Data providers and consultants warned on breaching reverse solicitation rules
Data providers and to a lesser extent consultants must be wearier in certain EU jurisdictions about breaching rules surrounding reverse solicitation under the Alternative Investment Fund Managers Directive (AIFMD).
Reverse solicitation has not been properly defined and some regulators, such as Italy, France and Germany could potentially take a tougher line than some of the more liberal regimes like the UK and Holland.
“Managers who are relying on reverse enquiry need to be aware that the use of data providers and consultants may pose a higher risk in some EU countries in terms of regulatory sanctions and potentially the “investor put” rescission risk. Because data providers, while paid for by the investor, send information to EU investors on a non-discretionary basis, this has the potential to be construed as marketing on behalf of the manager. While consultants face a similar challenge, if they select the data which they pass on to clients, the risk should be lower in certain member states,” said Simon Whiteside, partner at Simmons & Simmons in London.
Data providers point out they are a paid for service by investors and therefore do not fall foul of reverse solicitation. Nonetheless, some regulators could take an uncompromising stance, particularly in markets hostile to alternative investment funds.
The capital introductions arms at prime brokers and third party marketers are also feeling the heat on this issue. “Managers using capital introductions teams should have robust processes in place to ensure a clear audit trail of all communications between investors and managers at these (capital introductions) events to be certain that any investment is made at the investor’s initiative,” said Whiteside.
The bulk of non-EU managers are adopting a conservative approach towards marketing into the EU lest they be accused by regulators of being in breach of the rules. There is a risk investors could accuse a non-EU firm – should their investment go south – of marketing in breach of AIFMD. Others have been warned that top-up investments from existing clients must be carefully monitored.
“If an investor increases their investment into the fund on their own accord, then this should constitute reverse enquiry. However, if the manager solicits an existing investor to top-up its investment, and there is an increased allocation as a result, this could fall outside the exemption,” said Whiteside.
Reverse solicitation is unlikely to work for smaller or emerging managers, many of whom will not field many calls from prospective investors in Europe, a problem that will not impact their larger counterparts. Ignoring European investors has also been described as a short-termist approach by some providers who argue such a policy risks leading to a lack of diversity among managers’ client bases.