Memo #
33058

ESMA Consultation on Marketing Communication Guidelines: Member Call on 25 January at 10:00 am ET/3:00 pm GT/4:00 pm CET
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[33058]

January 20, 2021 TO: EU ESG Disclosure Regulation Working Group
EU Sustainable Finance Strategy Working Group
Global Operations Advisory Committee
ICI Global EU Capital Markets Union Task Force
ICI Global Regulated Funds Committee
International Compliance Advisory Committee RE: ESMA Consultation on Marketing Communication Guidelines: Member Call on 25 January at 10:00 am ET/3:00 pm GT/4:00 pm CET

 

On 9 November 2020, the European Securities and Markets Authority (ESMA) published[1] a consultation paper (“CP”)[2] on guidelines for marketing communications under the Cross-Border Distribution of Funds Regulation (“CDBF Regulation”).[3] ESMA is inviting feedback on the CP by 8 February 2021.[4] ICI Global intends to respond to the CP and will hold a member call to discuss our draft response on Monday 25 January at 10:00 am ET/3:00 pm GMT/4:00 pm CET via Zoom. Details of the zoom call are below.

Link: https://ici-org.zoom.us/j/8451715029 Meeting ID: 845 171 5029 Dial-in numbers: https://ici-org.zoom.us/u/aciU8N1qbl

Background

The CBDF Regulation requires fund managers[5] to ensure that:

  • marketing communications addressed to investors are clearly identifiable as such.
  • risks and rewards of purchasing fund units or shares are described in an equally prominent manner; and
  • information included in marketing communications is fair, clear, and not misleading.

ESMA is mandated by the CBDF Regulation to develop guidance on the above, taking into account on-line aspects of such marketing communications. The CP contains ESMA’s draft guidelines, on which it is seeking comment.

Consultation Paper

The CP is organised into five substantive sections. The first section covers the scope of the proposed guidelines (Section 3). The subsequent three sections describe the draft guidelines concerning the identification of marketing communications (Section 4), the description of risks and rewards (Section 5) and the requirements for marketing communications to be fair, clear, and not misleading (Section 6). The annexes to the CP (Section 7) contain the legislative mandate (Annex I), cost-benefit analysis (Annex II), a summary of the consultation questions (Annex III) and the draft guidelines (Annex IV)
Scope of the proposed guidelines

ESMA highlights that while the CBDF Regulation’s requirements, including those relating to marketing communications, apply only to fund managers, the distribution of funds is often carried out by intermediaries, whom themselves may be subject to separate rules on the provision of information. ESMA cites the example of a MiFID authorised distributor[6] who is subject to the requirement to ensure that information provided to its clients and potential clients is fair, clear and not misleading.[7] To avoid “discrepancies” between the requirements applicable to fund managers and those applicable to distributors, ESMA has designed its draft guidelines to be “substantially equivalent” to those in MiFID II.

ESMA notes that fund managers are responsible for ensuring the compliance of all marketing communications addressed to investors, including those “addressed by distributors” (e.g., where a fund manager delegates the marketing function to a distributor). As such, ESMA suggest that fund managers should contractually require distributors to comply with the marketing requirements to which the fund manager is subject.

ESMA is seeking input on its proposed approach to broadly align the marketing communications requirements under the CBDF Regulation with those under MiFID II (Question 1a), including whether there are gaps in the requirements (Question 1b) and whether further alignment is necessary (Question 1c).

Definition of marketing communications

ESMA proposes to define the “marketing communications addressed to investors” that will be covered by its proposed guidelines as: (i) those communications that have a marketing purpose; and (ii) contain a direct or indirect offering or placement of units or shares of a fund to or with investors domiciled or with a registered office in the Union. ESMA is seeking input on its proposed definition (Question 2).

ESMA also proposes to draw up a non-exhaustive list of the types of communications that it views as marketing communications, including taking into account online aspects of marketing such as message broadcasts on social media platforms. ESMA proposes that a very broad set of communications would be within scope, including:[8]

  • all messages advertising for a UCITS or an AIF, regardless of medium.
  • messages broadcast on any social media platform referring to any characteristics of a UCITS of AIFM including the fund’s name.
  • marketing material addressed individually to investors or potential investors, including presentations made on a public website or elsewhere.
  • communications advertising a UCITS or an AIF addressed to investors or potential investors, located in the home or host Member States.
  • communications describing the characteristics of a UCITS or an AIF, which are handed down to distributors by a fund manager and eventually addressed to investors or potential investors even if not original intended for that purpose.
  • communications by a third party and used by a fund manager for marketing purposes.

ESMA is seeking input on its proposed approach of developing a non-exhaustive list of marketing communications included in the scope of its guidelines (Question 3), including whether the guidelines take account of the on-line aspects of marketing communications (Question 4).

