Reverse Solicitation and Reporting

Are reporting requirements for reverse solicitation in the EU on the horizon?

A recent letter by ESMA to the European Commission on the topic of reverse solicitation raises the question of reporting requirements for asset managers relying on the practice to distribute funds within the EU.

Earlier this year, the European Securities and Markets Authority (“ESMA”) published a letter it had issued to the EU Commission (“Commission”) in which it suggested the introduction of new reporting requirements which would allow for the collection of information on the use of reverse solicitation in the EU.

ESMA was writing to the Commission on the topic of reverse solicitation and the use of the practice by asset managers in the EU, the overarching finding from ESMA being that there is a significant lack of data available on the extent of its use. National competent authorities (“NCAs”) are not obliged at an EU-level to collect this data and most do not do so. ESMA puts forward the suggestion of new reporting requirements as a means of addressing the unavailability of such data – something which is likely to catch the attention of both EU and non-EU asset managers.

Background to the ESMA Letter

ESMA’s letter to the Commission, dated 17 December 2021, came as a result of the introduction of a new Cross Border Distribution Framework, comprising EU Directive 2019/1160 (“CBDD”) and Regulation 2019/1156 (“CBDR”), last year. Specifically, Article 18 of the CBDR requires the Commission to prepare a report to the European Parliament and European Council on the topic of reverse solicitation and its impact on the EU’s marketing passport regime, following consultation with relevant stakeholders (the “Report”). The Commission wrote to ESMA on 24 September 2021 to request its input regarding the preparation of the Report. ESMA in turn carried out a survey of NCAs and the letter published by ESMA outlines its findings in this respect.

ESMA’s Findings

ESMA highlights a lack of available information on the use of reverse solicitation by asset managers in the EU given that the majority of NCAs do not collect such data. Of the 29 responses received by ESMA to its survey, only two NCAs, Consob (in Italy) and CySEC (in Cyprus), were readily able to provide statistics on the use of reverse solicitation by investment funds which were not registered for marketing in such jurisdictions.

Consob reported that 25% of fund subscriptions received by Italian asset managers during 2020 were received on the basis of reverse solicitation (with professional investors accounting for virtually all of this figure). CySEC also reported that 30% of UCITS management companies and 50% of AIFMs established in Cyprus use reverse solicitation. The figures provided by both Consob and CySEC are significant in terms of their size but it is important to highlight that these figures are likely to vary significantly from jurisdiction to jurisdiction. For instance, the only other figure provided by ESMA in its letter is the figure provided by the Spanish regulator, the CNMV. The CNMV used a number of indicative factors to provide an estimate for the use of the practice at 1.36% - significantly lower than that reported in Italy or Cyprus.

Notably, ESMA also highlighted as part of its findings that a number of the NCAs surveyed believed that reverse solicitation is used in practice to circumvent the EU marketing passport regime. ESMA notes that this in turn raises the potential for an “unlevel playing field” between EU asset managers and non-EU asset managers given the use of reverse solicitation by some non-EU asset managers as a means of distributing funds within the EU. ESMA makes clear, however, that this is an assumption which is not currently supported by tangible data.

As part of its findings and as requested by the Commission in its original request, ESMA identified a number of steps that could be taken in order to collate additional information on the topic. These include engaging with market participants such as asset managers, depositories or account holders, potentially through national and European trade associations. Of significance, however, was a further suggestion by ESMA that consideration be given to the introduction of new reporting requirements which would allow for the collection of information on the use of reverse solicitation in the EU. While not outlined in the ESMA letter, the responsibility for collection and collation of such data would presumably sit with the relevant NCAs.

Potential Future Developments

The use of reverse solicitation by asset managers operating in the EU has been in focus at a European level for some time. In January of last year, ESMA issued a reminder of the rules under Directive 2014/65/EU, commonly known as MiFID II, regarding reverse solicitation in the context of the end of the Brexit transition period, noting at the time that "...some questionable practices by firms around reverse solicitation have emerged...".

The CBDD also addresses reverse solicitation through the concept of ‘pre-marketing’ in the context of AIFMD, relating to the marketing of a fund which has not yet been established. While the CBDD has provided for welcome flexibility by allowing AIFMs and distributors to carry out pre-marketing in a particular jurisdiction, the CBDD has imposed certain restrictions in relation to same. For instance, the CBDD provides that any investment by professional investors in an AIF within 18 months of the AIFM having commenced pre-marketing the fund, will be considered to be as a result of marketing and will be subject to the notification procedures set out in the AIFMD. This means that AIFMs will not be able to rely on reverse solicitation in such circumstances for a period of 18 months after conducting pre-marketing.

These new rules do not apply to non-EU AIFMs, however, as part of the proposal to amend the AIFMD (commonly referred to as AIFMD II) the EU may seek to introduce provisions dealing with reverse solicitation more broadly. One noteworthy amendment proposed by the Commission in its initial draft of the AIFMD II is changes to Article 42 AIFMD dealing with the NPPR framework.

With reform in a number of areas impacting the use of reverse solicitation by asset managers either currently in focus or already proposed, it seems likely that changes in the area are on the horizon. ESMA’s recent suggestion to the Commission of new reporting requirements adds to the indicators in that regard. Both EU and non-EU asset managers who obtain subscriptions through the use of reverse solicitation may need to give future consideration to more formal marketing routes. Asset managers should also remain vigilant as to their marketing activities with this increased scrutiny further emphasising the importance of appropriately documenting any use of the practice.

Tony Ross, Senior Associate in the Asset Management Department in Matheson.

Contributor Profile

Tony Ross is a Senior Associate in the Asset Management Department in Matheson and advises on the legal and regulatory issues surrounding the establishment, operation, maintenance and marketing of UCITS and AIF investment vehicles and products in Ireland and other jurisdictions, including traditional mutual funds, hedge funds, and multi-manager platforms.