EU regulation of fund distribution. What changes to the rules means for you.

1. aosphere.com
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February 2018
Is 2018 the year to bring
harmony to fund distribution
in Europe?
aosphere senior associate Jenny Ljunghammar
looks at what 2018 may have in store for fund
distribution regulation in Europe
At a glance
Some changes to the regulatory landscape for marketing funds
in Europe are anticipated this year. European regulators are
expected to address some of the complexities caused by
differing marketing rules, with a view to increasing
harmonisation.
Three key initiatives will likely drive these changes:
1. A review of cross-border barriers to distribution
of AIFs and UCITS in Europe.
2. An assessment of the functioning of the AIFMD
(as well as potentially the UCITS framework).
3. The review of the role of ESMA in the operation
of European supervisory powers.
We expect that there will be resistance from member states to
elements of the above initiatives. It is therefore likely that
market participants will still need to grapple with differing
requirements from member state to member state. However,
some level of improved harmonisation would be a step in the
right direction for asset managers and distributors.

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Barriers to distribution: Addressing market fragmentation
Back in 2015, the European Commission raised concerns about market fragmentation in the asset
management sector and its impact on consumer choice for the investor.
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It identified various contributing
factors including varying national requirements on the marketing of funds via the UCITS and AIFMD passports,
such as fees imposed by host member states and other operational barriers.
ESMA has also voiced certain concerns on the functioning of the AIFMD marketing passport, for example
concluding that there are issues with divergent interpretations of what activities constitute permitted "pre-
marketing" (and thus do not trigger the application of the AIFMD).
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A number of publications have followed which demonstrate how the Commission's thinking on these topics has
developed. These publications range from a consultation paper (June 2016),
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a report which presented the
findings and recommendations of an expert group of member state representatives (February 2017),
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a mid-
term review of the CMU action plan (June 2017),
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and an impact assessment (June 2017).
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The 2017 impact
assessment flagged that the Commission is weighing up whether to address the barriers identified via either:
 a non-legislative initiative (e.g. combination of voluntary collaborative actions by member states), or
 a legislative initiative (e.g. harmonising rules currently subject to national legislation and further
alignment of the AIFMD and UCITSD requirements).
This decision will be key in determining the degree of harmonisation to be expected and the speed by which
any new initiatives will be introduced.
Proposals are expected to be launched imminently. In a
November 2017 speech Vice President of the Commission,
Valdis Dombrovskis, stated that the Commission is working
on a "proposal for early next year [2018] to address the
obstacles to cross-border distribution of funds".
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Capital Markets Union Action Plan, 2015
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ESMA’s opinion on the functioning of the AIFMD marketing passport and private placement regimes, 2015
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Consultation on cross-border distribution of investment funds, 2016
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European Commission Expert Report on accelerating the capital markets union: addressing national barriers to capital flows, 2017
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European Commission mid-term review of CMU Action Plan: financial services aspects, 2017
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Reducing barriers to cross-border distribution of funds, impact assessment, 2017

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Barriers to distribution: Areas to be harmonised?
The following are the key areas where proposals for harmonisation are most likely to occur:
Pre-marketing: Pre-marketing refers to the provision of early stage marketing materials such as draft term
sheets and draft offering documents to potential investors, often to "sound out" potential investors. Depending
on the form and nature of this early activity it may mean in some jurisdictions that the activity does not trigger
the licensing and other obligations of the AIFMD. However the current position is extremely varied across
Europe, leading to uncertainty for managers and distributors.
In order to achieve more harmonisation, it is possible that a definition of "pre-marketing" could be prescribed by
means of European legislation. Alternatively, member states could be asked to independently develop a
common understanding and voluntary convergence. In practice, any harmonisation initiative may prove
challenging, especially for jurisdictions that do not currently recognise "pre-marketing" and who would therefore
need to introduce the concept into their laws. Jurisdictions with a wide interpretation of "pre-marketing" may
need to narrow their definition to meet a common standard, something which may trigger resistance,
particularly in jurisdictions which prefer to encourage pre-marketing activities.
Reverse enquiry: Similarly, the approach to passive marketing is currently highly varied across member
states leading to confusion and uncertainty as to when a manager can respond to an enquiry from a potential
investor without obtaining a local licence or utilising a specific exemption from licensing. In the same way as for
pre-marketing, it is possible that a single definition could be prescribed by European legislation to replace the
current patchwork of definitions and approaches, or member states could be asked to voluntarily develop a
common understanding.

