Mediaboss Marketing

23 July 2021

Ganado Advocates

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The distribution of funds on a cross-border basis within theEuropean Union (the "EU") is the next important topic ofthe year for EU fund managers. The relatively new 'CBDFframework', which will come into force on 2 August 2021, willimpact alternative investment fund managers ("AIFMs") andUCITS management companies ("UCITS ManCos") as they willhave to ensure that marketing communications produced for fundsunder their management are compliant with this new framework. Thisarticle is aimed at: (i) providing a brief overview of the CBDFframework; and (ii) discussing the main challenges which AIFMsand/or UCITS ManCos may face once the framework is brought intoeffect.

Overview of the CBDF Framework

The 'CBDF Framework' is an EU legislative frameworkintended to facilitate the cross-border distribution of funds inthe EU by removing barriers to create a more competitive EUinvestment landscape. It is made up of two main legislativeinstruments - Directive (EU) 2019/1160 (the "Directive")and Regulation (EU) 2019/1156 (the "Regulation")supplemented by a Commission Delegated Regulation 2021/955 andguidelines issued by the European Securities and Markets Authority("ESMA") published on 27 May 2021. Most of thesubstantial provisions will apply as of 2 August 2021.

As a framework, it forms part of the capital markets union, aflagship initiative of the European Commission intended tostrengthen the European capital markets, which seeks to harmonisenational processes for the verification of marketing material bycompetent authorities and enables ESMA to monitor investment fundsmore closely. It allows managers to test the market and assess theappetite of potential investors for new investment strategies.Consistency regarding the way regulatory fees are determined willalso be introduced.

The main provisions of the CBDF Framework can be grouped underthe following five headings:

Main Challenges

The CBDF Framework is helpful to managers in certain respects,yet particular provisions require further clarification. The newrules will compel managers to decide whether to actively promote anew fund to potential investors or to rely on the reversesolicitation rule, but not to depend on both. The new frameworkindirectly imposes an 18-month ban on reverse solicitation if fundmanagers decide to pre-market a fund or sub-fund as a subscriptionwithin an 18-month period after the pre-marketing start date willautomatically be deemed to be marketing, triggering notificationrequirements. This is quite an unfavourable provision for fundmanagers. It is also unclear whether this automatic rule appliesonly within the member state where pre-marketing takes place orwhether it bans reverse solicitation anywhere within the EU.

Another provision that may be an issue for certain fund managersis the 36-month ban on pre-marketing of a de-notified fund withinthe member state. Managers are interested in launchingsuccessor/continuation funds, which increased in popularity in theprivate equity space over the pandemic, maybe hit by this avoidableharsh rule.

All the above could cause confusion and potentially damage EUinvestment. The industry hopes that national legislators andregulators tasked with the job of transposing the Directive intotheir respective national laws, by 2 August 2021, clarify thechallenges highlighted above by adopting narrow interpretations onthe bans. This may however result in differing views being adoptedby different member states which goes against the spirit of theCBDF Framework. Eventually, EU policymakers may need to revisit therules to resolve the issues altogether, as otherwise, barrierswithin the EU will continue to be present, compelling the EU toregress in its progress towards expanding the EU single market andcreating a capital markets union.

This article was first published in The Times ofMalta.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.

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