European Distribution for U.S. Managers: The Compound Effect
We recently sat down with Attilio Veneziano, founder of Veneziano & Partners, to chat about hot topics and trends in Europe that are impacting U.S. investment managers. This post, which has been adapted from a previously published article, takes a deeper dive into some of the issues we discussed.
Travel bans are increasingly being lifted across the world. The news is welcomed by many as a clear—even undeniable—sign that business is finally set to go back to pre-pandemic ways, including handshakes and crowded industry events. And while we don’t want to spoil the euphoria of the moment as things go back to normal, we believe that the digital dimension is here to stay.
In the past couple of years, our digital lives have evolved dramatically—and rapidly. From meetings to conferences, passing by cap intro events, we all experienced our fair share of business done through a screen. Investor meetings have been held online and due diligence exercises have been conducted entirely via video calls, leaving the in-person interaction as the very final stage of the process, where possible or allowed.
And where cultural acceptance of digitalization made European distribution for U.S. managers apparently easier—and more environment-friendly—the relentless regulatory output created more obstacles.
From marketing restrictions and online content sharing requirements to imposing the need to take an official stance on EU ESG matters, several issues should be taken into consideration in the paradigm of European distribution for U.S. managers. To make things more complicated—and interesting—premarketing rules were also recently rolled out in Europe.
Effect of Premarketing Rules under AIFMD
The Cross Border Distribution of Investment Funds Directive kicked in last summer, amending the European Alternative Investment Fund Managers Directive (AIFMD) and introducing new rules on so-called premarketing. Without making this another article strictly on premarketing and reverse solicitation, suffice to say that the route to European distribution for U.S. managers is filled with a brand new set of obstacles.
The first one is the fact that also non-EU alternative investment fund managers (AIFMs) will be subject in principle to the new notification requirements introduced with the premarketing rules. Similar to other prior regulatory endeavors in financial services, implementation of the Cross Border Distribution of Investment Funds Directive is far from taking place in unison across Europe. U.S. managers will have to pay particular attention to the developments of its implementation. It pays off to comply with the additional notification requirements when facing investors in EU domiciles, where the directive has already been translated in local rules. Among other things, the new rules' infiltration in the local law of some EU domiciles comes also with fines in case of omitted notification of premarketing activities.
The move to regulate premarketing in Europe is relevant and shouldn't be underestimated. U.S. managers should not only be mindful of the notification requirements introduced for premarketing, but also pay particular attention to the restrictions imposed on the type of documentation allowed when approaching EU domiciled investors. Simply put, new rules impose a new approach toward European distribution for U.S. managers.
And with the added complication of a reverse solicitation—via the introduction of a legal fiction of marketing—the official interpretation of the premarketing rules, made by certain national competent authorities, has also reinforced the idea that some activities aren't considered marketing or premarketing and as such don't require any authorization. While the boundaries are blurred and far from clearing up, it pays to put effort into thinking and acting differently.
Don’t Forget about ESG—No Longer Simply a Legal Exercise
ESG represents a new piece in the puzzle of European distribution for U.S. managers. This is especially true for those U.S. managers who reached the point of making a premarketing notification and got caught accordingly by the marketing legal fiction, with the 18-month prohibition to claim a reverse solicitation.
In July 2021, the European Commission released its official interpretation of Sustainable Finance Disclosure Regulation (SFDR) and clarified the scope of application to non-EU AIFMs marketing in Europe under national private placement regimes. According to the European Commission, the whole set of disclosure requirements will apply to non-EU AIFMs marketing in Europe, including the provisions related to disclosures for financial products. In other words, sustainability disclosures, both at entity and financial product levels, will have to be made both in the funds' offering documentation and on the managers' websites.
Again, the importance of this additional requirement shouldn't be underestimated for various reasons. On the one hand, Europe has been moving much faster on ESG than the United States. At the same time, we cannot really speculate yet whether the two regimes will be similar in their structure and framework. The UK, for instance, while aligned to global standards on disclosure, is adopting a completely different approach toward ESG than the rest of Europe. Chances are the United States might do the same. The challenge of European distribution for U.S. managers is further complicated by first having to take a formal stance on ESG through European lenses and parameters and then having to adopt a U.S. perspective in the near future. A double effort and cost, for sure.
From a more practical standpoint, European national competent authorities expect that, when a marketing authorization is submitted under any EU national private placement regime, applicable SFDR disclosures are already contained at least in the offering documentation of the concerned funds. Given that disclosures should not simply be drafted by a team of external lawyers, but require instead the active involvement of the various stakeholders within firms, we could see significant delays in the time to market if the ESG angle isn't tackled early on.
As regulation increasingly captures more aspects of European distribution for U.S. managers, the general climate of heightened alert across Europe triggered by Brexit is becoming a reality. At the beginning of 2021, the European Securities and Markets Authority (ESMA) issued a relevant statement that sets the theme for more intense scrutiny on approaches made by non-European firms toward European-based clients in terms of reverse solicitation.
While the compliance burden involved with European distribution for U.S. managers has clearly created a compound effect, timing and the right strategy remain of paramount importance when approaching Europe.
About Our Guest Blogger:
Attilio Venezianois a dual qualified lawyer with more than 15 years of international experience and the author of the 2019 book Deepening the Single Market in Europe. Starting as a practitioner in European extradition law and working through a career in-house at major financial institutions in the offshore investment funds industry, Attilio founded Veneziano & Partners in London in 2013 to respond to the rising demand by global fund managers for a centralized solution to European cross-border fund distribution compliance in the aftermath of AIFMD implementation. Veneziano & Partners excels at interpreting the needs and ambitions of each one of its clients, with the goal of establishing durable business relationships based on trust. The services offered by Veneziano & Partners are performed by experienced professionals, whose exclusive aim is to deliver business partnership support rather than an off-the-shelf mainstream solution. Get in touch at [email protected].