The UCITS and AIFMD ‘management’ and ‘marketing’ passports allow fund managers to manage and/or market funds across the EU, without the burden of establishing extensive administrative functions for every jurisdiction and allows them to create economies of scale where existing fund management companies are consolidated.
Distribution of UCITS and AIFs
UCITS benefit from the ‘passport’ introduced under the UCITS IV directive, by allowing them to be freely marketed on a public basis within all EU Member States, without additional authorisation from the competent regulatory authority of each host Member State after successful completion of a streamlined notification process. Outside the EU, distribution of UCITS funds into selective jurisdictions remains via private placement and thus must satisfy local regulations that are significantly more complex and time consuming than the EU passport notification process.
Similarly, the Alternative Investment Funds Directive (AIFMD) introduced a ‘passport’ for the distribution of units of AIFs to professional investors in the EU. Cyprus AIFMs, once authorised by the Cyprus Securities and Exchange Commission (CySEC), can market their EU AIFs to professional investors in all Member States, using the simplified regulator-to-regulator notification mechanism as opposed to having to seek permission from each Member State and comply with different national laws – the so-called National Private Placement Regimes (NPPRs). The AIFMD provides a more complex and delayed transposition schedule applicable to non-EU AIFMs and non-EU AIFs wishing to raise capital in the EU. In this case and in view of the uncertainty as to when and if the passport will be extended to third countries, the NPPR still remains applicable.
The EU regulator-to-regulator notification
- a UCITS authorised in Cyprus proposing to market its units/shares in a Member State other than Cyprus, must submit an advance notification letter to CySEC
- the notification letter must include information on arrangements made for marketing units of the UCITS in the host Member State, including where applicable, the categories of units/shares to be marketed
- in the case that the units/shares of a UCITS are marketed by its Management Company, in the context of its cross- border business within the territory of the UCITS’ host Member State, either through the establishment of a branch or under the freedom to provide services, accordingly the notification letter shall include an indication of this fact
- constitutional documents
- latest annual and half-yearly report (if applicable)
- Key Investor Information Document (KIID)
This country-by-country strategy by way of private placement is adopted by UCITS that seek to target a small number of larger institutional investors outside the EU. However, there are no harmonised rules within the EU surrounding private placement and thus fund promoters must contend with the specific local regulations governing each jurisdiction of intended distribution.
Cyprus AIFM marketing an EU AIF in the EU
EU regulator-to-regulator notification: The cross-border marketing by a Cyprus AIFM of an EU AIF addressed to professional investors is subject only to a notification procedure, under which relevant information is provided to the host Member State by the AIFM’s regulator (the notification procedure is similar to that for UCITS operators under UCITS IV).
Cyprus AIFM marketing a non-EU AIF in the EU
Through Private Placement: a Cyprus AIFM may market a non-EU AIF to professional investors in the EU under the national private placement regimes (and those EU AIFs which are feeders of a non-EU AIF master-fund) provided that:
- it is authorised under, and complies fully with the AIFM Law 56(I)/2013, as amended, except for the depositary provisions (however, an entity performing equivalent tasks has to be appointed subject to certain conditions)
- the third country where the non-EU AIF is established is not listed by the Financial Action Task Force (FATF) as a Non-Cooperative Country and Territory (NCCT)
- appropriate cooperation arrangements are in place between CySEC and the regulator in the country of establishment of the non-EU AIF
On 12 July 2019, the Official Journal of the European Union published the new EU cross-border fund distribution regulation and directiveRegulation (EU) 2019/1156 of 20 June 2019 on facilitating cross-border distribution of collective investment undertakings and amending European social entrepreneurship funds (EuSEF), European venture capital funds (EuVECA) and packaged retail and insurance-based investment products (‘PRIIPs’) regulations.
The main new requirements introduced by the new Regulation, which is effective as of 1 August 2019, are as follows:
- extension of the deadline for UCITS and AIFs under the same exemption to provide PRIIPs-KIDs from 31 December 2019 to 31 December 2021
- requirement for host regulators to send invoices or any other individual payment instruction relating to regulatory fees to the impacted UCITS´ or AIFM´s contact details indicated in the notification letter, thereby abolishing local requirement to calculate and pay regulatory fees without prior notification by host regulators
- implementation of a 10-business-day review period and deadline for marketing material reviews conducted by host regulators
- requirement for host regulators to publish summaries on local requirements (laws, regulations, administrative provisions, regulatory fees) in English on their websites
- creation and maintenance of ESMA databases detailing local requirements
- introduction of common rules on marketing communications (to be applied only after 2 August 2021)
- amending the EuSEF and EuVECA regulations to include the description and requirements for ‘pre-marketing’ (the same requirements apply as introduced in the AIFMD) (to be applied only after 2 August 2021)
As for theDirective (EU) 2019/1160 of 20 June 2019amending the UCITS and Alternative Investment Fund Manager directives (UCITSD and AIFMD), EU member states have to transpose the Directive into national law by 2 August 2021. It will apply as from that date to cross-border distribution of UCITS, AIFs, EuSEF and EuVECA.
The main changes the Directive brings to the UCITSD and AIFMD are the following:
- removal of requirement to appoint a local entity fulfilling the paying – and/or information agent function for UCITS and for AIFs distributed to retail investors
- implementation of uniform rules for the de-notification process, in case UCITS or AIFs shall no longer be marketed in a member state
- implementation of uniform definition and conditions for AIF ‘pre-marketing’ to professional investors