Funds

The initial drafts of the Directive and accompanying Regulation on the cross border distribution of investment funds provoked a number of concerns particular in the context of the pre -marketing of Alternative Investment Funds (“AIFS”).

While the intention of the Commission may have been to provide a “safe harbour” for the pre-marketing of investment funds qualifying as AIFs, allowing AIFMs to test the waters with professional investors without significant regulatory barriers, the consensus view seemed to be the that the wording adopted by the Commission was far too restrictive as to what would constitute pre -marketing in this context. The original wording would have prevented a number of pre- marketing activities currently carried on in relation to the distribution of AIFs. In this context, pre marketing means activities carried out before the formal marketing notification is made to the FCA or equivalent European regulators as required by the AIFMD.

In June the Commission published its revised proposal which seeks to move the debate on from the initial draft proposals released in March of this year.

The Commission’s initial proposals defined pre- marketing as “a direct or indirect provision of information on investment strategies or investment ideas by an AIFM or on its behalf to professional investors domiciled or registered in the Union in order to test their interest in an AIF which is not yet established.

These proposals limited pre- marketing to instances where:-

  • the relevant AIF had not already been established or the pre-marketing did not contain a reference to an established AIF;
  • the documentation provided to investors did not enable them to acquire shares or units in the AIF; and
  • the documentation did not amount to a prospectus, constitutional documents of a not yet established AIF, offering documents, subscription forms or similar documents whether in a draft or a final form allowing investors to take an investment decision.

These limitations were seen as potentially damaging to current pre-marketing activities as once a fund had been established any information circulated would not have benefitted from the pre -marketing safe harbour and the AIFM would need to have complied with the formal notification requirements at a much earlier stage. This wording was also seen as particularly harmful to the practice in the UK and elsewhere, of circulating draft documents to investors for initial comment and feedback well before formal notification requirements are made to the regulator in respect of marketing as required under the AIFMD.

The revised proposal retains the existing definition of pre-marketing but adds additional wording to make clear that pre marketing may take place in respect of a yet to be established or established AIF (which has not yet been notified to the regulator for marketing purposes) and which “does not involve an offer or placement to the investor to invest in the unit or shares of that AIF”.

The limitation wording contained in the bullets noted above has been heavily amended so that the qualifications make clear that the pre marketing “safe harbour” will not restrict the circulation of documentation which is obviously in draft and not final form (and guidance is given how this is achieved) and is not directed at that time to taking subscription monies. The circulation of subscription documents in draft or final form will however be prohibited at the pre-marketing stage.

Further discussions will now take place with the European parliament.

Frank Doran

Consultant at Brodies LLP
Frank has for many years specialised in the financial regulation and investment fund sectors and regularly advises clients such as banks, asset managers and insurers on compliance with existing legislation and preparing for future developments. His area of expertise includes compliance with the FCA and PRA Rulebooks and legislation that affects companies in the sector such as FSMA, AIFMD, MiFID and EMIR.
Frank Doran