In Germany, the administrative practice of the Federal Financial Supervisory Authority (“BaFin”) has allowed investment management companies to approach institutional investors with prospectuses or terms and conditions of investment at the draft stage in the case of special AIFs. This pre-marketing is standard practice with funds designed for institutional investors. It allows interest among investors and acceptance of the proposed terms to be established without the expense of obtaining a distribution license or preparing the final documentation. This initial contact is not deemed to be marketing and thus does not trigger any notification obligations. Even if an investor then decides to acquire an investment, this does not qualify as distribution activity (BaFin, FAQs on the marketing and acquisition of investment assets in accordance with the German Investment Code (KAGB), ref.: WA 41-Wp 2137-2013/0293, dated: 13 July 2016).
The legislation now being proposed jeopardises this liberal approach.
– First of all, it would no longer be possible for draft offer documents to be given to investors at the pre-marketing stage. Using drafts will be treated as a distribution activity that triggers notification obligations. However, it will not be possible to use draft documents to gain a distribution license or for distribution notification purposes. Any pre-marketing activity using drafts would be impossible in practice. Pre-marketing could then only take the form of providing general information on investment strategies or concepts. Gauging investor interest in a specific fund product, which is currently the purpose of pre-marketing, would no longer be possible.
– Secondly, the decision to acquire an investment in a fund following pre-marketing activity would be deemed a result of distribution activity under the draft legislation. This would force non-German fund providers in particular to undergo a licensing process, which would be particularly cumbersome and expensive for third countries.
Requirements for distribution notification
The draft legislation aims to create uniform requirements for EU-wide distribution via passporting notifications. Marketing documents should be identifiable as such, should present the risks and rewards, and should be fair, clear and not misleading. The last point, in particular, is likely to require content checks on distribution notifications and marketing documentation by the regulatory authorities. Up until now, checks on marketing documentation have been limited to ensuring that all the information required under Article 23 of the AIFM Directive is provided. Any review of the content of marketing documents would, in particular, be a new requirement for AIFs not subject to detailed product regulation or presentation requirements, such as the Luxembourg Reserved Alternative Investment Fund (RAIF) or a German AIF under section 282 of the KAGB. This creates uncertainty around the required level of documentation and could delay or prevent distribution.
Withdrawal from cross-border distribution
There is nothing to prevent an AIF being withdrawn from cross-border distribution, thereby avoiding the associated administrative obligations and costs. Under the draft legislation, however, any withdrawal would only be permissible if the investment fund has no more than ten investors in the relevant member state, who overall hold less than 1% of the assets under management. Many special AIFs will probably be unable to meet these requirements, particularly with regard to the investment threshold. Withdrawal from distribution is not then possible. The investment fund must continue to meet the ongoing requirements and bear the costs. This situation could make cross-border distribution more difficult.
EU legislators run the risk of delivering the opposite of what they set out to achieve. BaFin’s administrative practice could no longer be tenable in its present form if the draft legislation is enacted without modifications. It would be more difficult to market products to investors in Germany. That also applies to German AIFs, as a result of the restrictions on pre-marketing, but in particular to foreign AIFs on account of the other aspects. For foreign AIFs especially, the barrier to distribution in Germany – which has always been seen as high – would be raised even further.
The legislation is scheduled for enactment in May 2019 and would then be implemented in full by May 2021. Both foreign and German AIFs, their investment management companies and distribution partners should follow developments closely and adapt the way they approach investors in Germany accordingly.
 “Proposal for a Directive of the European Parliament and of the Council amending Directive 2009/65/EC of the European Parliament and of the Council and Directive 2011/61/EU of the European Parliament and of the Council with regard to cross-border distribution of collective investment funds” and “Proposal for a Regulation of the European Parliament and of the Council on facilitating cross-border distribution of collective investment funds and amending Regulations (EU) No 345/2013 and (EU) No 346/2013”.