The Cross-Border Distribution of Funds Framework

The Cross-Border Distribution of Funds (the “CBDF”) Framework is composed of the CBDF Regulation and Directive, and is supplemented by the Commission Delegated Regulation 2021/955 and by the ESMA Guidelines on Marketing Communications under the Regulation on Cross-Border Distribution of Funds. The ESMA Guidelines on Marketing Communications and the Commission Delegated Regulation 2021/955 came into effect recently on the 2nd of February 2022.

The CBDF Regulation establishes marketing requirements for collective investment undertakings and for marketing communications that are addressed to investors. This Regulation establishes principles relating to fees and charges that are levied on managers of collective investment undertakings with regards to their cross-border activities, and even refers to the establishment of a central database relating to the cross-border marketing of collective investment undertakings. On the other hand, the CBDF Directive defines and lays out conditions for pre-marketing, de-notification arrangements and notification procedures that relate to the changes in particulars communicated as part of a passporting notification.

Due to its nature, the CBDF Regulation is directly applicable and enforceable by law in all Member States; hence, fund managers must make sure to comply with the provisions of this Regulation. On the other hand, given that the CBDF Directive is a directive, Member States are required to transpose the provisions of this Directive into their domestic legislation. The CBDF Directive was transposed into the Maltese legislative framework by amendments that were carried out to Subsidiary Legislations under the Investment Services Act, particularly Subsidiary Legislation 370.18, 370.20, 370.21, and 370.22 of the Laws of Malta.

The main provisions found under the CBDF Framework may be summarised under the following four main headings:

I. Common Principles and the Requirements of Transparency:

The CBDF Regulation and Directive (the “CBDF Framework”) both provide broad principles that fund managers must comply with when drafting pre-marketing and marketing communications. For example, the CBDF Framework provides that it must be ensured that all marketing communications that are addressed to investors are identifiable as such, and that all the information that is included in marketing communications must be fair, clear, and not misleading. The marketing communication must state where, how and in which language (potential) investors may obtain a summary of investor rights and must assign a hyperlink to such a summary. Reference shall be made to the ESMA Guidelines on Marketing Communications under the Regulation on Cross-Border Distribution of Funds which provide further guidance on the application of the requirements for marketing communications.

Moreover, the CBDF Regulation requires national authorities, such as the Malta Financial Services Authority (the “MFSA”), to make available to the public information relating to the applicable laws, rules, and regulations that govern the marketing of Alternative Investment Funds (the “AIFs”) and of Undertakings for Collective Investments in Transferable Securities (the “UCITS”) along with their summaries. The language that is to be used in such case must be, at least, a language customary in the sphere of international finance.

II. The Requirement of Prior Notification of Marketing Communications and the Discontinuation of Marketing:

The CBDF Regulation provides that competent authorities of the Member States, such as the MFSA in Malta, have the power to decide whether to require prior notification of marketing communications which UCITS management companies aim to use directly or indirectly in their agreements with investors. The aim behind this is to ensure compliance with the CBDF Framework and with national rules dealing with marketing requirements.

Article 7 of the CBDF Regulation provides that prior notification shall not be seen as a prior requirement for the marketing of UCITS units. In cases where prior notification is required, the competent authorities have a period of 10 working days from the day of receipt of marketing communications to inform the UCITS management company whether any amendments to its marketing communications are required. However, the above-mentioned procedure should be without prejudice to any supervisory powers that the competent authorities might have to verify any marketing communications even after this procedure is carried out. Competent authorities who opt to adopt the prior notification procedure must publish on their website the procedure that must be adopted for prior notification.

Moreover, the CBDF Framework contains a de-notifying procedure where European Union (the “EU”) Alternative Investment Fund Managers (the “AIFMs”) may de-notify marketing arrangements that were made with regards to shares or units of all or some of its AIFs in a particular Member State if the conditions mentioned in the CBDF Framework are fulfilled. Further details regarding the de-notification procedure can be found in article 2 of the CBDF Directive, and even in regulation 4(14) of Subsidiary Legislation 370.18 and Regulation 4(15) of Subsidiary Legislation 370.21 of the Laws of Malta.

III. The Concept of Pre-Marketing:

The CBDF Framework introduced the concept of pre-marketing as an EU harmonised concept. The concept of pre-marketing helps AIFMs to be able to test the investor appetite with regards to a particular investment idea or strategy and to test the investors’ interest in an AIF or compartment which has not yet been established, or which has been established but has not yet been notified for marketing in that Member State where the potential investors are domiciled or have their registered office. In the pre-marketing stage, actual offers to invest or placements cannot be made to potential investors.

The CBDF Framework provides details and sets out conditions in cases where pre-marketing is being opted for. For example, the CBDF Framework requires EU AIFMs opting for the pre-marketing procedure to send an informal letter, which must contain the information that is stated in the CBDF Framework, within 2 weeks of it having begun pre-marketing, to the competent authorities of its home Member State.

IV. Fees and Charges:

The CBDF Framework provides that the competent authorities of each Member State, being the MFSA in the Maltese scenario, shall publish on their website updated information on the fees or charges that are levied to process marketing notifications on the MFSA’s website. Reference must be made to the MFSA’s website which contains detailed information on the fees and charges levied by the MFSA with respect to cross-border management and cross-border marketing.

Conclusion:

The CBDF Framework may be seen as a step forward to ameliorate and enhance the cross-border distribution of funds both with regards to AIFs and UCITS. This new Framework promotes and enhances uniformity in relation to the marketing of AIFs and UCITS, increases investor protection, lessens regulatory barriers, and promotes a more cost-effective approach. Fund managers who undertake marketing activities for AIFs or UCITS in the EU, or who engage distributors to market AIFs or UCITS in the EU, must ensure to take into consideration the CBDF Framework and carry out the necessary changes to their marketing materials and/or to their current cross-border distribution arrangements to ensure compliance with the Framework.