Narration (00:03):
Welcome to The Preferred Return, Skadden's investment management podcast covering regulatory developments in the UK and Europe.
Greg Norman (00:15):
Hello. Welcome to The Preferred Return, the Skadden podcast hosted by me, Greg Norman.
Abigail Reeves (00:20):
And I'm Abi Reeves. This podcast series provides short summaries of legal, regulatory and other topical developments in the UK and European investment management space.
Greg Norman (00:31):
This series is designed to be accessible to professionals in all fields. If there's a topic in particular you'd like us to discuss, we welcome your feedback. So, Abi, what's on the agenda today?
Abigail Reeves (00:43):
Thank you, Greg. Today we'll take a moment to talk about private funds marketing in the UK and Europe. The rules are based on the Alternative Investment Fund Managers Directive (AIFMD), which has been in place for almost a decade. One of the aims of the AIFMD was to provide a harmonized set of rules for marketing funds in Europe. However, the results were quite different, especially for non-EU fund sponsors. So I would like to summarize some of the issues to consider.
Greg Norman (01:11):
That's right, Abi. AIFMD was enacted in response to the global financial crisis and the view, particularly in the minds of his EU regulators, that the actions of private funds were one of the causes of that crisis. For the first time in Europe, a unified set of laws governing the alternative funds sector has been enacted.
(01:29):
In addition to the requirements introduced by AIFMD, so-called marketing passports were also introduced. The idea was to simplify the regulatory process so that private funds could access all professional investors in Europe.
Abigail Reeves (01:42):
AIFMD also had a significant impact on non-EU funds. AIFMD had considered marketing passports from non-EU funds, but this did not materialize. In the absence of such a regime, the AIFMD considered that each Member State could choose to introduce a regime for the marketing of non-EU funds within its jurisdiction. These systems are generally referred to as private placement systems.
Greg Norman (02:04):
Now, before we go into more detail about the national private placement system, I wanted to talk about when Marketing Passport will be available. A European private fund manager or his AIFM can use his EU fund marketing passport, which is marketed to professional investors.
Abigail Reeves (02:19):
Exactly, this is not something that is automatically available to managers. Before a manager engages in marketing activities, it must notify the fund's home regulator of its desire to market. The notice must include certain information, such as a description of the fund, the fund's founding securities, the Section 23 disclosures discussed below, and the identity of the depositary.
(02:43):
After receiving the notification, the regulator will notify the administrator within 20 business days whether the proposed marketing is permitted. However, it can only be refused if the information provided shows that the management carried out is not compliant with his AIFMD.
Greg Norman (02:57):
If a management company wishes to sell in another member state, it must provide a written notification to the regulator. That letter will include the program of business identifying the funds you wish to sell, the jurisdiction you wish to sell in, and information. Abhi said earlier. The home regulatory authority must transmit the notification to the competent authority in the relevant Member State within 20 working days of receiving the notification.
(03:21):
It is also worth noting that, with the exception of Gibraltar, EU controllers will no longer benefit from the UK marketing passport and vice versa after Brexit. So, Abi, should we move on to the discussion about private placements in the state?
Abigail Reeves (03:33):
Of course, Greg. As mentioned earlier, Marketing Passport is only available to EU Managers. Non-EU managers, including UK managers, who wish to market their funds to investors within the EU will have to rely on their national private placement regimes. These regimes are not in place in all EU member states and the requirements may vary from member state to member state. For example, in Germany there is a requirement that a European custodian be appointed to the fund, while in the Netherlands there is no such requirement.
Greg Norman (04:02):
Thank you, Abi. Although requirements may vary between Member States, there are common requirements for relying on the NPPR. For example, the filing requests information regarding whether a custodian is used or whether risk management portfolio management is performed by a third party. or the presence or absence of a broker, rating agency, independent auditor, and whether the relevant fund is a feeder fund.
Abigail Reeves (04:25):
In certain jurisdictions, administrators are also required to provide supporting documentation. Although requirements vary, managers may be expected to provide a private placement memorandum, certificate of incorporation, investment management agreement, and also make Section 23 disclosures to the fund.
Greg Norman (04:41):
There are also ongoing requirements that managers must comply with after registering a fund for marketing. First, managers must provide Section 23 disclosures to investors before they commit. In addition to reporting to regulators, asset management companies must also continually disclose information to investors. Third-country managers who register funds for marketing within the EU will also be subject to the AIFMD's asset stripping rules and sustainability-related regulations.
