Rulefinder Marketing
Restrictions
- Asset Management

Reverse enquiry, or passive marketing, is where an investor proactively takes the initiative to contact a firm about a financial product or service (e.g. a fund). A firm may potentially be able to sell funds or provide services to an investor following a reverse enquiry without being authorised/licensed in the way they would have to be if they were actively marketing those funds/services to that investor. 

Depending on the jurisdiction, it may be possible to respond to a reverse enquiry based on an official exemption or in other cases based on a tolerated practice. Care is needed as what constitutes a reverse enquiry varies. In general, it is important to document the reverse enquiry, but again, care is required, as how best to do so differs between jurisdictions.   

PPR stands for “Private Placement Regime” which generally refers to where a firm markets/sells interests in funds to a limited number or sub-set of investors via a private placement i.e. not via a public offering. Generally, the requirements for a private placement are likely to be less onerous than those for a public offering.

In the EU, Member States may (but are not obliged to) have a National Private Placement Regime (NPPR) relevant to the sale of AIFs for which an AIFMD marketing passport is unavailable. In order to market an AIF via the NPPR of a Member State it is necessary to comply with: (i) conditions deriving from the AIFMD (Article 36, for EEA AIFMs marketing non-EEA AIFs or Article 42, for non-EEA AIFMs marketing any AIF); as well as (ii) any specific additional (or “gold-plating”) requirements set by that Member State.

Pre-marketing refers to any promotional activity testing the appetite of investors for a particular fund which may be undertaken before triggering a requirement to register with, or to notify, the regulators in a particular jurisdiction. For an activity to be classed as pre-marketing, an investor must not be able to purchase interests in a fund as part of the promotional activity. Not all jurisdictions have a concept of pre-marketing, in which case it is usually relevant to consider the rules that would apply to active marketing of the fund.

Pre-marketing is an important concept in the EU and EEA, as a notification or registration is always required once an activity amounts to active marketing, irrespective of whether a fund is being distributed via an NPPR or a marketing passport. Firms will want to know which activities can be performed before a marketing notification or registration is required.

At the EU level, the pre-marketing of EEA AIFs managed by EEA AIFMs has been harmonised under the Cross Border Distribution of Funds Directive (2019/1160/EU). Pre-marketing of such AIFs is therefore possible in any EEA jurisdiction before a marketing passport notification is made. However, there is currently no harmonised position in respect of the pre-marketing of UCITS or of other AIFs prior to the use of an  NPPR. The position must therefore be checked on a jurisdiction-by-jurisdiction basis. 

General marketing is the general promotion of a firm without the marketing of any specific fund or service. A number of activities could fall under general promotion, including the use of a logo, distribution of business cards, presenting at a conference or speaking on a panel, publishing articles or research, distribution of branded merchandise, displaying a banner at an event and raising awareness of product lines without referencing a specific fund/service. Firms are keen to understand if they can raise the profile of their brand, product or service lines without triggering restrictions that apply to active marketing of funds or investment services. 

At aosphere we use the term Investment Management and Advisory Services to refer to the services of arranging, execution of orders on behalf of clients, investment advice and portfolio management, as set out in more detail below. These are the services which, in our view, are most relevant to asset managers who are looking to provide asset management services on a cross-border basis.

• Arranging, i.e. making arrangements for another person to buy, sell or subscribe for a fund or related services or passing execution instructions to a third party (also referred to as reception and transmission of orders or “RTO”);
• Execution of Orders on Behalf of Clients, i.e. agreeing to conclude agreements to buy or sell one or more financial instruments on behalf of clients;
• Investment Advice, i.e. providing personal recommendations to a client, either upon its request or at the initiative of the firm, in respect of one or more transactions relating to financial instruments;  and
• Portfolio Management, i.e. the managing of portfolios in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more financial instruments.

“UCITS” stands for “Undertakings in Collective Investments in Transferable Securities”. These are EEA funds that comply with the UCITS VI Directive (2009/65/EC) and benefit from a marketing passport in the EEA. They are open-ended retail funds which may only invest in certain types of assets, e.g. transferable securities, money-market instruments, derivatives and certain funds. Although only EEA funds can be UCITS funds, the UCITS brand is well-recognised by international investors and is something of a benchmark for other funds worldwide.

“AIF” stands for “Alternative Investment Fund” and essentially means any fund that is not a UCITS fund. AIFs are governed by the Alternative Investment Fund Managers Directive (2011/61/EU), which aims to create an internal market for the managers of AIFs and a harmonised framework for their activities within the EEA.

Some non-EEA jurisdictions may adopt their own national definition of an alternative investment fund or AIF, with the term generally referring to a fund which may not be available to retail investors.

“ELTIF” stands for “European Long Term Investment Fund”, which is a specialist form of AIF governed by the ELTIF Regulation (EU) 2015/760 as amended by the ELTIF Regulation (EU) 2023/606. ELTIFs allow professional and retail investors to invest in products and companies that require long-term capital. To qualify as an ELTIF, an AIF must comply with certain diversification rules, limit leverage and derivative use and have an authorised AIFM. It must also publish a prospectus and provide information on the redemption of units/shares and information about the illiquid nature of the AIF. Additional requirements are necessary if the ELTIF is to be marketed to retail investors.

A marketing passport allows a firm to market/sell a fund to investors in other jurisdictions without needing significant additional approvals from the regulators in those target (or host) jurisdictions. 

Marketing passports are available in the EEA for UCITS, ELTIFs and AIFs (provided they are EEA AIFs with EEA AIFMs and the investors are professional investors). Outside the EEA, there are a number of mutual recognition schemes which have a similar effect, such as the Association of Southeast Asian Nations (ASEAN) CIS Framework in Asia or the fund passporting scheme for domestic funds between the onshore UAE, the DIFC and the ADGM. The Hong Kong SAR, in particular, has entered into mutual recognition arrangements with a number of countries including the recently announced Hong Kong-UAE mutual recognition of funds arrangement. The Gulf Co-operation Council countries are also in the process of implementing a fund passporting framework among themselves in the Middle East.

“Gold-plating” or “super-equivalence” refers to where a national competent authority (NCA) of an EEA Member State exercises its permitted discretion to impose additional restrictions or more stringent requirements over and above those imposed under EU law. 

Administrative fines can potentially be very high. For example, in the UK a breach of the financial promotion restriction resulting in a conviction on indictment could lead to an unlimited fine. In Germany, the marketing or sale of a fund without notifying or registering with BaFin could result in a fine of up to EUR 5,000,000, with responsible individuals being fined up to EUR 1,000,000. In the US, wilful violation of the Commodity Exchange Act and Commodity Futures Trading Commission Rules may constitute a felony punishable by a fine of up to USD 1,000,000. 

Potentially, yes. The majority of the jurisdictions we survey may impose criminal penalties for breach of marketing restrictions. For example, in its statement on reverse solicitation on 13 January 2021, ESMA reminded non-EEA firms that the provision of investment services in the EU without proper authorisation under EU and applicable national Member State law exposes service providers to the risk of administrative or criminal proceedings.