ESMA also plans to draw up a negative list of communications that would not be deemed marketing communications and therefore not subject to the guidelines. ESMA intends to clarify that the qualification of a document as a marketing communication depends on its substance rather than on its form (e.g., excluding from the guidelines those documents that do not have a marketing objective even if provided to investors.) ESMA proposes the following examples of communications that would not be considered as marketing communications:

  • Legal and regulatory documents of a fund, such as the prospectus, pre-contractual information,[9] the UCITS KIID and PRIIPs KID, the annual and half-yearly reports of a UCITS or an AIF and constitutional documents.[10]
  • Corporate communications broadcast by the fund manager describing its activities or some recent market developments and which do not refer to a specific UCITS or AIF or a group of UCITS or AIFs, unless the activities of the fund managers are limited to one fund or a small number of funds which are implicitly identified in such corporate communication.
  • Short messages broadcast on-line, in particular on social media platforms such as Facebook or Twitter, which only include a link to a webpage where a marketing communication is available, but which do not contain any information on a specific AIF, UCITS or group of AIFs or UCITS.

ESMA is seeking input on whether it should include a negative list of documents in its guidelines and whether elements should be added or deleted from its proposed list (Question 5).

Identification of marketing communications

ESMA recalls that the CBDF Regulation requires that all marketing communications addressed to investors to be identifiable as such. ESMA considers that the purpose of this requirement is to distinguish such communications from legal and regulatory documentation which provides more detailed information on the features of a fund’s unit or shares. ESMA proposes that marketing communications should include a short disclaimer to:

  • Make clear that the communication has a marketing aim, which would draw the attention of investors or potential investors to the fact that an investment decision should not be based only on the marketing communication; and
  • Highlight the existence of the legal and regulatory documents of the promoted fund, in particular the prospectus and UCITS KIID or PRIIPs KID, including where and how an investor can obtain these documents, and other pre-contractual information.

ESMA proposes that the disclaimer should be stated in a clear manner, which should be assessed in consideration of the type of marketing communication (e.g., for video presentations, the disclaimer should appear in a prominent manner in the video, a short warning at the end of the video would not be sufficient).

ESMA is seeking input on whether a short disclaimer is the most appropriate means of identifying marketing communications and, furthermore, whether the disclaimer should mention the existence of the prospectus of the fund (Question 6).

Description of risks and rewards

ESMA recalls that the CBDF Regulation requires that all marketing communications describe the risks and rewards of purchasing units or shares of a fund in an equally prominent manner. ESMA considers that this requirement does not address the content of disclosed risk and reward information, but instead its format – leading to a balanced disclosure which investors or potential investors can clearly and easily understand.

ESMA considers that the disclosure of risks and rewards in an equally prominent manner does not imply that this information is mandatory in all marketing communications. Where risk and reward information is included, references should be made in the same “manner”, by using the same font and size, and by placing each description along with the other in the communication (e.g., in the form of a table or as a list.) ESMA lists examples of marketing communications which describe rewards at the beginning and risks at the end, describe rewards in the main body of the document and risks in a footnote, or only contain a description of rewards and refer to another document describing risks as not meeting the requirements set out in the CBDF Regulation.

ESMA is seeking input on its proposed approach, including the description of risks and rewards in an equally prominent manner (Question 7) and whether any specific requirements should be developed for marketing communications developed in other media than paper ( Question 8).

Fair, Clear and Not Misleading

ESMA recalls that the CBDF Regulation requires fund managers to ensure that “all information included in marketing communications is fair, clear and not misleading”. ESMA considers this requirement to ensure that the information contained in all marketing communications is balanced, understandable, not confusing to investors or potential investors, and is consistent with, and not contrary to, the legal and regulatory documentation of the promoted fund. ESMA notes that its proposed guidelines are not intended to replace existing national requirements on the information to be included in marketing communications to the extent they are compatible with existing harmonised EU rules (e.g., KIID cost and performance disclosures).

ESMA proposes two sets of requirements that fund managers would need to take into account when drawing up marketing communications. One set of general requirements would apply to all marketing communications regardless of format, outlook or content. Another set of requirements would cover the presentation of risk and reward, costs, past and expected future performance, and sustainability-related aspects of the investment.

General requirements

ESMA considers that the requirement for marketing communications to contain information that is fair, clear and not misleading should be understood as implying that information is: (i) “drawn-up” in a manner suitable to the target investors or potential investors; and (ii) is consistent with the information documents of the promoted fund. Furthermore, ESMA considers that the type of investor (i.e., retail vs professional) should be taken into account when determining how information is written and presented (i.e., the balance of technical wording vs explanation).

ESMA is seeking input on whether the fair, clear and not misleading “character” of information should be assessed differently for marketing communications related to funds for retail vs professional investors (Question 9).