Abigail Reeves (05:09):
If we first think about Article 23, or pre-investment disclosures, we would normally expect these to be included in the offering document or supplementary materials. The information that needs to be covered is quite extensive and includes details about the fund's investment strategy, leverage arrangements, service providers, valuation procedures and fees to be paid by investors.
Greg Norman (05:29):
Ongoing reporting requirements require management to prepare annual reports, which must be distributed to investors and made available to regulators upon request. The report should include typical accounting information such as a balance sheet, statement of assets, and income and expense accounts for the fiscal year. However, the annual report must also include information on the remuneration paid by managers to staff, and this information must comply with Level 2 AIFMD regulations.
Abigail Reeves (05:57):
The regulatory reporting required of asset managers primarily focuses on how assets are managed, including whether there are special arrangements for illiquid assets and the risk management systems in place. This is no different than the US Form PF report.
Greg Norman (06:13):
In the UK, the frequency of regulatory reporting depends on the size of the administrator. Managers with total assets under management of more than £1 billion are required to report quarterly, while smaller managers only need to report semi-annually or annually.
Abigail Reeves (06:29):
If a fund is registered for marketing, the fund and its AIFM are also subject to the AIFMD's asset stripping rules. This applies if the Fund acquires a UK or EU company. Broadly speaking, these rules require management to use their best efforts to prevent distributions by the company to shareholders, in which case net assets are equal to or less than 24 years of contributed capital and distributable This will be less than the reserve amount. A few months. This is important, as it may affect your post-transaction construction plans, for example.
Greg Norman (07:02):
Private fund managers should also be aware that if they sell funds within the EU, they will be subject to the EU's SFDR (Sustainable Finance Disclosure Regulation). Currently, the UK equivalent rules do not apply to non-UK managers.
Abigail Reeves (07:16):
Thank you, Greg. Now, we have covered Marketing Passport and national private placements at a high level, but are there times when you can no longer rely on these schemes?
Greg Norman (07:25):
Yes, unfortunately. As already mentioned, there are jurisdictions in Europe that do not have any private placement regime at all, so the sale of funds is largely prohibited in these countries. Exemptions may be available in limited circumstances, but generally investors in these jurisdictions must begin investing in non-EU funds to participate. Business owners considering marketing in Europe are advised to obtain jurisdiction-specific advice before offering an interest in a private fund to identify the different rules.
Abigail Reeves (07:55):
It is also worth noting that this area will be further regulated in the EU with the introduction of a pre-market regime in 2021. Before the Cross-Border Distribution Directive came into force, there was greater scope to rely on reverse solicitation and managers did not have to register for marketing if European investors acquired fund interests voluntarily. .
(08:15):
Although reverse solicitation is possible in certain limited circumstances, the scope of the premarket regime effectively prohibits non-EU operators from carrying out premarket activities unless they are registered with a national private placement regime. There is. Certain EU jurisdictions also allow non-EU controllers to notify national regulators about pre-marketing activities. However, again, advice should be obtained on a jurisdiction-by-jurisdiction basis.
Greg Norman (08:41):
That is correct. And for these purposes, the scope of pre-marketing actually includes any discussion with prospective investors that refers to investment strategies and ideas, or the fund itself. Once a manager has registered for pre-marketing, the fund must be fully registered for marketing before accepting EU investors. The potential risks of breaching these marketing rules are not trivial and may include fines and termination of the contract in which the investor has invested.
Abigail Reeves (09:07):
However, managers wishing to reach out to UK investors should also be mindful of the UK's financial facilitation regime. The UK Financial Promotion Regime may capture activities that do not fall under the UK AIFMD Marketing Regime.
Greg Norman (09:20):
Thank you, Abi. That concludes the summary. We have tried to briefly explain the rules that apply to marketing funds in Europe, but as you can see, the rules are relatively complex, so marketing plans should be carefully considered and taken into account the specific circumstances of the fund and market conditions. need to do it. manager. We don't believe there is one solution for all managers, but it's not as painful as it sounds.
Abigail Reeves (09:42):
Thank you for your attention. We look forward to the next episode.
Greg Norman (09:46):
This was a priority return. Keep investing.
Narration (09:50):
Thank you for joining us on The Preferred Return. If you enjoyed this conversation, be sure to subscribe on your favorite podcast app so you don't miss future episodes. Additional information about Skadden can be found at skadden.com.
