The main purpose of the CBDFD is to harmonise and facilitate the cross-border marketing and distribution of alternative investment funds (AIFs) within the EU. This legislative initiative goes back to the issue faced by many fund managers wishing to test investor appetite for a particular investment idea or investment strategy in different EU Member States. Here the treatment of pre-marketing (i.e. activities not yet amounting to the regulated activity of "marketing") varied considerably across the EU. While some EU jurisdictions have already provided for pre-marketing rules (specifically laying down the conditions under which pre-marketing would be permitted), other EU jurisdictions have so far not been allowing pre-marketing activities at all. The CBDFD seeks to address this issue by introducing a new harmonised pre-marketing regime within the EU.
Besides adopting the new harmonised pre-marketing rules, the CBDF package (i.e. the CBDFD together with the directly applicable Regulation (EU) 2019/11563) provides for further changes to the regulatory regimes applicable to undertakings for collective investment in transferable securities (UCITS), AIFs and fund managers.
Below we would like to shed some light on the major legal changes introduced by the Act:
- Pre-marketing: Pre-marketing rules require that any information presented to professional investors by an EU manager of alternative investment funds (AIFM) must not (i) be sufficient to allow investors to commit to acquiring units or shares of a particular AIF (i.e. the information provided must not constitute an offer capable of acceptance, (ii) amount to subscription forms or similar documents whether in a draft or a final form, or (iii) amount to constitutional documents, a prospectus or offering documents of a not-yet-established AIF in a final form. Where draft prospectuses or offering documents are provided to professional investors, they must not contain information sufficient to allow investors to take an investment decision and must clearly state that (a) they do not constitute an offer or an invitation to subscribe to units or shares of an AIF, and (b) the information presented therein should not be relied upon because it is incomplete and may be subject to change.
While not requiring a marketing notification pursuant to the Austrian Investment Fund Manager Act4 ("AIFMG"; implementing Directive 2011/61/EU5 into Austrian law), EU AIFMs will need to send a notification in written form to their home state regulator within two weeks of the pre-marketing in Austria having begun. The notification letter must specify in which EU Member States and for which periods the pre-marketing is taking or has taken place, together with a brief description of the pre-marketing (including information on the investment strategies presented and the AIF(s) covered).
Any subscription by professional investors made within 18 months of pre-marketing activities having commenced will be considered the result of marketing and will be subject to the applicable (marketing) notification procedures provided for under the AIFMG. To that effect, commencing any pre-marketing activity will preclude reliance on reverse solicitation for a period of (at least) 18 months.
Any third party carrying out pre-marketing activities on behalf of an EU AIFM will need to be authorised as an investment firm, a credit institution, a UCITS management company or an AIFM (in each case, under applicable EU laws), or act as a tied agent in accordance with Directive 2014/65/EU (MiFID II).
- Required "facilities": UCITS intending to market their units to investors in other EU Member States or AIFM intending to market units or shares in AIFs to retail investors in other EU Member States are required to provide investors in each such EU Member State with certain services (so-called "facilities"). In contrast to the previous legal situation, a UCITS or an AIFM marketing its units or shares to Austrian investors is no longer required to designate a local credit institution as paying agent (Zahlstelle). Rather, such "facilities" may be provided online (via a website) and may be performed by the AIFM/UCITS itself or by a third party. While enhancing geographical flexibility by eliminating the requirement of a local physical presence, the Act has broadened the scope of the "facilities" to be provided to local investors. Tasks to be performed by such "facilities" include, amongst others, processing subscriptions, repurchase and redemption orders, providing investors with information on how to make such orders, facilitating the handling of information relating to the exercise of investors' rights as well as acting as a point of contact for communicating with the competent local authority.
- Formalised de-notification procedure: The absence of clear and uniform conditions for the discontinuation of marketing units or shares of a UCITS or an AIF in a host Member State created economic and legal uncertainty for fund managers. To overcome this uncertainty, the Act provides for clear conditions under which the arrangements made for marketing in respect of some or all of the units or shares of a UCITS or an AIF in a host Member State can be de-notified. Those conditions (including a public offer to repurchase or redeem all units or shares held by investors in that EU Member State) are aimed at balancing a fund's or a fund manager's ability to terminate marketing arrangements and the interests of investors in such undertakings.
- Strengthening liquidity planning in open-ended real estate funds: Demand for liquidity caused by redemption of shares in an open-ended real estate fund ("OEREF") can be difficult to meet on time due to the illiquid nature of the fund's assets. Following the German example, the Act therefore introduces a statutory return period of 12 months for shares in OEREFs, after which they may be redeemed on certain dates specified by the management company (but at least quarterly). This aims to make redemptions from investors more predictable from a liquidity and risk management perspective. To curb speculative trading in shares of an OEREF, the Act further provides for a minimum (continuous) holding period of 12 months. The relevant provisions are set to apply to existing OEREFs as of 1 January 2027. The fund's terms and conditions may provide for an earlier application of these provisions (but not earlier than 1 January 2023).
Fund managers who undertake any kind of (pre-)marketing activities for AIFs in Austria or other EU Member States, or that engage distributors to (pre-)market AIFs in Austria or other EU Member States, will need to carefully consider whether the new pre-marketing framework requires them to make any changes to their existing (cross-border) distribution arrangements and/or (pre-)marketing materials.
Overall, fund managers are expected to hail the new pre-marketing regime as an improvement over the current patchwork approach across the EU. However, as the implementation of the new pre-marketing regime into Austrian law leaves room for interpretation with respect to, among others, the treatment of pre-marketing activities conducted in Austria by non-EU AIFMs, further regulatory guidance will be highly welcome.
1 Directive (EU) 2019/1160 of the European Parliament and of the Council of 20 June 2019 amending Directives 2009/65/EC and 2011/61/EU with regard to cross-border distribution of collective investment undertakings.
2 Bundesgesetz, mit dem das Alternative Investmentfonds Manager-Gesetz, das Immobilien-Investmentfondsgesetz, das Investmentfondsgesetz 2011 und das Referenzwerte-Vollzugsgesetz geändert werden, BGBl I Nr. 198/2021 (see here in German).
3 Regulation (EU) 2019/1156 of the European Parliament and of the Council of 20 June 2019 on facilitating cross-border distribution of collective investment undertakings and amending Regulations (EU) No 345/2013, (EU) No 346/2013 and (EU) No 1286/2014.
4 Alternative Investmentfonds Manager-Gesetz – AIFMG, BGBl. I Nr. 135/2013 as most recently amended by BGBl. I Nr. 198/2021.
5 Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010.