Regulating the cross-border distribution of collective investment undertakings in the EU: the example of Luxembourg
Arendt Regulatory & Consulting, Luxembourg
Arendt & Medernach, Luxembourg
On 2 August 2021, Directive (EU) 2019/1160 on the cross-border distribution of collective investment undertakings (the 'CBDF Directive') and the associated Regulation (EU) 2019/1156 (the 'CBDF Regulation') entered into force in the European Union. Whereas the CBDF Directive needs to be implemented by each EU Member State in its national legislation, the CBDF Regulation is directly applicable without any requirement for implementation. In Luxembourg, a law dated 21 July 2021 implements the CBDF Directive. Moreover, the Commission de Surveillance du Secteur Financier (CSSF), the regulator of the Luxembourg financial sector, published Circular CSSF 21/778 and a Q&A, as well as additional information on its website.
The new requirements set out in the CBDF Directive and Regulation (together the 'CBDF') apply to the distribution of all types of funds, whether they qualify as undertakings for the collective investment of transferable securities (UCITS) or as alternative investment funds (AIFs). The main impacts of these new rules on the distribution of funds may be summarised as follows:
Discontinuation of marketing
De-registration (or 'de-notification') is now possible even when investors remain invested in the funds in the jurisdictions from which de-notification is sought. Certain conditions apply, including the publication of a blanket offer of 30 working days before de-registration, allowing investors in the relevant jurisdiction to redeem, free of charge, the shares/units/interest concerned. Such a particular obligation is not applicable to close-ended funds.
For Luxembourg funds, the blanket offer, publication, notice and any contractual arrangements modified or terminated must be submitted electronically to the CSSF, together with a special form that the CSSF has released on its website, for onward transmission by it to the relevant host Member State(s) authority(ies) and to the European Securities and Markets Authority (ESMA).
In connection with alternative investment funds, it is worth noting that in the case in which a fund is de-registered, no pre-marketing for similar investment strategies or investment ideas can take place in the country of de-registration for a period of 36 months.
Even after de-registration, transparency requirements continue to apply towards the remaining investors. Hence obligations to provide relevant information (ie, constituting documents, (semi)annual report, prospectus and key investor information documents (KIIDs)) remain in place.
Retail marketing: facilities
UCITS and AIFs that are distributed to retail investors need to have in place facilities to provide the different tasks listed in Article 1(4) (for UCITS) or Article 2(6) (for AIFs) of the CBDF Directive (subscription, redemption, information/documents available, etc) in each host Member State in which they are offered.
No local physical presence may now be required any more in the host countries, that is, it is no longer possible for a Member State to require the appointment of a local agent to act as facilities agent to retail investors. Facilities can be made available by the UCITS/alternative investment fund manager (AIFM) or a third party duly authorised to do so. To the extent Luxembourg is concerned, such a third party should, however, be domiciled in the EU.
However, such facilities must always be made available in (one of) the official language(s) of the host Member State or a language approved by the competent authority. In Luxembourg, English, French, German and Luxembourgish can be used while delivering facilities to Luxembourg domiciled investors.
Moreover, investors should be provided with information relevant to the tasks that the facilities agent performs in a durable medium. In Luxembourg, the provision of the relevant information on a website qualifying as a durable medium is acceptable, and the CSSF confirmed that Luxembourg country supplements to prospectuses will not be required any more, provided that the relevant information on facilities are made available in a durable medium.
The details of the application of this requirement are still to be defined. More particularly, some Member States that allow the marketing of AIFs to semi-professional investors are now considering that, in such a case, facilities have to be provided to these investors.
EU Member States can decide to implement ex ante verification of marketing communications, with a ten working day timeframe for the relevant host Member State authority to revert with comments or approval. However, that requirement for prior notification does not constitute a prior condition for marketing. Some countries have already implemented a pre-approval system, and additional Member States might follow. It should be noted that each relevant Member State may also organise ex post verification.
The CBDF Regulation also brings specific requirements regarding the content and structure of marketing communications. ESMA, the European regulator, issued guidelines on marketing communications on 27 May 2021. These will be applicable six months after their release in all official EU languages, that is, as from February 2022.
Despite the above, some uncertainties and grey areas remain as to the content of marketing communications due to the absence of a clear definition of marketing communication, and to the room left for interpretation or potential additional requirements by local regulators.
In addition to the above and depending on the type of funds, the CBDF might have some additional impacts. With regards to alternative funds, the rules on pre-marketing are probably the most noteworthy.
Pre-marketing of AIFs
The pre-marketing concept is harmonised under the CBDF Directive, and no longer subject to a country-by-country approach. Several conditions apply to the use of pre-marketing, including the amount of information provided (which should not be sufficient to allow investors to commit to acquiring shares/units/interests); the absence of the possibility for the investors to subscribe; and mandatory disclosures on the draft offering/constitutive documents.
Specific notification about the contemplated pre-marketing has to be made to the relevant regulator within two weeks of the start of any pre-marketing activity.
In Luxembourg, the CSSF has already published specific templates of notification letters for pre-marketing, making the distinction between EU and non-EU AIFM. This application to non-EU AIFM seems to still be under discussion in other Member States.
A third party shall only engage in pre-marketing where it is authorised as an investment firm, credit institution, UCITS management company, AIFM or acts as a tied agent. Hence, unregulated entities can no longer promote funds, and the impact thereof on non-EU entities is still to be assessed.
Importantly, the use of pre-marketing does not allow the benefit of reverse solicitation for a period of 18 months, and does not allow it at all for investors individually contacted during pre-marketing.
For UCITS only, where a change in the fund documentation and/or fund organisation has an impact on the information provided in the notification letter received from the fund's regulator or when there is a change concerning the share classes to be marketed, such a change will have to be notified one month in advance.
For Luxembourg funds, such changes have to be notified to the CSSF and host Member State(s) authority(ies), while mere fund documentation update(s) without an impact on the notification letter have to be notified to host Member State(s) authority(ies) only (as was already the case before 2 August), without having to comply with one-month prior notice.
For AIFMs, the maintenance obligations remain the same as they currently are; however, different timelines now apply in the following scenarios:
- the AIFM home Member State authority has only one month to review and notify the relevant host Member State(s) authority(ies) with regards to changes that are compliant with the Alternative Investment Fund Managers Directive (AIFMD), whereas until 2 August, no particular timeline existed; and
- the AIFM's home Member State authority will either: (1) contact the AIFM within 15 working days in the case of a planned change being in breach of the AIFMD (and will inform the relevant host Member State(s) authority(ies)); or (2) notify the host Member State(s) authority(ies) without undue delay in the case of an unplanned change being already effective or a change implemented despite the AIFMD home Member State authority comments. Due measures in accordance with Article 46 of the AIFMD can be taken by the AIFM home Member State authority in the latter case.
The purpose of the CBDF is to enhance the cross-border distribution of funds within the EU towards a more harmonised single market, which is an important topic for Luxembourg as a hub for the cross-border marketing of investment funds.
However, many uncertainties remain: while some Member States have not yet transposed the directive into local law, others, despite having transposed the directive, have yet to clarify their positions with regard to the concrete application of provisions that are not necessarily detailed enough. It will definitely be necessary to closely follow the implementation of the CBDF in the coming weeks or months.
Indeed, even if the situation has become much clearer in Luxembourg, with various CSSF publications made in the course of August, major EU Member States have yet to do the same, which may have an impact on the distribution of funds, and could trigger the need for some adjustments in the distribution process and asset raising exercise of EU and non-EU funds within the EU.