It’s all marketing now: ESMA sets out requirements for fund managers

On 9 November, ESMA published its consultation paper on Guidelines for Funds' marketing communications.  The draft Guidelines it is proposing are broad reaching and prescriptive.

In particular, they will require fund managers to:

• carry out a full scoping project of all communications (including websites, social media posts, live presentations etc) that will be subject to the Guidelines;
• ensure all identified communications and marketing templates comply with the Guidelines.  In particular, ensure that all categories of information included in such communications comply with the specific formatting and content requirements set out in the Guidelines; and
• open up agreements with distributors (as fund managers will be responsible for third party marketing communications in respect of their funds).

While the draft Guidelines are subject to consultation, they are due to come into force in August 2021 - we would advise fund managers to engage with the draft Guidelines at this stage in preparation.

Who is impacted?

The Guidelines will apply to UCITS managers, AIFMs, EuSEF managers and EuVECA managers.

They will also be of interest to distributors of those funds, although the Guidelines are not directly applicable to them.

What are marketing communications?

The Guidelines cover marketing communications addressed to investors/prospective investors in relation to funds.  Fund managers will need to ensure that such marketing communications comply with the Guidelines regardless of who issues the marketing communications and who distributes the fund. 

ESMA has produced a non-exhaustive list of those communications that would and those that would not be regarded as marketing communications. 

• Communications which would not be regarded as marketing communications include legal and regulatory documents (the prospectus, KIID/KID, constitutional documents, accounts) and corporate communications which do not explicitly or implicitly identify funds.

• Otherwise the scope of marketing communications subject to the Guidelines is broad and can include mass marketing or individually addressed marketing communications (regardless of medium), press releases, live presentations, websites and social media posts.  It can also include communications describing the characteristics of a fund which are provided to distributors and which are eventually addressed to investors/potential investors, even if such communications were not meant to be provided to investors or potential investors.

Background

The Guidelines are made under the Cross-Border Fund Distribution Regulation ((EU) 2019/1156) (the "Regulation"). The Regulation stipulates that marketing communications sent to investors in order to promote UCITS and AIFs, including EuSEFs, EuVECAs and ELTIFs must:

• be identifiable as marketing material;
• describe the risks and rewards of purchasing units or shares of an AIF or units of a UCITS in an equally prominent manner; and
• contain information which is fair, clear and not misleading.

The Regulation requires ESMA to develop guidelines on the application of these requirements, taking into account the on-line aspects of marketing communications. 

For further background on the Regulation (and the associated Cross-Border Fund Distribution Directive) see our note here.

What do the draft Guidelines say?

The draft Guidelines break down into the three sections identified above applicable to all marketing communications.

Identifiable as marketing material

• Marketing communications should contain a short disclaimer identifying them as such.  The Guidelines provide an example template disclaimer.

Describe risks and rewards in an equally prominent manner

• This requirement relates to the format, rather than the content, of risk and rewards disclosures.  Disclosure of risk or reward is not mandated but if rewards are described, risks should also be described alongside, using the same font and size.  The disclosures should be balanced and rewards should not be disclosed without equal disclosure of risks - ie, risk disclosures should not be left to the end or only included in footnotes.

Fair, clear and not misleading information

• This is the most substantive part of the Guidelines in respect of content requirements, in particular with regards to information on risks and rewards, costs, performance and sustainability-related aspects.

• In general, information in marketing communications should be drawn-up in a manner suitable to the target investors or potential investors and be consistent with the fund's legal and regulatory documents.  The target audience can dictate how the information is written and presented.

• Short marketing communications (eg, social media posts) should be "as neutral as possible" and should indicate where more information is available.

• Where a communication includes a description of the features of the fund, there are specific requirements relating to explaining the features of a fund vehicle, use of leverage and, echoing ESMA's update to its UCITS KIIDs Q&A last year (see our note here), distinguishing between active and passive funds and references to benchmarks.

• Risks and rewards:

  • Disclosures of risk profile should refer to the same risk classification used in the KID/KIID.
  • AIFs which are sold to retail clients should clearly mention the illiquid nature of the investment where this is the case and state that the AIF should only represent a small proportion of the client's overall investment portfolio.
  • There are additional requirements in relation to ranking against other similar funds, reference to material risks and for new funds with no past performance.

• Costs:

  • References to costs should include an explanation to allow investors to understand the overall impact of costs on the amount of their investment and expected returns.
  • There are also requirements for references to costs in currencies other than the currency of the member state where target investors are resident.

• Performance:

  • Performance disclosures should be consistent with the fund documentation. 
  • There are requirements relating to position of performance information in the communication, identification of changes significantly affecting past performance, use of cumulative performance charts, impact of FX rates and disclaimers. 
  • There are also requirements relating to the use of future performance and limitation on the use of simulated past performance.

• Sustainability-related aspects:

  • Descriptions of the sustainability-related aspects of the fund should be consistent with the legal and regulatory documents.  ESMA cross refers to Art 13 of the Sustainable Finance Disclosure Regulation ("SFDR") which requires financial market participants to ensure that their marketing communications do not contradict information which is required to be disclosed under SFDR (whether at firm or product level).
  • This means that any sustainability-related information contained in a marketing communication will need to be commensurate with the extent to which the investment strategy of a fund promotes environmental or social characteristics (an "Article 8 product") or sustainable investment objectives (an "Article 9 product").
  • ESMA reserves the right to update the Guidelines on sustainability-related aspects once the final Level 2 Regulatory Technical Standards (or the implementing technical standards required under Art 13(2) SFDR to standardise disclosures in marketing communications) are published.
  • We are advising a large number of clients on requirements under SFDR and ESG in general - see here for more information.

What next?

The consultation period closes on 8 February 2021 and the plan is for finalised guidelines to be published by 2 August 2021 (the deadline under Article 4 of the Regulation).