On January 12, 2022, Skadden partners Greg Norman and Anna Rips led the webinar “Challenges for the Cross-Border Distribution of Private Funds in 2022,” which considered recent changes to the rules and regulations governing the marketing of private funds in the United States and Europe. As levels of private fundraising continue to be high and fundraising is becoming an increasingly cross-border effort, it is important that fund sponsors be able to navigate these new and amended regulations.
Below are the key points addressed by Mr. Norman and Mrs. Rips in webinar.
A recording of the event is available here.
Evolution of European marketing standards
Much of the European Union’s Cross-Border Distribution Directive (CBDD) and Cross-Border Distribution Regulation (CBDR) entered into force on 2 October 2021. The main purpose of the legislation is to remove regulatory barriers to the cross-border distribution of funds. in the EU, making it simpler and cheaper.
The CBDD, for example, introduces a clear definition of “pre-marketing”, thus harmonizing the dividing line between “marketing” activities, which trigger the full registration requirements of the Alternative Investment Fund Managers Directive (AIFMD). ) and “pre-marketing”. activities, not. EU member states had taken a different approach to this division, with the associated costs for alternative investment fund managers (AIFM) seeking to avoid activating registration requirements when approaching potential investors across the board. EU. This benefit is further enhanced by the broad definition of pre-marketing introduced by the CBDD. As long as the marketing information does not constitute subscription documents or a final constitutional offer, AIFMs are not required to register for full marketing. In contrast, AIFMs may be registered for pre-marketing with an informal letter to the relevant national regulators, without direct regulatory obligations arising from such registration. This should allow the AIFM to conduct market testing before making a decision on whether to launch an AIFMD compliant fund.
However, the CBDD only applies to EU AIFMs, which means that EU Member States can still take divergent approaches to non-EU AIFMs. While some Member States have applied the pre-marketing regime to both EU and non-EU AIFM, others have effectively banned non-EU AIFM from carrying out pre-marketing activities. In these Member States, non-Community AIFMS must now register their fund under the national private placement scheme before providing any information about the fund to potential investors. As a result, the implementation of the CBDD has made it more difficult for investors in some EU Member States to access global private funds.
Meanwhile, the CBDR is harmonizing the rules on marketing communications within the EU. For example, AIFMs need to ensure that all marketing communications to EU investors are identified as such and provide equally prominent descriptions of the potential risks and benefits of investing. As with the CBDD, the CBDR does not clearly apply to GIAs outside the EU. However, given the relatively light requirements and fairly close alignment with the rules in jurisdictions such as the US and the UK, it is likely that most managers seeking to market private funds in the EU will seek to comply with the requirements. CBDR rules. The introduction by the CBDR of clear rules that are broadly in line with the standards imposed in other major fundraising jurisdictions will be useful for managers preparing communications for a wide range of potential investors.
Finally, it is worth noting that the CBDD and the CBDR were approved before Brexit (although their date of application came after the United Kingdom left the EU), and the rules were not automatically transposed into British legislation. So far, there are no suggestions that the UK government plans to introduce equivalent rules.
Evolution of US marketing standards
Under the U.S. Securities Act of 1933 (Law or Securities Act), an issuer must record sales of securities. Section 4 (a) (2) of the Act provides for an exemption from this record for “transactions of an issuer that do not involve any public offering,” unless an exemption is available. The “public offering” is not defined in the Act, so most funds are subject to Rule 506 safe harbor (also known as Regulation D), which sets out the rules and procedures for complying with the exemption from registration. of Section 4 (a) (2). Other relevant requirements for marketing in accordance with the Securities Act include the requirement of Rule 506 (b) to offer securities only to recipients with whom the issuer has a substantial pre-existing relationship. This requirement does not apply to bids under Rule 506 (c). However, most funds remain dependent on Rule 506 (b).
The U.S. Securities and Exchange Commission (SEC) has adopted a new Rule 206 (4) -1, better known as the “Marketing Rule,” which came into force in May 2021, with a transitional period ending. in November 2022, which will require compliance with new rules for investment advisers who must be registered under the U.S. Advisors Act of 1940 (Advisors Act). The new rules codify the marketing communication approach for U.S. investment advisers, clarifying four key areas. First, the new marketing rules define and explain what constitutes an ad. Second, the new rules set out a disclosure standard that is consistent with the Securities Act standard, which prohibits advisers from making false statements about a material fact or not disclosing any material facts necessary to make a statement. the light of the circumstances in which this statement. it was not misleading. Third, the rules codify certain standards for the presentation of performance data, requiring advisors to include their results in their ads to present data in a fair and balanced manner and to include information on net performance whenever the gross yield is presented. Finally, a number of restrictions have been codified in the marketing rules regarding the provision of testimonials and endorsements. This regulatory development has been instrumental in clarifying the approach that U.S. investment advisers should take in marketing.
In December 2019, the European Union’s Sustainable Finance Disclosure Regulation (SFDR) came into force, with certain operational provisions coming into force in March 2021. The SFDR is effectively modifying the AIFMD to introduce new obligations. environmental, social and government outreach for managers and funds within the scope of this legislation.
The application of the SFDR to non-EU AIFM remains unclear. SFDR rules are broadly divided into two categories: product level and entity level. When the SFDR was first introduced, non-EU AIFMs approached the rules in the same way as the AIFMD, where the obligations generally apply only to the product being marketed. The sponsor of the non-EU fund must not comply with the rules. However, when asked by the European Commission to clarify how the SFDR should be applied to non-EU AIFMs, the answer was still somewhat ambiguous, saying that all rules should be applied. , in particular the product-level requirements (in other words that is, what people were already asking for). As a result, market practice still seems to have landed on this issue.
Product-level disclosure requirements require fund managers to make pre-investment disclosures to potential investors and provide ongoing reporting to actual investors. The form of some of these reports and disclosures must be specified by technical regulations. Although the SFDR is in force, the regulatory technical standards remain in draft form and are not expected to be finalized until the middle of this year at the earliest. Therefore, fund sponsors should do their utmost to comply without all the necessary details.
The SFDR represents a step towards the dissemination of ESG factors that are increasingly regulated and evaluated in marketing materials. While there are no specific ESG rules in the U.S. regarding mutual fund marketing, when announcing its review priorities in early 2021, the SEC stated that it was improving its focus on ESG risks. and climatic. In a risk alert issued in April 2021, the SEC presented a review of the Division of Examination’s ESG investment, which focused on three areas for staff examinations in relation to ESG issues: consistency of examination. portfolio management with statements made regarding portfolio management to applicable disclosure and any relevant marketing materials; performance advertising and marketing, including reports from investment advisers to ESG framework sponsors and statements made on marketing materials; and compliance programs related to ESG investment and outreach practices. This, along with the SEC’s request for comment on public change disclosure regulation, is a strong indicator that the SEC will need to continue to regulate ESG and / or climate change.