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Local administrative arrangements (e.g. paying agents): Many member states currently have a
requirement that a manager provide local facilities for redeeming, subscribing and obtaining payments when
UCITS are sold to investors in that jurisdiction. This usually involves the appointment of a paying agent in the
host member state. In addition certain jurisdictions require a locally licensed distributor to be used. The
additional cost and administrative burden of these requirements is a major disincentive for foreign managers.
Suitable intermediaries must be identified in the host state and then arrangements set up in order to contract
with and monitor the local agent and/or distributor. It is possible that in an attempt to harmonise these
obligations, member states could be required to amend or remove these requirements altogether. However, in
practice we anticipate that many member states will press to retain the requirement for paying agents.
Fees: The Commission has said it is looking at whether registration and licensing fees imposed by host
member states to register AIFs or UCITS should be prohibited. To the extent such fees will continue to be
permitted, it is possible that transparency requirements may be implemented so that all fee information from all
member states is pulled into a single website/repository to enable market participants to more easily compare
the relative costs of doing business in different member states. This seems a workable proposal and would
surely be welcomed by the industry.
Review of the AIFMD framework and also UCITS?
A review of the AIFMD by the Commission is now somewhat overdue: the directive required a review of the
application and the scope of the Directive by 22 July 2017. As part of the review, the Commission is required to
analyse the experience acquired in applying the AIFMD, its impact on investors, AIFs or AIFMs, in the EU and
in third countries, and the degree to which the AIFMD's objectives have been achieved.
The Commission has the power to propose appropriate amendments to the AIFMD as a consequence of this
review. It is possible that any such amendments could impact the current regime for marketing and distributing
funds in Europe.
On 1 December 2017, the Commission published a report
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on the follow up to the call for evidence to check
whether the EU legislation adopted since the financial crisis was working as intended. In Section 2 of the report,
the Commission confirms that:
 an external AIFMD study has been commissioned; and
 it will report on the outcome of the AIFMD review in 2018.
We understand that the Commission may take a fresh look at the UCITS framework as part of its review of the
AIFMD.
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Follow up to the call for evidence, EU regulatory framework for financial services, 2017

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Strengthened powers for ESMA?
Another key initiative is a proposal to strengthen the powers of ESMA to promote the effectiveness of
consistent supervision across the EU and beyond. In March 2017, the European Commission published a
consultation paper
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on the operation of the European Supervisory Authorities.
It has been noted that one outcome of the initiative could be that ESMA, rather than the relevant member state
regulators, takes control of certain aspects of the supervision of UCITS and AIFs. We would anticipate that this
would be politically unsatisfactory for many member states. Indeed, Sweden has specifically objected to
ESMA's plans, citing that it would be against the principle of national authority and subsidiarity (the concept that
EU action should only be taken where it would be more effective than doing so at Member State level). The
potential strengthening of ESMA's powers has also been controversial in the context of Brexit in terms of
ESMA's involvement in scrutinising proposed delegation arrangements.
Perhaps the threat of increased ESMA control may be enough to encourage member states to address areas
of divergence and take a more proactive approach to harmonisation.
Tracking developments
aosphere is closely monitoring and tracking these developments, and will continue to keep subscribers up-to-
date via our dedicated email alerting service. Subscribers can also use our "Marketing in EU for non-EU
managers" App which compares the reverse enquiry, private placement and pre-marketing rules across Europe
in a few simple clicks.
Contact
Jenny Ljunghammar
Senior Associate
aosphere LLP
jenny.ljunghammar@allenovery.com
www.aosphere.com
Disclaimer:
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Public consultation on the operations of the European Supervisory Authorities, 2017