Investing at your own initiative: a practical guide to reverse enquiry

• I've heard UK firms might not be able to market funds or provide managed account services to EU-based investors after the end of the Brexit transitional period, is this right? Yes, in the event there is no deal for financial services, UK firms will lose the benefit of their current passporting rights which enable them to offer funds/products or provide managed account services or to EEA based clients. As such, some UK firms may encounter licensing restrictions in certain EU jurisdictions and may need to cease providing fund marketing materials and/or other managed account services to their EEA clients after 1 January 2021.

• So will Brexit prevent me from investing in funds managed by a UK firm or opening a managed account with such a firm? Not necessarily. There is a general exception in the EU rules (eg under MiFID 2) enabling firms to provide funds/products or services (or information on the same), without triggering a licensing requirement, if these funds/products or services are requested at a client's own exclusive initiative.

• What does 'own exclusive initiative' mean? The 'own exclusive initiative' test (or 'reverse enquiry' as it is also known) means that as long as the initial initiative to receive services or information on funds/products was taken by the investor rather than the firm, the firm can accept the request for services or information from the investor. For example, where a relevant investor has contacted a firm about a fund and requested information about the fund without first having been approached by the manager, the manager is able to provide the requested information, which may subsequently lead to an investment. Note that the prior marketing of a fund/product or service in a jurisdiction may make it harder for firms to rely on reverse enquiry. There are also differing views between EEA regulators on how reverse enquiry should apply depending upon the type of fund/product or service and the client type. Typically, across the EEA, retail clients are a more protected category of client than professional clients, so local regulator views on reverse enquiry are likely to be stricter for retail clients as compared to professional clients and local regulators will also restrict certain funds/products or services from being offered to retail clients.

• How do I know if I am a retail or professional investor? There are definitions set out in MiFID 2. A professional investor is anyone falling within the definition of Professional Client under MiFID 2; the definition covers most types of institutional investor. Retail investors are investors who are not Professional Clients or Eligible Counterparties as defined under MiFID 2. Note that all individual persons are by default retail clients, unless they have specifically agreed with a firm to be treated as a professional investor; so if you’re an individual acting in a private / personal capacity, you should assume you are a retail investor.

• Is there a common definition of 'own exclusive initiative' or 'reverse enquiry' in the EEA? No, unhelpfully, the interpretation as to what is meant by 'own exclusive initiative' or 'reverse enquiry' is different across the EEA. However, there are commonalities and, as a general rule, the more specific the client/investor's request is as to the fund/product or services, and the documents or information it wishes to receive, the more likely it is that a firm can accept the request.

• So unless I make a specific request, I may not get the same access to information after Brexit? Correct. After Brexit, some UK firms will only be able to deal with clients or investors established in certain EEA countries on a "reverse enquiry" basis. In particular, the internal policy of the relevant firm may mean that it is only permitted to send documents or information to you about its funds/products or services, upon receipt of a specific request from you naming the relevant fund/product or service and specifying the type of document or information you wish to receive.

• Once I've made one request, can the manager then send me all information? No. Many firms will only send documentation which has been specifically asked for. If you require any further information, then you may need to make a further specific request for it.

• What practical steps could I take in order to ensure that my request is specific? The following steps should be taken:

  • Make a written request - ie contact the firm in writing;

  • Be as precise as you can as to the funds/products or services in which you are interested (ideally you should name each fund/product or service in relation to which you would like to receive information and, if you want to be provided with information about new funds/products or services which the firm may launch in the future, make an express statement to that effect); and

  • Set out details of the information or documentation you would like to receive in respect of the firm and each fund/product or service. For example, in relation to funds, specify that you would like to see:

    • investor newsletters and/or fund fact sheets prepared by the manager that relate to the funds (you may wish to specifically request past, as well as, on an on-going basis, future newsletters or factsheets);
    • summary details of the funds (names, jurisdictions, fees/liquidity terms);
    • investor presentations;
    • risk reports;
    • due diligence questionnaires;
    • annual and any interim accounts prepared for the funds;
    • article 23 AIFMD and PRIIPS KID documentation (if applicable);
    • subscription agreements, limited partnership agreements and application forms; and
    • offering memoranda or prospectuses.

  • If you would like to be sent current versions of the above documents as and when they are updated, you should expressly state this in your request; and

  • You should expressly state that (i) you are a professional investor; (ii) you are initiating contact with the manager; and (iii) your contact with the manager has not been requested or solicited in any way by the manager or any person acting on the manager's behalf. You may find the following example useful when considering how to phrase such a statement:

    "We confirm that we are a professional investor and that by sending this [letter]/[email] we are initiating contact with the manager."

• I am already an investor, do I need to take the steps listed above? If you find your current service providers are unable to provide you with information or services after 01 January 2021, you may wish to make a reverse enquiry along the lines of the above, to see if they are able to service you on this basis.

IMPORTANT NOTE: each jurisdiction in the EEA may interpret the scope of "reverse enquiry" and "marketing" differently (as those concepts are not clearly defined within the various EU regulatory regimes). Additionally, investors from certain jurisdictions may find that some firms/managers may have specific requirements that they require the investor to satisfy before they are prepared to provide information to them.