Date Published 11/07/2022
ESMA Focus on Reverse Solicitation
In early January 2022 ESMA released a copy of a letter dated 17th December 2021 (the “Letter”) which it had sent to the European Commission in relation to their request for information relating to the practice of reverse solicitation. The Letter notes the difficulty in obtaining relevant information on the prevalence of this practice, highlights some statistics it was able to obtain in specific markets and proposes a new reporting obligation in this regard. The Letter notes the belief among national regulators that the practice may be used to circumvent marketing requirements, among other concerns, indicating that a crack-down on the practice may be pending.
Background
The Alternative Investment Fund Manager’s Directive (“AIFMD”), Directive 2011/61, provided for a pan EU passport for alternative investment funds (“AIFs”) for the first time. However, obtaining this passport requires compliance with the relevant terms of the AIFMD. As some alternative investment fund managers (“AIFMs”), particularly those outside the EU not subject to equivalent local obligations, have determined this to be too onerous, their funds were not actively marketed in the EU. However, as the AIFMD focuses on the concept of marketing it does not prohibit sales where these occur without any such activity, for example when an investor approaches an AIFM and subscribes into an AIF without having been solicited to do so. This is known as “reverse solicitation” as the activity is instigated by the investor rather than a distributor or AIFM.
Other Relevant Recent Updates
The EU has recently seen the adoption of the new Cross Border Distribution Framework (“CBDF”), comprising EU Directive 2019/1160 and Regulation 2019/1156, in 2021 (see our related Legal Updates for further information). This revised regime is aimed at ensuring greater harmonisation and efficiency for cross border distribution matters. It also addresses the concept of “pre-marketing”, another potential loophole in the AIFMD, since marketing of a fund which has not yet been created, for example, falls outside the scope of this legislation. Under the related revised rules of the CBDF any subscriptions made within 18 months of the commencement of pre-marketing of such an AIF mean that the fund is subject to the registration requirements and accordingly the reverse solicitation “exemption” will not apply during this period. However, the new pre-marketing regime only applies to EU-AIFMs so non-EU AIFMs are not subject to this.
Separately, a draft proposal to update the AIFMD has been released, which includes provisions relating to the ability of third country AIFs to avail of national private placement regimes (“NPPRs”), with a restriction on this being a likely change in the modified AIFMD.
Findings of the Letter
The Letter notes the general difficulty in finding information pertaining to the volume of distribution occurring through the reverse solicitation method. However, it notes the significant figure of 25% of total subscriptions raised by Italian managers from professional investors being raised through reverse solicitation. The Letter highlights the potential for this to be used to circumvent the general registration requirements, raising concerns around both investor protection and competition issues. The difference in treatment of EU-AIFMs and non-EU AIFMS under the CBDF also raises further concerns that an uneven playing field has been created which discriminates against EU AIFMs.
Accordingly, in order to better gauge the full extent of the level of subscriptions being received through the reverse solicitation method and consequently determine whether steps are warranted to curtail it, the Letter proposes the introduction of a new reporting requirement to collect related data.
Implications and Next Steps
With the reform of the NPPRs already proposed and a renewed focus on the practice of reverse solicitation, it seems inevitable that steps will be taken to curtail this. Managers currently receiving significant subscription s through the reverse solicitation route would be advised to consider one of the formal routes to market in order to ensure continued European investment.