appropriately documented.
The AIFM Must Notify the Regulator of the Pre-Marketing Activities
A Finnish or non-EU AIFM must make an informal notification of the pre-marketing to the FIN-FSA within two weeks of the commencement of the pre-marketing in Finland. An EU AIFM must make the notification to its home regulator.
The notice should specify:
- that the AIFM is or has engaged in pre-marketing in Finland;
- the periods during which the pre-marketing is taking place;
- a brief description of the pre-marketing including information on the investment strategies presented; and
- where relevant, a list of the AIFs which are the subject of pre-marketing.
There is no need to describe which potential investors will receive pre-marketing or attach any marketing documentation. No regulatory approval is needed for the pre-marketing and the notice can be submitted after the pre-marketing has started (as long as it is submitted with two weeks form the commencement of pre-marketing).
Marketing Notification Is Required Before Potential Investors Can Acquire Interests in the AIF
Under the Proposal, the AIFM has an obligation to ensure that potential investors do not acquire units or shares in an AIF through pre-marketing and that investors contacted as part of pre-marketing may only acquire units or shares in that AIF once marketing is permitted in Finland.
Any offer or placement of interests in the AIF would constitute “marketing” under the AIFM Act, and the AIFM would need to notify the AIF for marketing in Finland before a Finnish investor invests in the AIF.
Restrictions on Reverse Solicitation During 18 Months from the Start of Pre-Marketing
Any subscriptions by investors within 18 months of the AIFM having begun the pre-marketing will be considered to be the result of marketing and will require a marketing notification (or passporting) under the AIFM Act.
Under the Proposal, the above 18-month period is intended to apply to all investors in Finland irrespective of whether such investor has, in fact, received any pre-marketing. If passed in its current form, an AIFM would not be able to rely on reverse solicitation during the 18-month period in respect of any investor in Finland if it has engaged in pre-marketing in Finland.
A New Harmonised Process for Deregistration of AIFs
New rules regarding deregistration of an AIF will also introduced. If an AIFM wishes to deregister an AIF from marketing in Finland, there must be a public offer to repurchase (free of charge) all such AIF units or shares held by investors in Finland. This condition does not apply to closed-ended AIFs. Also, the intention to terminate the marketing must be made public by means of a publicly available medium and any contracts with financial intermediaries must be modified to prevent any further marketing of the relevant AIF.
Notification of compliance with the above must be submitted to the AIFM home regulator or the FIN-FSA (in respect of non-EU AIFMs).
It is important to note in respect of any successor funds that that once an AIF is deregistered from marketing, the AIFM cannot pre-market that AIF or any other AIF with a similar investment strategy or investment idea in Finland for a period of 36 months from the date of deregistration.
Requirements for Marketing Communications
The Regulation sets out new rules on marketing communications. The Regulation is directly applicable in Finland and therefore certain rules on marketing communications currently in the AIFM Act will be repealed.
Generally, AIFMs must ensure that all marketing communications addressed to investors are identifiable as such, describe the risks and rewards of purchasing units or shares in an equally prominent manner, and that all information included in marketing communications is fair, clear, and not misleading.
Statements in marketing materials must not contradict or diminish the significance of information in other communications to investors (prospectus/key investor information, Article 23 disclosures). Such marketing communications must specify where, how, and in which language investors or potential investors can obtain a prospectus and the key investor information (if any) and shall provide hyperlinks to or website addresses for those documents.
The European Securities and Markets Authority (ESMA) has recently published the final report on its Guidelines under the Regulation on the application of the requirements for marketing communications. The Guidelines further specify the requirements that funds’ marketing communications must meet.
The consultation on the Proposal ended on 17 June 2021.
The deadline for the implementation of the Directive by the EU Member States is 2 August 2021. However, according to the published timetable, the Government Bill is planned to be presented in the Parliament for discussion on the week starting 2 August 2021. Finland will therefore be late in the implementation of the Directive.
The financial services regulation team at Hannes Snellman is following closely the implementation process and is available to respond to any questions.