The introduction of the concept of pre-marketing was one of the more widely discussed elements of the Cross Border Distribution Directive (and Regulation); however, it went further and introduced a number of measures (See our previous summary here), including changes to marketing communications for AIFs and UCITS.
When the Cross Border Distribution Directive came into force on 2 August 2021, ESMA published its Guidelines on marketing communications under the Regulation on cross-border distribution of funds (the “Guidelines”), which apply from 2 February 2022.
In short, the requirement for marketing communications to be fair, clear and not misleading has been extended from applying not only to retail investors in the EU, as was previously the case, but to all AIF and UCITS communications. There are additional requirements to identify marketing communications as such, and additional requirements on performance reporting, costs, incorporation of sustainability, and description of risks and rewards in an equally prominent manner.
We have summarise the new requirements below. However, a summary is no substitute for a full understanding of the Guidelines, and while the Guidelines apply to AIFMs, UCITS ManCos, EuVECA managers and EuSEF managers, all promoters of UCITS and AIFs should familiarise themselves with the requirements, given that they would be likely to be preparing such communications in the first instance.
> What is a Marketing Communication?
The Guidelines do not give hard prescriptive rules on what should be considered but say that they “apply to all marketing communications addressed to investors or potential investors for UCITS and AIFs, including when they are set up as EuVECAs, EuSEFs, ELTIFs and MMFs”. They go on to give examples of what should be considered a marketing communication, which includes all forms of advertising, regardless of the medium and method of publication (such as social media), and includes direct correspondence with investors. They also apply to communications issued by third parties.
In terms of what is not considered to be a marketing communication for these purposes, corporate information at the level of the manager or promoter would be out of scope, as would legal information (as this is governed elsewhere), but what should come as something of a relief to promoters is that pre-marketing information is expressly out of scope.
> Summary of the Requirements
The identification as such of marketing communications
Linking to the point on pre-marketing communications being excluded, marketing communications are only permitted where the UCITS or AIF in question has been approved for distribution in a given Member State. At that point, the requirement for identification should be self-explanatory, but the applicable communications should be clearly labelled as a “marketing communication” such that any person can easily identify it.
Additionally, marketing communications should include a disclaimer along the lines of the following:
“This is a marketing communication. Please refer to the [prospectus of the [UCITS/ AIF/EuSEF/EuVECA]/Information document of the [AIF/EuSEF/EuVECA] and to the [KIID/KID](delete as applicable)] before making any final investment decisions.”
However, ESMA also accepts that certain mediums, such as social media, may not allow for this, so shorter identification of “Marketing Communication” or even “#MarketingCommunication” will suffice.
The description of risks and rewards in an equally prominent manner
Marketing communications that reference any potential benefit of purchasing units or shares of an AIF or units or shares of a UCITS should be accurate and always give a fair and prominent indication of any relevant risks. This equally prominent disclosure of risks and rewards should be assessed in relation to both the presentation and the format of these descriptions.
Practically, this means that firms should consider factors such as font size, colour and positioning, rather than simply burying risks at the bottom of a document in a grey box.
The fair, clear and not misleading character of marketing communications
As mentioned previously, this is a standard that already applied to retail clients under MiFID. It now applies to all fund marketing communications and investor groups, although the level of information and the way that the information is presented may be adapted to whether investment in the promoted fund is open to retail investors (i.e. UCITS or retail AIFs), or to professional investors only (i.e. non-retail AIFs). So, for example, it would be expected that communications to retail investors would not include excessive technical language, but those to professional investors could retain technical terms.
Prudent firms should already be ensuring that information presented in the marketing communications is consistent with the legal and regulatory documents of the fund, but this is now a regulatory obligation, and care should be taken beyond the basics, to think more about recommended holding periods, risks and rewards, costs, past and expected future performance, and sustainability-related aspects of the investment. The requirement is to ensure consistency, rather than a reproduction of all of the legal terms. Furthermore, firms should avoid cross-referencing to the legal documents.
Information on risks and rewards
Further requirements remind firms that risk profiles should be consistent with KIID or KID disclosures, and illiquid retail funds should clearly state liquidity risks.
Information on costs
Marketing communications should include an explanation to allow investors to understand the overall impact of costs on the amount of their investment and on the expected returns.
Information on past performance and expected future performance
What must be disclosed will depend on the form of performance reporting (periods, reference data, material events etc), with additional obligations around any simulated reporting. Again, one would expect performance reports to already caveat along the lines that “Past performance does not predict future returns”, but this is now required language.
There are additional requirements around expected future performance, such as being based on reasonable assumptions supported by objective data; as with simulated data, promoters should take additional care in relation to such modelling.
Information on sustainability-related aspects
Helpfully, there is additional guidance to incorporate the additional requirements of the Sustainable Finance Disclosure Regulation (SFDR). In particular, as SFDR requires certain website disclosures, any marketing communication that refers to the sustainability-related aspects of the investment in the promoted fund should link to the website detailing the additional information.
Furthermore, as part of the drive against greenwashing, information on the sustainability-related aspects of the promoted fund should not outweigh the extent to which the investment strategy of the product integrates sustainability-related characteristics or objectives.
The requirements around marketing communications were one of the less discussed elements of the Cross Border Distribution Directive, and the application of these prescriptive measures is likely to catch many fund promoters out, as they will need to consider the future requirements of these Guidelines at the earliest stages of product development, particularly for their first foray into the EU.
Furthermore, promoters operating on a delegated management basis from a third party AIFM or ManCo platform in the EU must prepare for additional lead time before issuing marketing communications, and work with the third party manager on appropriate policies and processes around the content, approval and issue of marketing communications.