The new ‘CBDF Framework’ coming into force

On 2 August 2021, the Cross-border Distribution of Funds Framework (the ‘CBDF Framework’) on the distribution of funds on a cross-border basis within the EU, was brought into effect. It is composed of two main legislative instruments – Directive (EU) 2019/1160 (the ‘CBDF Directive’) and Regulation (EU) 2019/1156 (the ‘CBDF Regulation’) supplemented by a Commission Delegated Regulation 2021/955 on implementing technical standards (ITS) and guidelines (the ‘Guidelines’) issued by the European Securities and Markets Authority (‘ESMA’) published on the same date, which will become applicable six (6) months after the date of the publication of the Guidelines on ESMA’s website in all official EU languages and are to be updated on an ongoing basis.

The CBDF Framework forms part of the broader Capital Markets Union (‘CMU’), seeking to harmonise national procedures for the verification of marketing material by competent authorities and enables ESMA to monitor collective investment undertakings more closely. It also allows fund managers to test the market and evaluate the appetite of potential investors for new investment strategies. The scope of the CBDF Framework generally targets fund managers operating within the EU, specifically, Alternative Investment Fund Managers (‘AIFMs’) (including self-managed Alternative Investment Funds (‘AIFs’)), Management Companies of Undertakings for the Collective Investment in Transferable Securities (‘UCITS ManCos’) (including self-managed Undertakings for the Collective Investment in Transferable Securities (‘UCITS’)) as well as managers of European Venture Capital Funds (‘EuVECA’) and of European Social Entrepreneurship Funds (‘EuSEF’).

Whilst the CBDF Regulation is directly applicable in all EU member states and fund managers must ensure compliance with the requirements emanating from the Regulation, the provisions of the CBDF Directive are still, in principle, required to be transposed into Member States’ domestic legislation.

The main provisions of the CBDF Framework cover the following main areas:

1. General Principles

The CBDF Regulation and CBDF Directive lay out general principles to be adhered to by fund managers when drafting pre-marketing and marketing communications, including, inter alia, that all communications must be identifiable as such, and all information contained in such communications shall be fair, clear, and not misleading.

2. Pre-marketing

The CBDF Framework also introduces ‘pre-marketing’ as an EU harmonised concept serving as an information point on investment strategies or ideas, put forward by EU AIFMs to potential professional investors to test their interest in an AIF or a compartment/sub-fund which is not yet established, or which is established, but not yet identified for marketing to the relevant competent authorities.

Under the CBDF Framework, documents used as part of the pre-marketing should not be in a form that would allow any potential investor to commit to investing. Any documents should clearly state that they do not constitute an offer or invitation to invest and that the information therein should not be relied upon as it is incomplete and subject to change.

EU fund managers falling within the scope of the CBDF Framework should also be required to follow a notification procedure in order notify their local regulator of their intention to pre-market in certain jurisdictions. Such notification procedure should be completed within two (2) weeks of pre-marketing having begun.

In terms of the CBDF Framework, any subscription by professional investors, within 18 months of an EU AIFM having begun pre-marketing, to units or shares of an AIF referred to in the information provided in the pre-marketing communication, is to be considered the result of marketing, subject to the applicable notification process.

3. Prior Notification of Marketing Communications

National competent authorities have the discretion under the CBDF Framework to decide whether to impose a prior notification requirement on marketing communications for the purpose of ex-ante verification of compliance of those communications with the framework. The verification should be performed within a limited timeframe, however competent authorities should also not be prevented from verifying marketing communications ex-post for purposes of enhanced supervision.

Generally, marketing communications should include satisfactory information to make it clear that the communication is purely for the purposes of marketing, is not a contractually binding document or an information document required by any legislative provision and is not sufficient to take an investment decision.
The ESMA Guidelines, appreciating that the term ‘marketing communications’ is broad in scope, stipulate that ‘marketing communications’ should include marketing material addressed individually to investors or potential investors as well as any form of advertising, press releases and interviews but certain other forms of communications should generally be excluded. Going into further detail, they also mandate the inclusion of specific disclaimers to be used, and the avoidance of using legal and regulatory documents of the promoted fund (e.g. prospectuses, M&As etc.) as marketing material, though consistency must be achieved between the two.

4. Discontinuation of Marketing

The CBDF Framework prescribes a procedure for de-notifying a fund for marketing in a particular Member State and through which fund managers should notify the relevant competent authority of their intention to cease marketing of funds in certain jurisdictions. Under this procedure a blanket offer must be made to repurchase or redeem, free of charges or deductions, all units or shares held by investors in that particular Member State for at least 30 working days, and must be addressed individually to all investors in that Member State where known. Additionally, the intention to terminate arrangements for marketing in the Member State/s must be made by means of a publicly available medium (including electronically) as is customary for marketing that specific type of Fund and any contractual arrangements with financial intermediaries or delegates must be modified or terminated.

For a period of 36 months following de-notification of an AIF, EU AIFMs should not engage in pre-marketing of units or shares of the EU AIFs referred to in the de-notification or in respect of similar investment strategies or investment ideas in the Member State/s identified in the de-notification letter.

5. Reporting and Transparency Requirements

Under the CBDF Regulation, the Malta Financial Services Authority (‘MFSA’) and other national competent authorities are also required to publish online information about the applicable national laws, regulations, and rules governing the marketing of AIFs and UCITS Funds and their summaries along with up-to-date information on the fees or charges levied to process marketing notifications on their websites. A centralised online database with all relevant information is to be maintained by ESMA.

Conclusion

The CBDF Framework is intended to harmonise national laws and procedures on the cross-border distribution of collective investment funds across the EU by removing regulatory barriers to create a more competitive EU investment landscape and enhance investors’ protection.

Malta is currently in the process of transposing the CBDF Directive into local legislation by way of amendments to be made to various Subsidiary Legislations (‘S.L.’) under the Investment Services Act, particularly S.L 370.18, 370.20, 370.21 and 370.22 of the Laws of Malta. The MFSA as the national competent authority has announced that it is periodically updating its Investment Services Rulebook to reflect the changes brought about by the CBDF Framework.

Deloitte Malta will be monitoring developments in the implementation of the CBDF Framework both locally and overseas.