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New fund marketing rules

Further to the new EU Directive and EU Regulation on cross-border distribution of funds, marketing of funds will be subject to new rules from 2 August 2021. Further important changes will apply as soon as the new ESMA Guidelines become applicable. These new rules will probably have an impact on marketing materials, irrespective of whether they are online, by social media or in hard-copy.

Cross-border fund distribution: new rules

In June 2019, new rules were adopted on the cross-border distribution of collective investment undertakings by means of the Directive on cross-border distribution of collective investment undertakings (2019/1160/EU) (CBDD) and the Regulation on cross-border distribution of collective investment undertakings (EU/2019/1156) (CBDR). Apart from the CBDD and the CBDR, ESMA will issue final guidelines on marketing communications which shall apply from six months following publication. Dutch law will also be amended in line with the CBDD but the bill is still pending.

The new rules amend the existing AIFMD and UCITS regimes with a view to harmonisation of distribution of funds in the EU. As a result, marketing of funds is the central theme of the new rules.

Scope unclear

There is some ambiguity about the scope of the new rules. While technically the new rules only apply to licensed AIFMs and UCITS ManCos, the general principle is that EU AIFMs should not be disadvantaged relative to non-EU AIFMs. One cannot therefore exclude that the new rules will also apply to non-EU AIFMs. This will largely depend on local implementation. The Dutch implementation bill is however silent on this topic.

Marketing vs. pre-marketing

The new regime draws a clear line between what is considered pre-marketing and marketing of funds.
Pre-marketing precedes marketing and as such, pre-marketing is not marketing and the other way around. There are however situations where pre-marketing will be deemed to be marketing after all, notably in case of subscription within 18 months following the start of pre-marketing.

Without further going into the requirements of pre-marketing, it is important to understand that – in short – while pre-marketing comes with certain restrictions, marketing may ony take place after a cross-border notification has been duly made.

Marketing communications

The CBDR and the ESMA Guidelines include certain quite prescriptive rules on marketing communications. Article 4 of the CBDR starts with the fairly straight forward and standard requirement for fund managers that marketing communications shall be identifiable as such, shall describe risks and rewards and shall be fair, clear and not misleading. The ESMA Guidelines further set out what this general requirement means in practice.

The ESMA Guidelines start by stipulating what constitutes a marketing communication. In short, this includes all messages and material, irrespective of the medium, relating to a particular fund (AIF or UCITS). It excludes statutory information (e.g., prospectus, KIID/KID, annual reports, articles and fund terms) and information not relating to a fund. In addition, any information for the purpose of pre-marketing is also excluded. This is understandable as pre-marketing is not considered marketing and has its own standards for information that can be used for this purpose.

As was the case before, where marketing communications are aimed at retail investors in the Netherlands, they shall be in Dutch. Marketing communications to professional investors in the Netherlands may also be in English

Disclaimers

The ESMA Guidelines recommend or even require that specific disclaimers and wording will be used in marketing communications:

  • To be identifiable, it is recommended by ESMA that marketing communications include the wording “marketing communication“.
  • Marketing communications shall 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 the above general disclaimer may be replaced by the words “MarketingCommunication” or the hashtag “#MarketingCommunication“.
  • In case of use of past performance, the marketing communication shall include:
    Past performance does not predict future returns.
  • In case of use of expected future performance, the marketing communication 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 on future performance being subject to taxation depending on the personal situation of the investor which may change in the future, as well as a statement that investment may lead to a loss if no capital guarantee is in place.

Prescriptions for marketing communications

In addition to requirements on disclaimers, the ESMA Guidelines including some further new requirements depending on the information to be included in the marketing communications:

