New rules on marketing communications for funds
On 2 Februari 2022 new ESMA Guidelines on marketing communications for funds come into effect. The Guidelines include detailed requirements for fund marketing materials and marketing statements. Fund marketing communications will have to be in compliance with these new rules.
Background: Cross Border Distribution Regulation
The Regulation on cross-border distribution of collective investment undertakings (EU/2019/1156) (CBDR) has delegated the power to adopt certain guidelines on marketing communications to ESMA. The Guidelines were published on 2 August 2021, at the same time the CBDR started to apply.
Application: 2 February 2022
The Guidelines shall apply six months after their publication, so on 2 February 2022. There is no transitional regime and consequently as of 2 February 2022 all marketing communications must comply with the Guidelines. For the Netherlands, the AFM has indicated that it shall monitor compliance. It may be expected that the AFM will do a survey at some point in the forseable future as a first step.
Scope: EU approved managers only
The Guidelines apply to UCITS ManCos, self-managed UCITS, AIFMs, EuVECA managers and EuSEF managers. Although not mentioned by the Guidelines, one may assume that they also apply to ELTIFs, at least by analogy. The Guidelines do not apply to small, sub-threshold AIFMs and do also not apply to non-EU managers, even if they market their funds in the EU using national private placement regimes.
Marketing communications: irrespective of medium applied
According to the Guidelines all messages and materials relating to a particular fund (AIF or UCITS), irrespective of the medium applied, are marketing communications. An exception is made for statutory information such as the prospectus, the KIID/KID, annual reports, company articles and fund terms. Also general corporate communications are excluded, provided there is no reference to a particular fund. Marketing materials may be in any form: in writing or printed form, in electronic format, through press coverage, by interviews, online, by video, radio or live presentations, or on social media. It includes communications addressed to certain investors as well as to the general public. It also includes communications by ManCos and AIFMs as well as by third parties, albeit that the Guidelines only apply to ManCos and AIFMs so they must make sure that third parties acting on their behalf also comply with the Guidelines in their marketing communications.
The Guidelines clarify that communications relating to pre-marketing, are out of scope. This is to draw the line between pre-marketing and marketing which are two different concepts under the cross border distribution regime.
General requirements: no change
The basic marketing requirements remain unchanged. Marketing communications shall be identifiable as such, shall describe risks and rewards and shall be fair, clear and not misleading. This is very much in line with the existing requirements. However, the Guidelines go beyond this and even go beyond the existing marketing requirements for investment firms under MiFID II.
Risks and rewards: stricter rules
Risks and rewards disclosures must be appropriately balanced, both in content and format. While this requirement is not new, the Guidelines stress that font size of risks wording shall be at least equal to the font size of rewards wording. Risks wording in smaller print is no longer allowed. The Guidelines further require that risks shall be positioned in an equally prominent place, for example in a two-column table mentioning risks and rewards. This means that risks mentioned at the end of a document only, are no longer allowed. In addition, at least the risks mentioned in the KIID/KID and the prospectus (!) shall be included. It is unclear how all risks from the prospectus shall be included in marketing communications, especially in short-form communications. Some form of generalisation should still be allowed.
Retail funds: clarification on investment and investment policy
Marketing communications for retail funds that provide characteristics of the fund, must make clear that the investment is related to the fund and not to the underlying assets. In addition, the investment policy must be briefly described. It is not clear what constitutes the ‘charateristics of a fund’. Presumably this relates to the investment strategy or the underlying assets. Where marketing communications are aimed at retail investors in the Netherlands, the Dutch law requirement that communications shall be in Dutch, remains to apply.
Investment policy: active or passive management to be disclosed
If the investment policy is described, marketing communications shall include words like “active” or “actively managed” or “passive” or “passively managed” and “index-tracking” for index-tracking funds. The latter category does not include actively managed index-tracking funds as these are considered to be actively managed. Marketing communications on actively managed index-tracking funds shall also explain the use of the benchmark and the degree of freedom to deviate from the benchmark.
Social media: neutrality of communications
Short marketing communications on social media shall be as neutral as possible and must mention where further information can be found by using a link to the relevant webpage. This triggers the question whether promotional communications on social media are still possible as they normally lack neutrality. Further guidance on this aspect from ESMA would be welcome.
Costs: also information on impact
If costs are mentioned, marketing communications must include information for investors to understand the overall impact on the investment and the overall return of the investment. The mere mentioning of costs such as management fees, is therefore no longer allowed.
Disclaimers: dependant on type and content of communication
The Guidelines recommend, or even require, that specific disclaimers and wording are used in marketing communications. To be identifiable as such, ESMA recommends that marketing communications include the wording “marketing communication”. Marketing communications shall also include a general disclaimer stating:
“This is a marketing communication. Please refer to the [prospectus of the [UCITS/AIF/EuSEF/EuVECA]/information document of the [AIF/EuSEF/EuVECA] and to the [KIID/KID] (delete as applicable) before making any final investment decisions.”
In case of short messages this disclaimer may be replaced by the words “MarketingCommunication” or the hashtag “#MarketingCommunication”. The Guidelines suggest that this long-form or short-form disclaimer is a requirement rather than a recommendation. The disclaimer should be clearly displayed in marketing communications. Parties are free to decide how this is done against the background of the type of communication. The Guidelines however indicate that the end of a video message is not appropriate. The Guidelines are not as strict as, for example, the Dutch rules on risk warnings for certain financial products and services, which must always be displayed in a particular place and must have a particular size.
If past performance is displayed, marketing communications shall include the wording “Past performance does not predict future returns.” If expected future performance is displayed, marketing communications shall include:
“The scenarios presented are an estimate of future performance based on evidence from the past on how the value of this investment varies, and/or current market conditions and are not an exact indicator. What you will get will vary depending on how the market performs and how long you keep the investment/product.”
Future perfomance information shall also be accompanied by a disclaimer indicating that future performance is subject to taxation depending on the personal situation of the investor which may change in the future and that investment may lead to a loss if no capital guarantee is in place.
Action required: check all communications
For parties in scope, action is required as the new regime has now started to apply. New marketing communications must comply with the new rules. Marketing communications made earlier that are still being used, must not be used until revisited to check compliance with the new rules (which is probably not the case as they are unlikely to include the new disclaimers). Going forward, the Guidelines shall be part of a checklist for marketing communications.