Firms should consult MiFID II for insights into AIFMD reverse solicitation rules
Firms seeking to rely on reverse solicitation to attract EU capital under the Alternative Investment Fund Managers Directive (AIFMD) should refer to the Markets in Financial Instruments Directive II (MiFID II) as the text makes passing reference to the yet-to-be properly defined concept of reverse solicitation.
A Sidley Austin legal update on AIFMD published in September 2014 highlighted MiFID II allows for a non-EU firm to provide investment services to an EU client providing the latter “initiates at its own exclusive initiative” this investment activity. MiFID II highlighted the non-EU firm would not be permitted to provide additional products or services to that EU client. This could be an indication of how EU regulators intend to approach reverse solicitation under AIFMD, said the Sidley Austin paper.
“Non-EU fund managers must be careful when an investor approaches them. If an EU investor approaches the manager about purchasing units in fund A, but that same investor then buys units in Fund A, B and C, that would be in breach of the spirit of the regulations. In addition, if the manager speaks about funds B and C to the investor, that too would fall foul of the rules,” said Jeremy Lam, partner at Deacons law firm in Hong Kong.
Leonard Ng, partner at Sidley Austin, agreed. “Drawing an analogy from MiFID II, it would suggest that if an investor calls, for example, a fund manager in New York specifying an interest in a credit fund, the fund manager should not then pitch a real-estate fund, as that could amount to unlawful marketing of the real estate fund in breach of the AIFMD,” he said.
Regulators have been urged to provide more clarity over what constitutes reverse solicitation. A number of US managers have said they will rely on reverse solicitation whereby they will only respond to direct inquiries by European allocators so as to circumvent compliance with the AIFMD.
“I understand that MiFID II will possibly include a further definition of what constitutes marketing, and possibly define the evidence that would be required to show the approach was initiated by the investor, and not the manager,” said Bill Scrimgeour, head of regulatory and industry affairs at HSBC Securities Services in London.
The bulk of firms are adopting a conservative approach towards marketing into the EU lest they be accused by regulators of being in breach of the rules. Many are increasingly shunning third party marketers while capital introductions events hosted by prime brokers are facing scrutiny. Some are going further and refusing to hand out business cards to European investors. “Managers are advised to put in place an audit trail recording how conversations with prospective EU investors originated to ensure they can evidence compliance with AIFMD, if challenged,” commented Lam.
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 befall their larger counterparts. Ignoring European investors has also been described as a short-termist approach by some providers arguing such a policy risks leading to a lack of diversity among managers’ client base.