Taking these regimes in turn, I will try to give an outline of the key considerations which any marketing entity (whether the manager of the fund or other distributor) should consider before approaching investors in a particular jurisdiction. There are at least 3 parallel regulatory regimes:
The problem with parallel regimes is that you have to consider them all and the fact that you may be able to avoid one of them does not mean that you can market the fund without breaching the others.
In order to determine whether fund marketing could require a local licence various questions would need to be considered. These include:
The question as to whether the activity is locally licensed depends on two things:
The activities which are carried out depend on the marketing entity – some only provide factual information about a product to interested investors, while others go as far as advising the investors on the merits of investing in the product. In many jurisdictions, the provision of factual information and general marketing would not trigger a licensing requirement on its own, while the provision of advice normally would (this is particularly the case in Europe following the implementation of the Markets in Financial Instruments Directive in November 2007). It gets more tricky where no advice is given but the marketing entity is involved in the handling of subscription forms or sales, as in some jurisdictions this may qualify as a licensable activity.
Although there has been harmonisation in Europe on many of these issues, from my experience, there is not a common response to this question – partly as each entity does things differently, partly as each jurisdiction has different laws as to what constitutes a licensable activity.
If the activity is licensable locally, then the next question is whether the way in which the activity is carried out would fall outside the remit of the requirement. In many jurisdictions there are exemptions which are available if only certain types of investors are contacted or only limited activity is carried out – in particular if the activity is carried out on a cross-border basis. Another common way to fall outside the scope of local regulation is when an investor contacts the marketing entity without previously having been solicited by the entity (normally referred to as unsolicited business/reverse solicitation).
Harmonisation has been achieved as to certain activities across Europe which means that a marketing entity would be able to benefit from the European single passport regime in carrying out its activities across 30 jurisdictions. For entities established outside Europe, there is no harmonisation and the obtaining of a licence involves the painful process of getting local licence in each jurisdiction where such licence is required (which, in the worst situation, could be everywhere). Another twist to this is that in many jurisdictions, a licence can only be obtained if a physical presence, in the form of a branch or subsidiary, has been established.
The next regime to consider is whether the product being offered/marketed is subject to any local product restrictions. Unfortunately, funds are generally subject to very restrictive rules – such as restrictions to offer the fund to the public without the fund being locally registered/approved or, in the worst cases, an outright prohibition on any offer of the fund without any ability to get the fund locally registered/approved. This is where the actual type of fund matters, as the regimes will vary quite significantly – not just as to the restriction but also as to the possibility to get a fund registered for local distribution. The first distinction is obviously as to whether the fund has been registered for public distribution. In Europe, we have achieved some harmonisation in respect of UCITS funds, although the process is far from smooth in many EU member states. When it comes to unharmonised funds (ie. all funds other than UCITS funds), there is no harmonisation across Europe (although the EU Commission is currently considering the benefit of creating such regime). This means that if the marketing entity is looking to offer/market a fund, it will need to consider the local regime in each jurisdiction where an investor is based.
Another issue to consider is whether the product in question would qualify as a ‘fund’ in the relevant jurisdiction – something which can be a very complicated question (especially as there is no universal definition). One question to be considered in all of this is whether the product being marketed is indeed a fund within the local funds regime or if it would constitute a different financial instrument or possibly falls within both regimes. In Europe this is a common consideration for so-called ‘close-ended’ funds. The problem which has occurred is that certain types of ‘close-ended funds’ fall within the prospectus requirement under the EU Prospectus Directive, while others do not. In addition, some jurisdictions would treat a close-ended fund also as a fund and therefore require compliance with both set of rules.
From my experience, the product restrictions are very complex and exemptions are limited. The process to get a fund which is not regulated elsewhere or meeting certain eligibility criteria is often not available nor an option due to cost and timing. Instead, the common way to offer/market a fund locally is to rely on any local private placement exemption (PPE). The PPEs vary significantly from jurisdiction to jurisdiction – examples of some are set out below:
Some jurisdictions are generous and combine the exemptions, while others do not allow for any active marketing and therefore only allow the marketing entity to respond to an unsolicited request. In most jurisdictions, reliance on a PPE should be supplemented for evidentiary reasons with clear selling restriction language in all documentation and clear records.
This restriction is a catch all and can be very different from jurisdiction to jurisdiction. In some jurisdictions, if the marketing entity manages to fall outside the licensing regime and within a PPE, there may not be any additional restrictions. In others, there may be a cold-calling restriction such as a restriction to only contact the investor by phone, email or fax with a prior invitation. In jurisdictions such as France, Italy and the UK there are specific marketing rules which govern the sending of marketing materials to investors over and above the other two sets of restrictions.
Unfortunately this is why the above is important and why any marketing entity should take care. The sanctions for breach are quite similar for each of the 3 regimes and can be either a criminal or an administrative offence. In addition, in many jurisdictions a breach may result in the resulting contract being unenforceable or null and void. As outlined above, this is a very complex area and care needs to be taken by any marketing entity to ensure that it is aware of the restrictions applicable to the jurisdiction where the investor is based as well as any restrictions applicable in the jurisdiction from which the marketing entity operates. This is a very time consuming and costly exercise. Although there has been some harmonisation across Europe, when it comes to harmonised funds and the provision of activities/services, we have still no harmonisation for other types of funds. At Simmons & Simmons we have tried to help clients navigate through these issues.
Charlotte Stalin is Financial Services Partner at Simmons & Simmons. The firm has developed a fund marketing service which considers the above issues in around 60 jurisdictions, is updated on a quarterly basis, and is used on a 247 basis.