ESMA highlights that marketing communications should be consistent with, and not contrary to, the legal and regulatory documents of the promoted fund (e.g., prospectus, KIID, KID etc.) ESMA considers that information contained in a marketing communication does not differ from the same information disclosed in legal and regulatory documents and does not diminish or contradict it. For instance, ESMA notes that simulations or figures relating to risks and reward, costs, past or expected future performance should be consistent across marketing communications and legal or regulatory documents. ESMA notes that while marketing communications may not contain all key information on a fund, they should be stand-alone documents and not include “excessive cross reference” to legal or regulatory documents of the fund.

ESMA is seeking input on whether the same information should be included in marketing communications and legal and regulatory documents (Question 10).

ESMA considers that while marketing communications should contain information that is fair, clear and not misleading, this should not imply that marketing communications contain all the information necessary to make an investment decision, as this is the purpose of the fund’s prospectus, KID/KIID and other pre-contractual information. ESMA suggests that the level of information contained in marketing communications should “fit” the size and format of the communication. ESMA does not plan to develop a minimum set of information that should be included, but underscores that all information on in a marketing communication should be fair, clear and not misleading, including particularly the information on the following aspects:

  • the fund’s investment policy and underlying assets.
  • costs, risks and rewards, past and future performance, sustainability-related aspects of the investment and the use of leverage;
  • whether the fund is passively or actively managed, or active but managed in reference to a benchmark index; and
  • reference to the name of the national competent authority.

ESMA is seeking input on its proposed approach to not develop a minimum set of information that should be included in marketing communications and, furthermore, that information that is included will depend on the size and format of the communication (Question 11).

Information on risks and rewards

ESMA considers that while risk and reward information should be disclosed in an equally prominent and fair, clear and not misleading manner, this does not imply that all marketing communications should necessarily describe the risks and rewards of purchasing the shares or units of a fund. ESMA notes that some communications, such as short messages broadcast on social media platforms, may contain only a short description of some characteristics of a fund. In cases where marketing communications describe risks and rewards, the following requirements should be met:

  • information on rewards should always be accompanied by information on risks;
  • rewards should not be overemphasised and risks should not be underemphasised, but rather be presented in a balanced manner;
  • information should be consistent with the risks and rewards described in the legal and regulatory documents of the fund;
  • only risks and rewards included in legal and regulatory documents of the fund should be included in marketing communications.

ESMA is seeking input on its proposed approach of describing risks and rewards in marketing communications in a fair, clear and not misleading manner (Question 12).

Information on costs

ESMA notes that when providing information on costs, marketing communications should give a realistic picture of the costs borne directly or indirectly by investors and should encompass both one-off and ongoing costs. Furthermore, that the aim of the disclosure of costs should be to enable investors or potential investors to understand the effects of costs on the amount and the net performance of their investment. ESMA considers that information on costs contained in marketing communications should not replace the same information contained in the legal and regulatory documents of the fund.

ESMA proposes that its guidelines should not dictate the level of detail of information on cost presented in marketing communications, but instead only ensure that this is fair, clear and not misleading. ESMA determines that when a marketing communication mentions the costs associated with the investment in the promoted fund, it should at least allow investors to understand the overall impact of costs on the amount of their investment and on the expected returns. Furthermore, where costs are represented in a different currency to that of the investor’s Member State, the applicable currency conversion rate (along with the effects of rate fluctuation on costs) should be clearly disclosed.

ESMA is seeking input on its proposed approach to the presentation of costs (Question 13).

Information on past and expected future performance

ESMA considers that past and expected future performance information included in marketing communications should be fair, clear and not misleading, as such information is key to influencing investors or potential investors’ decision to invest. Furthermore, past performance information should provide an accurate and fair representation of the fund, based on historical data and accompanied by the reference period and location of the data source. ESMA highlights that where no past performance information is available, simulated past performance may only be permitted where based on comparable information.

ESMA proposes that the indicators, simulations and figures for past performance that are included in marketing communications should be the same as those in the fund’s legal and regulatory documents. ESMA notes that the UCITS KIID[11] requires 10 years of past performance information to be presented where available[12] and considers that marketing communications promoting UCITS should mirror this past performance disclosure. ESMA suggest that for funds which do not produce a UCITS KIID and for funds which produce a PRIIPs KID, the presentation of 5 years of actual past performance (or simulated past performance where applicable) should be included in marketing communications, consistent with the requirements in the MiFID Delegated Regulation.[13]

ESMA notes that marketing communications should include a disclaimer that future performance cannot be predicted based on past performance, nor “on the current situation.” Furthermore, ESMA considers that marketing communications should only include expected future performance where the estimations used are:

  • based on reasonable assumptions supported by objective data;
  • “envisaged” in the legal and regulatory documents of the fund;
  • based on a clear referenced timeframe for a minimum of 1 year or multiples of a year;
  • presented in a fair, clear and not misleading manner;
  • disclosed for each fund and not aggregated;
  • supported by references to applicable taxation; and
  • accompanied by the clear presentation of the impact of costs on expected future performance.

