European Union: Cross-Border Fund Marketing Post August 2021: Six Key Impacts Of New EU Fund Distribution Rules

On 2 August 2021, most of the provisions of the EU Cross-Border Distribution of Funds (CBDF) legislation come into effect. The CBDF legislation, designed to reduce barriers to the cross-border marketing and sale of funds, includes a Directive amending the cross-border marketing provisions of both the UCITS Directive and AIFMD and a Regulation setting down disclosure rules for UCITS and AIF marketing communications. The Regulation's marketing disclosure rules will be supplemented by ESMA Level 3 guidelines, a draft of which were issued for consultation last November with a scheduled date for finalisation and publication of pre-2 August 2021.

While the CBDF Regulation is directly effective and applicable from 2 August 2021, the provisions of the CBDF Directive must be transposed into national law before becoming applicable in individual Member States. The deadline for transposing and applying provisions of the CBDF Directive under national law is 2 August 2021. As Ireland, along with several other Member States, has yet to transpose the CBDF Directive (2019/1160), this briefing is based on the provisions of the CBDF Directive and could be impacted by individual Member States' national laws transposing the CBDF Directive.

In this briefing we analyse six key impacts of the CBDF legislation and ESMA Level 3 guidelines on fund managers' existing marketing operations and processes.

Impact one: an end to physical local facilities

From 2 August, the CBDF Directive prohibits host Member States (in which UCITS or AIF shares are marketed) from requiring UCITS managers and AIFMs (in respect of retail investor AIFs) to have a physical presence in the host Member State for the purpose of making available local investor facilities. As such, Member States, who have to date gold plated the UCITS and AIFMD (retail investor marketing) rules by requiring the appointment of a local entity to provide local facilities, will, subject to local law transposition, be prevented from doing so from 2 August 2021.

Managers may wish to review their existing local agent arrangements and, provided ongoing compliance with local facilities' requirements can be ensured, amend and/or discontinue such arrangements in line with local laws transposing the CBDF Directive.

Impact two: protracted UCITS process for changes post-passporting

The CBDF Directive amends the process for notifying changes to a UCITS which is registered to market on a cross-border basis (a Passported UCITS). From 2 August (subject to local law transposition), a UCITS manager must provide one month's prior notice, to both the home and relevant host regulatory authorities, of any changes to a Passported UCITS' initial notification letter, as filed with the host regulatory authority when first registering to market cross-border (Passport Notification Letter). This contrasts with the current process which requires only prior notification to the host regulatory authority of any changes to the Passport Notification Letter.

UCITS SHARE CLASSES

Under the CBDF legislation, changes regarding share classes to be passported (e.g. resulting from a share class launch) are specifically included as changes to the Passport Notification Letter requiring one months' prior notice to home and host regulatory authorities. In general, the current practice across Member States for passporting a new share class of a Passported UCITS simply involves an advance filing of the relevant translated KIID with the applicable host regulatory authority. As such, a requirement to file translated KIIDs at least one month in advance and with both the home and host authorities is likely to have a significant and unwelcome impact on UCITS managers' plans for passporting share classes. Notably, it is also is in stark contrast to the 10-day turnaround for passport notifications of funds.

A stated objective of EU legislators in amending the UCITS process was to align it with the AIFMD process for passporting EU AIFs across the EU. However, the revised UCITS process clearly (but perhaps unintentionally) deviates from the AIFMD process.

Under the AIFMD process, only planned, material changes to a passported AIF are required to be made one month in advance of implementation and only to the AIFM's home authority (this remains the case post 2 August 2021). Furthermore, ESMA has confirmed that the launch of a new share class of a passported AIF does not constitute a material change requiring one month's prior notice. While a similar clarification of the UCITS process would be most welcome, the possibility of providing such a clarification could be frustrated by the specific inclusion of the new share class requirement in the relevant CBDF legislative provision.

Impact three: enhanced marketing disclosure requirements

The CBDF Regulation sets out high-level, principles-based disclosure rules for UCITS and AIF marketing communications and provides for the publication by ESMA of guidelines to further specify disclosure standards for such communications. The CBDF disclosure rules apply to UCITS managers and EU AIFMs (including internally managed structures) from 2 August 2021.

In November 2020, ESMA issued a consultation on draft guidelines on marketing communications under the CBDF Regulation (Guidelines). The consultation closed on 8 February 2021 and ESMA is scheduled to issue final Guidelines by 2 August 2021.

Given the timing to compliance with the CBDF Regulation, fund managers would be well advised to have regard to the Guidelines, key of which are summarised below, in preparing for compliance with the new disclosure requirements under the CBDF Regulation from 2 August 2021.

Many of the below guidelines will be familiar to UCITS managers already subject to the Central Bank's advertising standards (Schedule 6 of Central Bank UCITS Regulations) by virtue of marketing in Ireland or in a Member State which does not regulate marketing disclosures. The Guidelines are not intended to replace the Central Bank's standards, however UCITS managers will need to comply with the Guidelines to the extent they do not already do so pursuant to their compliance with Central Bank rules. AIFMs, who are subject to far more limited Central Bank rules for marketing disclosures should pay particular attention to the ESMA guidelines in their preparations for compliance with the CDBF disclosure rules.

Fund managers should be aware that the category of marketing communications in scope of the Guidelines is broadly defined and includes all paper-based, electronic and verbal fund related communications, fund-specific social media communications, direct investor/prospective investor communications and distributor and third party communications used by a fund manager to market a fund. The Guidelines also set out a negative list of marketing communications considered outside the scope of the Guidelines which include legal and regulatory fund documents, communication of fund manager activities or limited social media message which in either case do not refer to a specific fund or group of funds.

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