On August 2 2021, the European Securities and Markets Authority (ESMA) published guidelines on marketing communications under Regulation (EU) 2019/1156 on facilitating cross-border distribution of collective investment undertakings and amending Regulations (EU) 345/2013, (EU) 346/2013 and (EU) 1286/2014 (the Cross-Border Distribution Regulation).
Article 1 of the Cross-Border Distribution Regulation:
(i) Establishes uniform rules on (a) the publication of national provisions concerning marketing requirements for collective investment undertakings and (b) marketing communications addressed to investors;
(ii) Sets out common principles concerning fees and charges levied on managers of collective investment undertakings in relation to their cross-border activities; and
(iii) Provides for the establishment of a central database on the cross-border marketing of collective investment undertakings.
Guidelines enter into force in Cyprus
National and competent authorities are required to notify ESMA as to whether they comply, or intend to comply, with the guidelines, stating reasons in the event of non-compliance.
The Republic of Cyprus readily notified its intention to comply. On October 13 2021 the Cyprus Securities and Exchange Commission published a circular (C473) evidencing its adoption of the guidelines by incorporating them into its supervisory practices and regulatory approach. The guidelines entered into full force as of February 2 2022.
Which regulated entities are affected?
The guidelines apply to undertakings for the collective investment in transferable securities (UCITS), including self-managed UCITS, alternative investment fund (AIF) managers, managers of European social entrepreneurship funds, European venture capital funds and European long-term investment funds, money market funds and relevant competent authorities. These are all described as regulated entities.
Key purpose of the guidelines
The purpose of the guidelines is to specify the application of the requirements for marketing communications addressed to investors, including potential investors, set out in Article 4(1) of the Regulation to establish common principles and guidance as to the interpretation of the requirements.
It is clarified that the guidelines are not intended to replace existing national requirements to the extent that these are compatible with any existing harmonised EU rules (such as rules on disclosure of costs or performance in the key investor information document (KIID)).
Fundamentally, the guidelines establish that marketing communications must meet, inter alia, three criteria:
1. They must be identifiable as marketing material.
Marketing communications ought to contain sufficient information to make it clear that the communication has a purely marketing purpose, is not a contractually binding document or an information document required by any legislative provision and is not sufficient to take an investment decision.
There should be a prominent disclosure of the term ‘marketing communication’. Online, this could even take the form of a hashtag #marketingcommunication so that anyone can identify it as a marketing communication.
Additionally, ESMA proposes that all marketing communications include a disclaimer such as: “This is a marketing communication. Please refer to the [prospectus of the fund] and to the [KIID/KID] (as applicable) before making any final investment decisions.” In the case of online content, this requirement may be adjusted to suit the medium used provided there is a clear disclaimer that it is a marketing communication.
2. They must describe the risks and rewards of purchasing units or shares of an AIF, or units of a UCITS, in an equally prominent manner.
The information included in a marketing communication should be proportionate to the size and format of the communication. The risks and rewards of the fund should be equally prominent in relation to both presentation and format of the description. When disclosing information on risks and rewards one should ensure the font and size used to describe the risks is at least equal to the predominant font size used throughout the information provided, and its position should indicate such prominence.
Footnotes disclosing risks should be avoided, as should small print disclosures of risks within the main body of the marketing communication. A two-column table or a list clearly differentiating the risks and the rewards on a single page, mentioned either at the same level or one immediately after the other, is likely to be deemed to be presented in an equally prominent manner.
3. They must contain only information that is fair, clear and not misleading.
The marketing communication should be written in the official language (or one of the official languages) of the member state where the fund is distributed or another language accepted by the national competent authority of the member state.
The guidelines set out various general requirements in terms of the suitability of the marketing communication to the target investors or potential investors. All marketing communications should contain information that is fair, clear and not misleading.
However, the level of information and the way that the information is presented will depend largely on whether the fund is open to retail investors or to professional investors only. Where a fund is open to retail investors, marketing communications should not consist of excessively technical wording, should provide an explanation of the terminology used and should be easy to read.
In some instances, it may be necessary to adequately explain the complexity of the fund and the risks arising from an investment in order to assist investors to understand clearly the characteristics of the fund in question.
When providing details of the characteristics of the promoted fund, the communication should describe accurately the features of the investment that is promoted. If the fund is open to retail investors it should make it clear that the investment concerns the acquisition of units or shares in a fund, and not in a given underlying asset such as real estate or shares of a company, as these are only the underlying assets owned by the fund.
Among other things, information presented in marketing communications (for example, sustainability-related aspects) should be consistent with that contained in the fund’s legal and regulatory documents.
Where the marketing communication describes features of the investment, this information must be updated, should contain sufficient information to understand the key elements of those features and should not make excessive cross-reference to the fund’s legal and regulatory documents.
What can constitute marketing communications?
The guidelines give quite a broad scope to what can constitute marketing communications. This includes all communications advertising a UCITS or an AIF, extending to communications on social media platforms, including LinkedIn, Twitter, Facebook, Instagram and any other technologies that enable social interaction and the creation of collaborative content online, if they refer to any fund characteristics, including the fund’s name.
This scope encompasses paper-printed documents and information made available in electronic form or online, and can extend to articles, press releases, press interviews, online documents, webpages and presentations, regardless of whether on radio, video or live.
These would be considered marketing materials or presentations addressed to individual investors or the public, or communications advertising a fund to investors or potential investors, or even communications by a third party used by a fund manager for marketing purposes.
What are not considered marketing communications?
The guidelines expressly exclude legal and regulatory documents/information from being considered marketing communications. Such documents include a fund’s prospectus, constitutional documents, financial reports or the KIID/KID, Memorandum and Articles of Association or notice to a general meeting of shareholders/unitholders.
Also excluded are any corporate communications broadcast by the fund manager describing its activities or recent market developments, which do not identify a specific fund or group of funds, as well as pre-marketing communications and short messages broadcast online, such as via social media, which only include a webpage link, where a marketing communication is available
Next steps
The guidelines were primarily developed by ESMA with a view towards member states applying the requirements across the EU in a uniform and consistent way, leading to an eventual standardisation.
All regulated entities must carefully examine and consider the recommendations set out in the guidelines and take all necessary actions to ensure they are followed each time they address marketing communications to investors and/or potential investors.
It is highlighted that the guidelines apply irrespective of the category of investor. However, the level of information and the way that information ought to be presented may be adapted depending on whether the fund is open to retail investors or only to professional investors.
Procedures should be put in place to track and harmonise any changes across all documents relating to a particular fund to ensure all requirements set out in the guidelines are met when preparing and distributing marketing communications, irrespective of the medium chosen.
All regulated entities must ensure that any communications are clearly 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 only information that is fair, clear and not misleading.
Pamela A Evangelou
Senior associate, Elias Neocleous & Co
E: pamela.evangelou@neo.law
