Regulators are taking a strict approach
Managers looking to rely on claims from European investors should take note of the enforcement action taken by French regulators last year. Enforcement actions, while ensuring that the reverse solicitation remains sufficiently legitimate, focus on specific investor requests and demonstrate the regulator's willingness to examine the fund rather than the type of communication that leads to such requests. Investments.
Summary
French distributor Auvergne said its German fund manager clients had returned calls to investors. French regulators disagreed and ruled that the dealer was illegally selling the currency. The regulator fined Auvergne and its president personally for their failure and banned him from working as an investment adviser for five years.
Background
Trading of funds in the EU is regulated by the Alternative Investment Fund Managers Directive (AIFMD). European funds managed by European managers benefit from a pan-European marketing passport, which provides access to professional investors in the EU once the fund goes to market, but non-EU funds must rely on each country's national private placement system. Some countries have effectively closed the door to funding from non-EU countries (eg France and Italy). However, if this procedure is initiated by an investor (“Reverse Request”), these restrictions do not apply. The facts here are a bit unusual as the fund is based in the European Union but is not listed on the market and is sold to non-professional investors who require additional authorization in France.
Solution
Four elements prevent distributors from using reverse demand:
- Although in some cases investors wrote letters of reverse request, the regulator concluded that the letters were similar to templates provided by fund managers to distributors and lacked the required “spontaneous and unpredictable” character.
- It should be noted that the letters reflect general interest in the manager's products, but do not mention specific investment funds.
- Likewise, if a dealer offers a fund without a manager description, upon the investor's request, the dealer will provide a description covering the manager's entire portfolio of investment products. Again, there is no specific question for these funds.
- A distribution agreement, in which the distributor agrees to give the manager's money to investors, is the opposite of the application where the manager agrees.
Conclusion
- Content is more important than form. According to a statement last year by ESMA (European Securities and Markets Authority), having a return summons (or a contractual clause or caution to that effect) is not a get-out-of-jail-free card. If it contradicts basic facts.
- “Be Specific” – Investors should ask for information about a specific fund or product. There is not enough general interest in the manager or the product.
- Counter-applications are maintained in appropriate circumstances: the regulator verifies that the investor who invested in the family business fund and wrote an application to invest in the fund has submitted a valid counter-application and that no transaction has occurred. Property. The place is busy. . This is an important finding (although the implementation of EU border distribution rules last year, future anti-requests in EU countries could be suspended for 18 months after pre-marketing in those states).
- Managers can communicate with investors to analyze the market; Without closing the door to cancellation requests, their history and related activities: The regulator recognizes that investment managers may participate in conferences or investor meetings to discuss the market, the manager's performance and management. There is no investment proposal or relationship with a fund open to investment. Thus, reverse research may be offered to professional investors who have previously invested in manager-managed closed-end funds, as they may research specific futures funds as part of their ongoing relationship.
- It is unclear why the regulator launched an investigation: It is unclear why the regulator launched an investigation - this is just a statement that the regulator decided in 2019 to monitor distributor compliance through a professional investigation.
Sanctions available
- The regulator has broad powers to impose fines on companies of up to 100 million euros (or $15 million for individuals) or ten times net profits, as well as other sanctions. Factors to consider include losses incurred by investors. The distributor admitted that not a single investor complained about this. Investors invested less than €14 million in the main fund, while distributors received commissions of around €375,000. As well as breaching trading standards, the distributor failed to comply with certain anti-money laundering obligations and the regulator was not impressed by the distributor's request for cooperation and was judged to have failed to exceed expectations. Controlled company.
Punishment
- The regulator imposed a fine of 150,000 euros on the distributor. The court found the president personally responsible for the company's losses, fined him 50 thousand euros and banned him from working as an investment consultant for five years. Regulators do not distribute fines among refusals. The distributor disputes the inspector's conclusion and has the opportunity to appeal the decision.