ESMA is seeking input on its proposed approach to information on past and expected future performance (Question 14).

Information on sustainability-related aspects

ESMA notes that fund marketing communications may include sustainability related aspects. ESMA recalls the Sustainable Finance Disclosure Regulation’s (SFDR)[14] requirements for entity level disclosure of sustainability risks; entity and product level disclosure of principal adverse sustainability impacts; and disclosure of sustainable product characteristics or objectives for “Article 8”[15] and “Article 9”[16] products, for instance in a UCITS’ prospectus.[17] ESMA considers that the inclusion of sustainability-related aspects in marketing communications should not be discouraged but to avoid greenwashing, recalls that the extent of information in marketing communications on sustainable characteristics is important to determine whether a financial product qualifies as an “Article 8” product under the SFDR.

ESMA considers that to ensure sustainability-related information in fund marketing communications is fair, clear and not misleading, it should be based on content of a fund’s prospectus or pre-contractual documentation, to complement rather than contradict the SFDR’s requirements.[18] Furthermore, ESMA considers that sustainability-related information in marketing communications should be commensurate with the extent to which the investment strategy of the fund promotes environmental or social characteristics, or sustainable investment objectives. For example, if the investment strategy of a fund is primarily pursuing financial performance, any sustainability-aspects of the investment in the promoted fund should not be the main information of a marketing communication. ESMA notes the possible future need to update its guidelines to reflect the development of Level 2 requirements under the SFDR.

ESMA is seeking input on its proposed approach to sustainability-related information in fund marketing communications (Question 15).

Next Steps

ESMA is inviting feedback on the CP by 8 February 2021. ESMA will consider the feedback it receives in response to the consultation, with a view to issuing final guidelines by 2 August 2021.

 

Giles Swan
Director of Global Funds Policy
ICI Global

 

Attachment

endnotes

[1] Press Release: ESMA Consults on Guidance for Funds’ Marketing Communications, 9 November 2020, available from https://www.esma.europa.eu/press-news/esma-news/esma-consults-guidance-funds%E2%80%99-marketing-communications

[2] ESMA Consultation Paper on guidelines on marketing communications under the Regulation on cross-border distribution of funds, 9 November 2020, available from https://www.esma.europa.eu/sites/default/files/library/esma34-45-926_-_cp_guidelines_on_marketing_communications.pdf

[3] Article 4(1), Regulation 2019/1156 on facilitating cross-border distribution of collective investment undertakings (“CDBF Regulation”), available from https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32019R1156

[4] Response form – guidelines on marketing communications, available from https://www.esma.europa.eu/sites/default/files/library/esma34-45-926_guidelines_on_marketing_communication_response_form.docx

[5] Alternative Investment Fund Managers (AIFMs), European Venture Capital Fund (EuVECA) Managers, European Social Entrepreneurship Funds (EuSEF), UCITS Management Companies (ManCo) 

[6] Authorised under Directive 2014/65/EU on markets in financial instruments, available from https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32014L0065

[7] Article 44, Commission Delegated Regulation 2017/565 supplementing Directive 2014/65/EU as regards organisational requirements and operating conditions for investment firms (“MiFID II Delegated Regulation”), available from https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32017R0565

[8] Section 1, Annex IV, CP

[9] For instance, information which is to be disclosed to investors in accordance with Article 23 of Directive 2011/61/EU, Article 13 of Regulation (EU) No 345/2013 or Article 14 of Regulation (EU) No 346/2013

[10] For instance, the Memorandum and Articles of Association, By-Laws, Trust Deed or similar documents required to legally establish a fund.

[11] Article 15, Commiassion Regulation 583/2010, as regards key investor information and conditions to be met when providing key investor information or the prospectus in a durable medium other than paper or by means of a website, available from https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX%3A32010R0583

[12] UCITS which do not have performance data for 1 year are required to include a statement explaining that there is insufficient data, and those UCITS which have less than 5 years of complete performance data are required to present performance data covering up to 5 years, with any years for which data is not available shown as blank.

[13] Article 44(4)(b), MIFID II Delegated Regulation

[14] Regulation 2019/2088 on sustainability-related disclosures in the financial services sector (“SFDR”), available from https://eur-lex.europa.eu/eli/reg/2019/2088/oj

[15] i.e., a financial product which promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics in accordance with Article 8, SDFR.

[16] i.e., a financial product which has sustainable investment as its objective in accordance with Article 9, SFDR

[17] Disclosures are required for other types of funds such as pre-contractual disclosures for AIF (Article 13, AIFMD), including EuVECAs (Article 13, EuVECA Regulation) and EuSEFs (Article 14, EuSEF Regulation).

[18] Article 13(1), SFDR