EU Proposals to Facilitate the Cross-Border Distribution of Investment Funds - Member Call on Thursday 12 April at 3PM BST/10AM EDT

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March 27, 2018 TO: ICI Global EU Capital Markets Union Task Force
ICI Global Regulated Funds Committee
International Operations Advisory Committee
International Operations Working Group RE: EU Proposals to Facilitate the Cross-Border Distribution of Investment Funds - Member Call on Thursday 12 April at 3PM BST/10AM EDT

 

On 12 March 2018, the European Commission (“Commission”) published[1] a proposed Regulation[2] and a proposed Directive[3] (“the proposed legislation”) to facilitate the cross-border distribution of investment funds in the EU.[4]

ICI Global will hold a member call on the proposals on Thursday 12 April 2018 at 3pm BST/10am EDT. Dial-in details for the call are below:

UK: 0330 336 0036
US: 1 917 793 0005
PIN: 066875 

Other telephone numbers: https://static.powwownow.co.uk/media/pdf/Powwownow-Dial-in-Numbers.pdf

If you wish to join the member call, please advise Lesley Dunn on +44 207 961 0830 or at lesley.dunn@iciglobal.org.

Background

Through the proposed legislation, and under the auspices of the CMU initiative,[5] the Commission is seeking to make the cross-border distribution of investment funds “simpler, quicker and cheaper”. The Commission is seeking to achieve this objective by:

• Amending those provisions in the AIFM and UCITS Directives that have been identified as burdensome or insufficiently clear and allowed the creation of additional requirements (‘gold plating’) when they were transposed into national legal systems;
• Aligning rules between the different legislative frameworks for investment funds; and
• Addressing the wide variation in fees and charges levied by national competent authorities (NCAs) for supervisory tasks.

ICI Global fully supports these objectives,[6] as detailed in our response[7] to the Commission’s prior public consultation[8] and our response[9] to its recent inception impact assessment.[10]

ICI Global has lauded the Commission’s effort to develop the proposed legislation, but recommended further work in several areas.[11] The proposed legislation will now be discussed by the Council of the EU and the European Parliament. The Commission is seeking to put in place the CMU by 2019.

Key aspects of the proposed legislation

The proposed legislation seeks to address fragmentation in, and barriers to, the marketing of UCITS and AIF across the EU single market. The key provisions of the proposed legislation are summarised below and compared against ICI Global’s recommendations to the Commission.

Marketing Communications

In response to industry feedback, including ICI Global’s recommendations, the Commission proposes to require ESMA[12] and national competent authorities (NCAs)[13] to publish online database(s)[14] containing all applicable national laws, regulations and administrative provisions governing marketing requirements for AIFs and UCITS (a summary must also be published). Under the proposed Regulation, NCAs that require systematic notification of marketing communications[15] (which shall not constitute a prior condition for UCITS marketing) shall:

• publish procedures for this notification on their website;[16] and
• submit an annual report to ESMA on decisions to reject or request adaptations to marketing communications that they have taken in the preceding year.[17]

ICI Global has previously called for:

• a pan-European marketing regime, including a single definition and set of requirements governing “marketing communications” and supplementary information to “obligatory investor disclosures”; and
• a notification process which enables UCITS funds to access the single market passport through a single filing, akin to the MiFID services passport and consistent with the proposed approach for EuVECA and EuSEF.

Regulatory Fees and Charges

In response to industry feedback that the level of fees for certain regulatory transactions is inconsistent across NCAs and does not appear to be proportionate to expenditure incurred (e.g. authorisation and notification), the Commission has proposed that fees or charges levied by NCAs are:

• proportionate to the expenditure incurred;[18]
• invoiced to the AIFM or UCITS management company each financial year;[19]
• published by NCAs on their website, including the calculation methodologies;[20] and
• notified to ESMA.[21]

It is also proposed that ESMA will develop an interactive database and tool on its website listing fees and charges levied by NCAs.

ESMA Fund and Marketing Notifications Database

The proposed Regulation will require ESMA to develop a database of all management companies and funds (i.e. AIF and UCITS) and the Member States in which the funds are marketed.[22] ICI Global has called for the development of a single central UCITS notification hub and repository maintained by ESMA and building on the existing UCITS register.[23]

Pre-marketing Definition

In response to industry feedback and the recommendation of a Commission expert group,[24] the proposed Directive introduces a definition of pre-marketing for AIF, namely: “a direct or indirect provision of information on investment strategies or investment ideas by an AIFM or on its behalf to professional investors domiciled or registered in the Union in order to test their interest in an AIF which is not yet established”.[25] The proposed Regulation introduces similar definitions for EuVECAs[26] and EuSEF.[27] The proposed legislation does not extend the concept of pre-marketing to UCITS.

Paying Agents and Information Facilities

In response to industry feedback, the Commission has proposed changes to the requirements for paying agents and information facilities in the UCITS Directive. In particular, the Commission has sought to ban the imposition of a physical presence requirement. This requirement has been a common feature of Member State implementation of UCITS, as illustrated by a thematic study undertaken by ESMA.[28] Of particular note, the revised requirements have been extended to AIF that are marketed to retail investors.[29]

The proposed Directive requires a UCITS management company to establish, in each Member State where it intends to market, facilities to perform various tasks, including those associated with processing subscriptions and redemptions (e.g. paying agent services) and the provision of information to investors (e.g. fund rules, annual reports etc.). A physical presence is not to be required of the UCITS management company for the purpose of providing such facilities,[30] but the facilities must have various characteristics, including that the tasks are performed in the official language(s) of the Member State where the UCITS is marketed.

