On 27 May 2021, ESMA published the final report on its Guidelines for marketing communication under the regulation on cross-border distribution of funds (CBDFR). CBDFR applies to European managers of European funds from 2 August 2021. It remains unclear how it will apply to third country managers, as this is a matter for local implementing laws; however, national law cannot disadvantage EU managers over their third country equivalents.
CBDFR requires all European fund managers to ensure that marketing communications addressed to investors are identifiable as such and describe the risks and rewards of investing in the fund in an equally prominent matter, and that all information is fair, clear and not misleading. The Guidelines clarify the requirements that fund marketing communications must meet to comply with CBDFR.
The Guidelines apply 6 months after the date of publication of the guidelines on ESMA's website in all EU official languages. This will now be after 2 August when the relevant Article of CBDFR comes into effect.
WHO?
The guidelines apply to all European fund managers. Care will need to be taken with distributors and contractual documents may need to be revised to ensure compliance with Article 4 of CBDFR. The application to non-EU managers is subject to national law implementing the CBDFR package of reforms.
WHAT?
The Guidelines apply to all marketing communications addressed to investors or potential investors in UCITS funds and AIFs, including those set up as EuVECAs, EuSEFs, ELTIFs and MMF's (fund).
In its consultation from November 2020, ESMA helpfully reminded us that a "marketing communication" to which the Guidelines should apply is one "which contain a direct or indirect offering or placement of units or shares of a fund to or with investors domiciled or with a registered office in the Union". This picks up the definition of "marketing" from the AIFMD and must be the right place to start. However, ESMA's response to this question in the Feedback Statement was rather unhelpful. ESMA states it is not the job of the Guidelines to define a "marketing communication" (despite ESMA's attempts to do so) and ignored the very sensible suggestion to align the definition to "marketing" and "pre-marketing". For now, we are left with the following non-exhaustive examples of what may and may not qualify as a marketing communication. Since pre-marketing is on the "negative" list, it would appear that the rules on marketing communications should only apply to "marketing".
MAY QUALIFY AS A MARKETING COMMUNICATION
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MAY NOT QUALIFY AS A MARKETING COMMUNICATION
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All messages advertising a fund, regardless of the medium, including paper printed documents or information made available in electronic format, interviews, advertisements, documents made available on the internet, as well as webpages, video presentations, live presentations, radio messages or factsheets.
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Legal and regulatory documents/information of a fund, such as the prospectus or the information which is to be disclosed to investors in accordance with the annual and half-yearly reports of the fund, the Memorandum & Articles of Association etc
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Messages broadcasted on any social media platform, when such messages refer to any characteristics of a fund, including the name of the fund.
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Corporate communications broadcast by the fund manager describing its activities or some recent market developments – such as the disclosure of quarterly or half-yearly earnings, dividend announcements, organisational announcements or senior management changes.
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Communications by a third party and used by a fund manager for marketing purposes.
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| Marketing material addressed individually to investors or potential investors, as well as documents or presentations made available by any fund manager to the public on its website or in any other places (fund manager’s registered office, distributor’s office, etc.) |
Short messages broadcast on-line, in particular on social media platforms, which only include a link to a webpage where a marketing communication is available, but which do not contain any information on a specific fund. |
| Communications advertising a fund addressed to investors or potential investors located in Europe. |
Information or communication issued in the context of pre-marketing.
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THE TOP TAKEAWAYS FROM ESMA'S PUBLICATION
All fund managers must ensure that:
- Marketing communications of funds are identifiable as such. All marketing communications should make it clear that the communication has a purely marketing purpose and is not a contractually binding document. Fund managers can satisfy this requirements by prominently using the disclosure: "Marketing communication" even when this is preceded with a # on social media.
Marketing communications should also include the following disclosure, unless the medium does not allow for it, in which case a shorter disclaimer can be used such as "Marketing communication" or #MarketingCommunication.
"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] before making any final investment decisions."
Everyone will be overjoyed at referring investors to the KIDs – we are not sure if this squares with the fair, clear and not misleading requirement!
- The description of the risks and rewards of the promoted fund are disclosed in an equally prominent manner. Marketing communications that reference any potential benefit of investing should be accurate and always give a fair and prominent indication of any relevant risks.
The risks and rewards of the fund should be equally prominent in relation to the presentation and the format of the description. Moreover, the risks and rewards must be mentioned either at the same level or one immediately after the other. No small print, white text on white backgrounds, illegible font types, footnote references etc. People have tried, yes they actually have, and failed before.
- The communication must be "fair, clear and not misleading". All marketing communications, regardless of target investor, should be "fair, clear and not misleading".
Where the fund is marketed to retail investors, the marketing communication should refrain from using excessively technical wording, provide an explanation of the terminology used and ensure communication of the information could be easily read.
The information presented in the marketing communication should be consistent with the legal and regulatory documents of the promoted fund. The information included in a marketing communication should be proportionate to the size and format of the communication.
The requirements for fair, clear and not misleading marketing communications are set out in the Guidelines in some detail, and are not dissimilar from the FCA's rules on financial promotions and communicating with customers or the MiFID rules on marketing. Some particular references to note, include:
- The need to use objective and verifiable sources for all statements, and quote the sources.
- Social media posts can link to a webpage with marketing materials on it – a departure from the FCA's "standalone compliant" rule.
- Costs need to be disclosed.
- Past performance and future performance information has to be preceded by prescribed statements that are similar to, but not be identical to, what many firms currently use.
- Actively managed funds should say they are active or actively managed, and passive funds should say they are passive or passively managed in order to make this clear to investors.
The requirements for marketing communications are broadly in line with the equivalent MiFID and UK FCA standards, albeit with some differences. Impacted firms should readily identify with many of the requirements. However, this will be a change to the current industry practice, especially in the professional markets, and firms need to prepare for this aspect of the CBDF package alongside the other aspects of the new regime.
Authors: Bradley Rice, Partner and Casha Ali, Paralegal