  • Risks and rewards disclosures should be appropriately balanced, both in content and format. While as such this requirement is not new, the way to secure this is that the font size of risks wording shall be at least equal to the font size of the rewards wording. ESMA also requires that the risks shall be positioned in an equally prominent place, for example in a two-column table mentioning risks and rewards. 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 that are relatively short. I believe that some form of generalisation should still be allowed.
  • Marketing communication for retail funds that provide characteristics of the fund, shall make clear that the investment is in the fund and not in the underlying assets. In addition, the investment policy must be briefly described. It is unclear what constitutes the charateristics of a fund. Presumably this relates to the investment strategy or the underlying assets.
  • If the investment policy is described, the marketing communication shall include “active” or “actively managed” for actively managed funds and “passive” or “passively managed” as well as “index-tracking” for index-tracking funds. The latter category does not include actively managed index-tracking funds as these are considered actively managed. Marketing communications on actively managed index-tracking funds shall explain the use of the benchmark and the degree of freedom to deviate from the benchmark.
  • Short marketing communications on social media shall be as neutral as possible and must include where further information can be found by using a link to the relevant webpage.
  • If costs are mentioned the marketing communication must include information for investors to understand the overall impact on the investment and the overall return.

Action required?

The new rules will have an impact on marketing communications of all funds. Consequently, marketing communications shall be checked on compliance. As indicated, while the CBDD and CBDR apply from 2 August 2021, the ESMA Guidelines apply from six months after final publication, so these are the relevant deadlines for compliance checks. Apart from these checks, the other requirements under the new rules, such as those on pre-marketing and de-notification, may also require attention.

Brexit update

With the postponed Brexit date of 31 October 2019 rapidly approaching, this is a short update of relevant Dutch rules and regulations for the financial services industry to mitigate the negative consequences of a hard Brexit. This update does not cover EU-wide arrangements such as those on clearing and trading at regulated markets.

Coming to the Netherlands

In September the Netherlands Instute of International Relations “Clingendael” has published a database of companies that have moved or are in the process of moving, (part of) their business to the Netherlands with a view to a Brexit. Where the Netherlands Foreign Investment Agency mentioned earlier that in August 2019 some 98 companies had opted for the Netherlands, the “Clingendael” institute now counts 56 companies moving 32 of which are financial sector companies. This group consists of trading venues, boutique trading firms and more traditional financials. No doubt depending on further Brexit developments more financials may follow. If they do, they may however benefit from the following regulations and may avoid moving for the purpose of market access.

UK investment firms

Investment firms domiciled in the UK providing services to professional clients in the Netherlands or dealing on own account in the Netherlands, may benefit from a new exemption from the Dutch licensing requirements for investment firms under MiFID II. Similar to the existing exemption for investment firms domiciled in the U.S., Switzerland and Australia, also UK investment firms may benefit from this exemption but only in case of a hard Brexit. In case of a deal on Brexit, this exemption will not enter into force. This exemption may be of a temporary nature only.

To benefit from this exemption the investment firm involved may only provide investment services to professional clients (such as Dutch institutional investors), must be subject to supervision by a competent supervisor (the FCA), and must register itself with the Netherlands Authority for the Financial Markets (AFM). This registration is of an administrative nature and can already be made prior to and conditional upon a hard Brexit. A registration fee of € 4,400 will be charged by the AFM in case registration will actually take place upon a hard Brexit.

A limited number of ongoing requirements applicable to Dutch licensed investment firms will apply upon registration. These requirements should not be burdensome for UK investment firms nowadays meeting the MiFID II requirements.

UK AIFMs

AIFMs domiciled in the UK may benefit from the existing Dutch private placement regime under AIFMD in case of a hard Brexit. In order to do so, marketing must be limited to qualified investors (such as Dutch institutional investors), the competent regulator (the FCA) has to confirm that it will be able to meet the obligations under the cooperation agreement with the AFM as recently agreed upon, and registration with the AFM has to take place by the AIFM. This registration is of an administrative nature and is free of charge.

Further to AIFMD, a limited number of ongoing requirements applicable to AIFMs will apply upon registration. These requirements should not be burdensome for UK AIFMs nowadays meeting the AIFMD requirements.

Other financial services sectors

Other than the EU-wide arrangements to mitigate the negative effects of a hard Brexit, there are no particular Dutch mitigation measures for other financial services sectors. As a result, other types of UK financial institutions will still have to take into account what part of their business in the Netherlands may be impacted by a hard Brexit. As a positive note it can be mentioned that in the meantime the Dutch regulators DNB and AFM have ample experience in handling authorization requests by UK financial institutions to set up a regulated Dutch business. As a result, while authorization remains to be a timeconsuming and expensive process, the benefit of an application at this stage is a smoother process than the initial applicants have gone through.