In this premiere episode of "The Preferred Return" podcast, Skadden attorneys Greg Norman and Abigail Reeves dive into the complexities of marketing private funds in the U.K. and Europe under the regulations of the Alternative Investment Fund Managers Directive (AIFMD). They discuss the impact of AIFMD on EU and non-EU funds, the process and regulations surrounding the marketing passport, the role of national private placement regimes, and ongoing requirements after registering a fund for marketing. The episode highlights the regulatory complexities fund managers face when marketing in Europe, emphasizing the importance of jurisdiction-specific advice.

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Name: Greg Norman

Title: Partner, Investment Management at Skadden (London)

Specialty: Greg’s practice focuses on advising private capital businesses on their formation and operations. This work includes private fund capitalization and structuring, as well as the formation and regulation of private capital sponsors, including investment managers and advisers. In addition, Mr. Norman counsels on incentive compensation arrangements, internal governance arrangements and regulatory compliance.

Connect: LinkedIn

Name: Abigail Reeves

Title: Associate, Financial Institutions; Investment Management at Skadden (London)

Specialty: Abigail focuses her practice on advising financial institutions, including asset managers, financial sponsors, banks and insurance companies, on their regulatory obligations, internal governance and compliance arrangements. She also has experience working for fund managers and investors on the formulation, structuring and marketing of investment funds.

Connect: LinkedIn

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The Preferred Return is a podcast by Skadden, Arps, Slate, Meagher & Flom LLP, and Affiliates. This podcast is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This podcast is considered advertising under applicable state laws.

Welcome to The Preferred Return, Skadden's investment management podcast covering legal and regulatory developments in the UK and Europe.

Hello and welcome to The Preferred Return, a Skadden podcast hosted by me, Greg Norman,

And by me Abi Reeves. In this podcast series we'll be providing short summaries of legal, regulatory, or other topical developments in the UK and European investment management space.

The series is intended to be accessible by professionals across the sector. We welcome any feedback, particularly if there are topics people would like us to discuss. So Abi, what's on the agenda for today?

Thanks, Greg. Today we are going to spend a bit of time talking about marketing private funds in the UK and Europe. The rules for this stem from the Alternative Investment Fund Managers Directive, the AIFMD, that has been enforced for almost 10 years now. One of the aims of the AIFMD was to provide a harmonized set of rules for marketing funds in Europe. However, the result, particularly for fund sponsors outside of the EU, has been quite different. And so we wanted to give a summary of some of the issues to be considered.

That's right, Abi. The AIFMD was enacted in response to the global financial crisis and the view, particularly in the minds of EU regulators, that the actions of private funds were among the causes of that crisis. For the first time in Europe, there was a unified set of legislation governing the alternative funds sector.

Alongside the requirements that the AIFMD brought into place, it also introduced a so-called marketing passport. The idea was for a simplified regulated process to allow private funds to access all European professional investors.

The AIFMD also had a significant impact on non EU funds. Although the AIFMD contemplated a marketing passport from non EU funds, this never happened. In the absence of this regime, the AIFMD contemplated that each member state could choose to implement a regime for the marketing of non-EU funds in their jurisdiction. These regimes are commonly referred to as private placement regimes.

Now, before we provide more detail on the national private placement regimes we wanted to talk about when the marketing passport is available. European private fund managers or AIFMs, can use the marketing passport for EU funds, which are marketed to professional investors.

Exactly, and this is not something which is automatically available to those managers. Before the manager engages in marketing activity, it must notify its home state regulator of the fund that it wants to market. The notification has to include certain information, including the description of the fund, the fund's instruments of incorporation, the Article 23 disclosure information, which we'll come to later, and the identification of a depository.

After receiving the notification, the regulator has 20 working days to inform the manager whether the proposed marketing is allowed. That said, it may only refuse if the information provided shows that the management carried out is not in line with the AIFMD.

If the manager wishes to market in other member states, it must also provide the regulator with a notification letter, which includes a program of operations identifying the fund it wants to market, the jurisdictions which it wants to market in, as well as the information Abi just mentioned. The home state regulator must then transmit the notification to the competent authorities in the relevant member states within 20 working days of receiving it.

It's also worth noting that with the exception of Gibraltar, EU managers no longer benefit from a marketing passport in the UK, and vice versa post Brexit. So, Abi, should we move on to discussing national private placement?

Sure, Greg. As we mentioned before, the marketing passport is only available for EU managers. Non EU managers, including UK managers, which wish to market funds to investors in the EU, will need to rely on national private placement regimes. These regimes are not enacted in all EU member states, and the requirements across member states can differ. For example, in Germany, there is a requirement that a European depository has been appointed for the fund, whereas in the Netherlands, no such requirement exists.

