On June 2, 2016 the EC issued a consultation document of interest to the many alpha seekers who would like to market their funds in one or more of the countries of the Eurozone.
In a sense, its interest is much broader than that, because it fits into a very complicated and consequential picture.
Europe, after all, is the site of a lot of centrifugal forces just now. The upcoming Brexit referendum is an obvious example of this. So are the surge of Euro skeptical sentiment in France, the near-miss of Austria‘s Freedom Party in that country’s recent presidential election, and the increasingly bitter tone of talks between the northern and the southern tiers of the continent. Running counter to all this, of course, there are centripetal forces: notably the financial and commercial gains still to be made by an ever more integrated marketplace.
Cross-Border Fund Distribution
The new document reflects the EC’s current thinking on the cross-border distribution of funds, including UCITS and AIFs. It solicits responses from interested parties by October 2.
The EC wants to encourage greater cross-border marketing and sales on the hypothesis that this will allow funds to grow, gain economies of scale, and allocate capital more efficiently. Also, as borders stop serving as barriers, competition within each of the constituent nations may heat up for the benefit of investors.
This consultation paper is part of a broader push to create a Capital Markets Union. Contributions to the discussion are especially sought “from respondents who have an interest and/or experience in cross-border distribution of, and investment in, investment funds,” the EC says.
The paper seeks feedback on six matters: marketing restrictions; distribution costs and regulatory fees; administrative arrangements; distribution networks; notification processes; and taxation.
Marketing Restrictions
On the matter of marketing restrictions, the paper observes that funds are required to comply with national requirements set by the host states, and that these vary widely. It adds by way of example: “some Member States require ex-ante approval of the marketing communications [while] other Member States monitor the communications ex-post.” It asks in essence for further examples of discord in marketing rules that “go unreasonably beyond what should be considered in marketing” for a unified European market.
The paper also asks which of the following, if any, is a “particular burden” on cross-border marketing:
- Differing interpretations of what constitutes marketing
- Differing methods for complying with marketing requirements
- Differing interpretations of what constitutes a retail or professional investors, or
- Additional requirements on communications?
AIMA’s reaction
The Alternative Investment Management Association has issued a press release welcoming this consultation. It maintains that barriers to the funds’ passport have “held back growth in the European economy and hurt savers and investors.”
AIMA is especially concerned about the imposition of separate registration and notification fees on funds by the member states, sometimes imposed also on sub-funds. This practice can amount to the expenditure of hundreds of thousands of euros annually for funds that market across the continent.
Also, some jurisdictions require an investment manager to appoint a local representative or agent: another AIMA concern.
The consultation paper is pursuant to a broader “Action Plan” on the creation of a Capital Markets Union issued by the EC in September 2015. It remains the reigning opinion in Europe just now that capital-market convergence will unlock investment, both within the European Union and from the rest of the world; will connect financing to investment projects; will increase the stability of the financial system by sharing the impact of shocks, and; will increase competition while lowering costs. These are all good reasons for caution in the face of various appeals for “exits.”
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- For the record: UCITS are “undertakings for collective investment in transferable securities.” We’re told that the EC staff has estimated that since the original 1985 directive giving such funds that acronym, the market has grown so that €8 trillion is now under such management.
- AIF are “alternative investment funds.” They have about €5 trillion of asset under management.