Cross-border distribution of investment funds: a trade-off between removing distribution barriers and adequate investor protection

18 Apr 2019 | Press Releases  

ALFI statement following the adoption by the European Parliament of the Directive amending the UCITS and AIFM Directives and the EU Regulation amending the European Venture Capital Funds (EuVECA) and European Social Entrepreneurship Funds (EuSEF) Regulations

ALFI, the Association of the Luxembourg Fund Industry, has been engaged in the Capital Markets Union initiative from the outset and has actively followed up on the European Commission’s 2016 proposal on barriers to the cross-border distribution of investment funds (“CBDF”).

On 16 April 2019, the European Parliament in its most recent plenary session adopted the final text of the Directive amending the UCITS and AIFM Directives and the EU Regulation amending European Venture Capital Funds and European Social Entrepreneurship Funds Regulations as a result of the interinstitutional negotiations on CBDF.

ALFI welcomes the final outcomes of the negotiation as a trade-off between the objectives of removing barriers to cross-border distribution of investment funds and the adequate protection of investors.

  • The introduction of harmonised pre-marketing for AIFs across the EU

Pre-marketing has been introduced in the AIFM Directive as well as in the EuVECA and EuSEF Regulations and applies to all AIFs and their sub-funds, established or not yet, in the phase before marketing notification.

The Directive sets out requirements for pre-marketing activities of EU AIFMs in particular to avoid investors acquiring AIF units during the pre-marketing phase. It introduces (i) an obligation for EU AIFMs to inform their respective home Member State of their pre-marketing activities within two weeks of beginning them as well as (ii) a presumption that any acquisition of AIF units during the first 18 months after beginning pre-marketing is the result of marketing.

ALFI considers these requirements as somewhat restrictive given that these rules are designed to apply to transactions between professional investors requiring not as much protection as retail investors.

  • The harmonisation of de-notification procedures applicable to UCITS and AIFs

One of the aims of the Directive was to provide a harmonised framework to de-notification procedures for UCITS and AIFs respectively. ALFI has been supportive of such a harmonisation.

The implementation of the harmonised procedure is subject to, among others, the submission of a letter to the competent authorities of the UCITS or AIF home Member State containing a series of information. The host Member State authorities will continue to be provided with relevant information and will retain a comparable role to the one provided for in the context of marketing by the UCITS and AIFM Directive respectively.

ALFI believes that, although these rules are not entirely suited to the investor protection objective and the way the industry is organised, it has the advantage of providing a harmonised framework and a level playing field throughout the EU.

  • Removal of the requirement for a local presence or representative

ALFI welcomes the provisions introduced in the UCITS and AIFM Directives whereby it shall not be required to have a physical presence in a host Member State or to appoint a third party as local representative. Harmonisation in this respect is a very positive and balanced outcome that ensures that investors will receive the information they need while significant costs are avoided.

  • Extension of the review period for UCITS KIID and PRIIPs KID

Regarding the amendments to marketing communication requirements and to avoid that investors receive two different information documents (a UCITS KIID and a PRIIPs KID for the same investment fund), a 1-year extension of the PRIIPs review period and a 2-year extension of the application of the UCITS KIID have been granted.

ALFI welcomes the introduction of such a provision by the European Parliament in the course of the legislative process as it removes uncertainty and an obligation that would have been redundant for both the market and investors. All institutions and supervisory authorities involved have nevertheless been called upon to act as fast as possible to facilitate the termination of the transitional exemption.