Thanks, Abi. Even though the requirements can differ across member states, there are common requirements for relying on NPPR. For example, the filings will request information on whether custodians are used or whether risk management portfolio management is carried out by a third party. Or if there are brokers, valuation agents or independent auditors, as well as whether the relevant fund is a feeder fund.

In certain jurisdictions the manager is also required to provide supporting documentation. While the requirements are different, managers may be expected to provide private placement memoranda, certificates of formation, investment management agreements, and also to produce Article 23 disclosures for the fund.

There are also ongoing requirements which the manager has to comply with after registering a fund for marketing. First, the manager has to provide the Article 23 disclosures to investors before they commit. The manager will also have to make ongoing disclosures to investors, as well as reports to regulators. Third-country managers who register their funds for marketing in the EU will also become subject to the AIFMDs Asset stripping rules and sustainability-related regulations.

Taking first the Article 23, or pre-investment disclosures, we would usually expect to see these in the offering document or in a supplement. The information which needs to be covered is fairly extensive, and includes details relating to the investment strategy of the fund, any leverage arrangements, details regarding any service providers, evaluating procedures, and fees borne by investors.

The ongoing reporting requirements require a manager to prepare an annual report, which must be distributed to investors and made available to regulators on requests. The report should include typical accounting information, including a balance sheet, a statement of assets, and also the income and expenditure account for the financial year. But the annual report should also include information about the remuneration paid by the manager to its staff, and this information will need to be in line with Level 2 AIFMD regulations.

The regulatory reporting, which the manager is obliged to carry out, largely focuses on how the assets are managed, such as whether any special arrangements are in place for illiquid assets and the risk management systems in place. This is not dissimilar from the Form PF reporting in the United States.

In the UK, the frequency of the regulatory reporting will differ depending on the size of the manager. Where a manager has a total AUM in excess of one billion pounds, then they'll be obliged to report on a quarterly basis, whereas smaller managers may only have to report half-yearly or annually.

If a fund is registered for marketing, it and its AIFM will also be subject to the AIFMD's asset stripping rules. This applies where a fund acquires a UK or EU company. At a high level, these rules require a manager to use its best efforts to prevent any distributions by the company to shareholders, where this would result in the net assets becoming lower than the amount of subscribed capital plus any distributable reserves for a period of 24 months. This is important as it can, for example, impact post deal structuring plans.

Private fund managers should also be aware that if they market funds in the EU, they will be also subject to the EUs SFDR, the Sustainable Finance Disclosure Regulation. Currently, the UK's equivalent rules would not apply to a non UK manager.

Thanks, Greg. So now we've covered the marketing passport and national private placement to a high level, are there instances when reliance on these regimes will not be available?

Yes, unfortunately. As we've mentioned, there are European jurisdictions which have not introduced a private placement regime at all, and so marketing a fund in these countries is largely prohibited. In limited circumstances, an exemption may be available, but generally investors in those jurisdictions would have to initiate any investment in a non EU fund to participate. We urge any managers seeking to market in Europe to obtain jurisdiction-specific advice before offering interest in their private funds to identify the differing rules.

It's also worth noting that in the EU the introduction of the pre-marketing regime in 2021 further regulates this area. Before the Cross-Border Distribution directive came into force, there was greater scope for reliance on reverse solicitation, whereby managers were not required to register for marketing where European investors acquired fund interests at their own initiative.

While reverse solicitation may be possible in specific limited circumstances, the scope of the pre-marketing regime effectively prohibits non EU managers from carrying out pre-marketing activities unless they are registered under the National Private Placement Regime. Certain EU jurisdictions also permit non EU managers to notify the national regulators of their pre-marketing activities. But again, advice must be obtained on a jurisdiction-by-jurisdiction basis.

That's right. And for these purposes, the scope of pre-marketing really encompasses any discussion with prospective investors that reference investment strategies or ideas or the fund itself. Once a manager has registered for pre-marketing, the fund must be fully registered for marketing before admitting any EU investors. The potential risks of breaching these marketing rules are not light, and could include monetary fines or an unwinding of the contract under which the investor made its investment.

However, managers wishing to reach out to investors in the UK should also be mindful of the UK's financial promotion regime, which may capture activities which do not fall within the UK AIFMD's marketing regime.

Thanks, Abi. And that brings us to the end of our summary. We've tried to provide a simple explainer of the rules applying to marketing funds in Europe, but as you can see, the rules are relatively complex, and so marketing plans should be thought through carefully factoring in the particular circumstances of the fund and the manager. We really don't think there is a one solution for all managers, but it isn't as painful as it might sound.

Thanks again for listening, and we look forward to you tuning into our next episode.

This was The Preferred Return. Stay invested.

Thank you for joining us on The Preferred Return. If you enjoyed this conversation, be sure to subscribe in your favorite podcast app so you don't miss any future episodes. Additional information about Skadden can be found at skadden.com.