In November 2021, we wrote an article about the implications of CBDF on reverse solicitation. With AIFMD II, European regulators seek to crack down further on the use of reverse solicitation to sidestep pre-marketing rules in EU jurisdictions.
The Cross Border Distribution of Funds (CBDF) Directive and Regulation, launched in August 2021, explicitly defines pre-marketing activity for all alternative investment fund managers (AIFMs) marketing funds within the EU. Fund managers traditionally relied on reverse solicitation to market their funds in Europe, but CBDF was an initial step toward regulating pre-marketing contact by increasing the scope of what “pre-marketing” means.
Further, ESMA guidance applicable to CBDF came into force in February 2022, effectively broadening the definition of marketing while narrowing the definition of reverse solicitation.
Original Alternative Investment Fund Managers Directive (AIFMD) rules broadened, and the European Commission decided that pre-marketing a fund—even if that fund has not been set up yet—should prevent funds from capitalising on reverse solicitation for a period of 18 months.
Under the current guidelines for reverse solicitation, investors can access funds they want to invest in without falling within AIFMD marketing requirements—if the investor initiates the approach. But EU regulators aim to crack down on reverse solicitation, suggesting that it’s often used to circumvent AIFMD.
There is no clear timeline attached to AIFMD II regulation yet, but ESMA wrote an opinion piece on this topic in December 2021, so it’s clearly top of mind. Asked to make suggestions on how to determine how frequent reverse solicitation is, ESMA wrote that “one solution could be the introduction of new reporting requirements.”
The Commission will most likely act on this idea as part of AIFMD II, but it will probably be a while before any new reporting rules are imposed. And there are lots of logistics to smooth out, particularly for non-EU managers who don’t fall under the purview of the current CBDF or AIFMD regimes.
We may not see AIFMD II regulation until 2024 or beyond, but change is on its way. If reverse solicitation is a closing door, firms that act now to get ahead of regulatory changes will have an advantage when official regulations are released.