The tasks associated with the provision of the facilities outlined above can be performed by the UCITS management company itself or a third entity subject to regulation governing the tasks to be performed, or both. If a third entity performs the facilities, then its appointment by the UCITS management company shall be evidence by a written contract specifying how the performance of tasks is split between the third entity and the UCITS management company.

ICI Global has called for the removal of physical presence requirements for the provision of paying agent services and information facilities. A comparison of the proposed requirements and existing UCITS requirements is contained in the annex to this Memo.

Discontinuation of marketing

The proposed Directive introduces conditions which must be fulfilled before a UCITS[31]  or AIF[32] may discontinue marketing in a Member State for which it has previously submitted a marketing notification. The conditions include:

• there being no more than 10 investors in the Member State that collectively hold units representing more than 1% of the fund’s assets;
• at least 30 days beforehand, the UCITS having made a blanket offer to investors in the Member State to repurchase, free of any charges or deductions, all units held by the investors; and
• the notification of the UCITS’ intention to stop marketing activities by means of a publicly available medium which is customary for marketing UCITS and suitable for a typical UCITS investor.

The proposed Directive requires the UCITS to make a notification to its home state NCA, which will, in turn, transmit this to the relevant host state NCA.

Next Steps

The proposed legislation will now be discussed by the Council of the EU and the European Parliament. The Commission is seeking to put in place the CMU by 2019.

 

Giles Swan
Director of Global Funds Policy, ICI Global

Attachment

endnotes

[1] See Memo 31129, RE: European Commission Publishes Capital Markets Union Package, dated 14 March 2018, available from https://www.iciglobal.org/iciglobal/pubs/memos/ci.memo31129.global

[2] https://ec.europa.eu/transparency/regdoc/rep/1/2018/EN/COM-2018-110-F1-EN-MAIN-PART-1.PDF

[3] https://ec.europa.eu/transparency/regdoc/rep/1/2018/EN/COM-2018-92-F1-EN-MAIN-PART-1.PDF

[4] https://ec.europa.eu/info/publications/180312-proposal-investment-funds_en

[5] See Memo 28743, RE: European Commission Green Paper – “Building a Capital Markets Union”, dated 18 February 2015, available from https://www.iciglobal.org/iciglobal/pubs/memos/memo28743

[6] ICI Global Response to European Commission Green Paper on “Building a Capital Markets Union”, dated 13 May 2015, available from https://www.iciglobal.org/pdf/28990.pdf

[7] See Memo 30285, RE: ICI Global Response to the European Commission’s Consultation on the cross-border distribution of funds across the EU, dated 30 September 2016, available from  https://www.iciglobal.org/iciglobal/pubs/memos/memo30285

[8] See Memo 30155, RE: European Commission Consultation on the cross-border distribution of funds across the EU, dated 22 August 2016, available from https://www.iciglobal.org/iciglobal/pubs/memos/memo30155

[9] See Memo 30791, RE: EU Commission Inception Impact Assessment – Reducing Barriers to the Cross-Border Distribution of Investment Funds – ICI Global Response, dated 21 July 2017, available from https://www.iciglobal.org/iciglobal/pubs/memos/memo30791

[10] See Memo 30765, RE: EU Commission Inception Impact Assessment – Reducing Barriers to the Cross-Border Distribution of Investment Funds, dated 4 July 2017, available from https://www.iciglobal.org/iciglobal/pubs/memos/memo30765

[11] ICI Global Press Release: Commission Proposal on Cross-Border Distribution of Funds Falls Short on Critical Issues, 12 March 2018, available from https://www.iciglobal.org/iciglobal/policy/rules/18_news_icig_ec_crossborder

[12] Article 4, proposed Regulation

[13] Article 3, proposed Regulation

[14] The database maintained by ESMA will also include hyperlinks to the website of NCAs (article 4, proposed Regulation).

[15] For example, upon the submission of a marketing notification

[16] Article 5(2), proposed Regulation

[17] Article 5(4), proposed Regulation

[18] Article 6(1) refers to expenditure relating to the authorisation or registration and the performance of the supervisory and investigatory powers

[19] Article 6(2), proposed Regulation

[20] Article 7(1), proposed Regulation

[21] Article 7(2), proposed Regulation

[22] Article 10, proposed Regulation

[23] https://registers.esma.europa.eu/publication/searchUcits

[24] https://ec.europa.eu/info/sites/info/files/170227-report-capital-barriers_en.pdf

[25] Article (2), proposed Directive

[26] Article 12(2), proposed Regulation

[27] Article 13(1), proposed Regulation

[28] https://www.esma.europa.eu/sites/default/files/library/esma34-43-340_final_report_on_thematic_study_on_notification_frameworks.pdf

[29] Article 2(2), proposed Directive introduces a new Article 30a to be inserted into the AIFMD.

[30] Article 92(2), proposed Directive.

[31] Article 1(7), proposed Directive introduces a new Article 93a to be inserted into the UCITS Directive.

[32] Article 2(5), proposed Directive introduces a new Article 32a to be inserted into the AIFMD.