Marketing in Europe: What to Do in the Wake of the Latest EU Development
U.S. advisers seeking to market alternative investment funds in the European Union may be disappointed by a recent EU body’s recommendation that an EU-wide marketing passport not be extended to U.S. firms. But the failure to recommend the passport, which would have simplified the business of marketing alternative investment funds in Europe, does not prevent U.S. firms from marketing in Europe – they just need to do so within the existing rules.
The European Securities and Markets Authority (ESMA) on July 30 recommended that the passport – known as the Alternative Investment Fund Managers Directive (AIFMD) passport – be withheld from advisers in the U.S., Hong Kong and Singapore at this time. Had ESMA recommended approval, U.S. advisers registered in one EU state would have been allowed to market alternative investments throughout the EU.
Politics may have played a role in the ESMA recommendation, as the EU wants to make sure that it can have reciprocal entry for its alternative investment securities in U.S. markets, said ACA Compliance (Europe) head of business development Andy Welch. ESMA made its recommendation after assessing each country for the adequacy of its investor protection arrangements, the likelihood that EU alternative investment fund managers and funds might be disadvantaged by extending the passport, barriers to the entry of EU fund managers and funds in those countries, and the effectiveness of monitoring systemic risk.
What’s more, given the twists and turns of the EU bureaucracy, there is a good chance that the AIFMD passport is unlikely to be extended to U.S. advisers anytime soon, said ACA Compliance (Europe) consultant Martin Lovick. For one thing, ESMA’s recommendation was preliminary. For another, there is speculation that the EU may wait to make a decision until a larger group of non-EU countries can be approved at once. Currently, ESMA has recommended only three non-EU countries for the passport: Jersey, Guernsey and Switzerland, and even Switzerland still has a number of legislative hoops to jump through prior to receiving final approval on the passport.
Marketing can still occur
All the ESMA decision really means, however, is that U.S. advisers will need to continue marketing in Europe the way they have already been doing, on a country-by-country basis. "At the moment, it’s business as usual," said Mayer Brown of counsel Alexandria Carr.
"Decide on the market strategy and identify your target countries, then understand the National Private Placement Regime (NPPR) and resultant regulatory obligations in each country," said Welch. Going through an NPPR is the safest and most reliable way to market within each EU member state, he said.
Advisers seeking to do so might want to work with a compliance firm or a law firm with offices in Europe already familiar with the details of the EU NPPR process, which can be daunting. That’s because each EU member state’s NPPR may have different requirements in such areas as:
Annual reports containing qualitative and quantitative information on the adviser and the aggregate compensation paid to top executives;
Required disclosures in private placement and offering memoranda, which Carr said includes a description of the investment strategy and objectives of the fund, a description of the type of assets in which the fund may invest, the techniques it may employ and risks, as well as the types and sources of leverage permitted, the identity of service providers, a description of how the fund ensures the fair treatment of investors, and the types of side letters that might be entered into; and
EU Annex IV reporting, which is the equivalent of completing the SEC’s Form PF.
Pre-marketing and reverse solicitation
Another marketing avenue exists, but it is one that should be only cautiously considered, as it involves bypassing the NPPRs by engaging in actions that do not trigger its rules. Such a path requires a detailed knowledge of each target country’s NPPR, and interpretations of definitions and rules that may be fluid. Failure to adhere to those definitions may leave an adviser in violation of a country’s NPPR.
For instance, different EU countries have different definitions of what constitutes marketing. In the United Kingdom, "marketing" means doing something that allows a target investor to buy a security, such as the provision of, or assistance with, subscription documentation, said Welch. Under that definition, simply providing generic information about a fund or security, and providing contact information so investors can learn more, may not be considered marketing. Instead, providing such information is considered "pre-marketing," which may fall outside the scope of a country’s NPPR.
Another approach is to rely on "reverse solicitation" to make the sale. This means that the adviser simply waits for the investor to make the contact, Carr said. In doing so, the adviser is able to avoid having to meet the NPPR disclosure, reporting, compensation and other requirements.
Neither Welch nor Lovick recommend this method. "We would be very wary to endorse this approach," Lovick said. "Its compliance with individual NPPRs is largely untested, either in law or regulation. The risk of getting it wrong is high for the adviser – potentially allowing a disgruntled investor to seek redress on the basis that he was mis-sold to at some point in the future."
Carr said that reverse solicitation is a viable alternative to marketing in some countries, but warns that caution is necessary. Confirmation from the investor that the sale was at the investor’s initiative should always be obtained and pre-marketing may negate the possibility of a subsequent reverse solicitation, she said.