![Global rules on foreign direct investment](https://www.nortonrosefulbright.com/-/media/images/nrf/nrfweb/knowledge/publications/us_24355_legal-update--fdi-alert.jpeg?w=265&revision=a5124a65-abf9-40e4-8e96-9df39ffdb212&revision=5250068427347387904&hash=96B456347C3246E5649838DF281C5F5D)
Publication
Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
United Kingdom | Publication | luglio 2024
European asset managers are excited about the revised European long-term investment funds (ELTIF) regime and hope that the greater flexibility for managing and distributing ELTIFs will open up new markets for their long-term investment strategies. By creating a product passport under which non-UCITS can be distributed not only to professional investors, but also retail investors, and by discarding some of the provisions that made ELTIF 1.0 highly unattractive for both fund sponsors and investors, ELTIF 2.0 (i.e., Regulation (EU) 2023/606) is indeed a game-changer.
Mixed with the euphoria are certain remaining unanswered questions regarding the new regime. In particular, the revised Art. 30 of ELTIF 2.0 has created considerable uncertainty amongst German and non-German alternative investment fund managers (AIFMs) wishing to distribute their products in Germany.
Art. 30 para. 1 of ELTIF 2.0 requires that a suitability assessment shall take place whenever ELTIFs are distributed to retail investors:
“Specific requirements concerning the distribution and marketing of ELTIFs to retail investors
1. The units or shares of an ELTIF may only be marketed to a retail investor where an assessment of suitability has been carried out in accordance with Article 25(2) of Directive 2014/65/EU and a statement on suitability has been provided to that retail investor in accordance with Article 25(6), second and third subparagraphs of that Directive.
The assessment of suitability referred to in the first subparagraph of this paragraph shall be carried out irrespective of whether the units or shares of the ELTIF are acquired by the retail investor from the distributor or the manager of the ELTIF, or via the secondary market in accordance with Article 19 of this Regulation.”
As a consequence, an AIFM or investment firm wishing to distribute ELTIF must obtain from investors all the information that an investor would typically give to an investment firm only when this leads to the subsequent provision of investment advice, for instance information about risk tolerance, investment objectives, etc.
However, Art. 30 para. 1 ELTIF 2.0 also states that providing a suitability statement to the retail investor shall not per se be considered as the rendering of investment advice. But the line between a “mere suitability assessment” under ELTIF 2.0 and investment advice under the Markets in Financial Instruments Directive II (MiFID II), as implemented into German law and interpreted by the German Federal Financial Supervisory Authority (BaFin), is not always clear, in particular in Germany, where the courts have traditionally confirmed the existence of an investment advisory agreement – even without a written contract – whenever an investor in need of investment advice contacts a firm that distributes investment products.
The German Banking Act defines investment advice as
‘the provision of personal recommendations to clients or their representatives relating to transactions in certain financial instruments, provided that the recommendation is based on an assessment of the investor's personal circumstances or is presented as suitable for the investor and is not disclosed exclusively via information dissemination channels or to the public (investment advice)’
In short, investment advice requires (i) a personal recommendation to conduct a transaction in a financial instrument and (ii) a statement that such recommendation is suitable for the investor, considering the investor’s personal circumstances. In other words, strictly legally, a mere statement that an investment is suitable is not akin to providing investment advice, unless making such a suitable investment is also recommended. However, if an investor is informed by the offeror of an investment that such investment is suitable for it and is subsequently provided, for example, with a subscription form, the typical investor would interpret such action as a recommendation of a suitable investment, i.e., investment advice.
Let us look first at a scenario that does not cause practical problems. i.e., the distribution of ELTIFs by a MiFID II-regulated investment firm, e.g., a bank, to retail investors that are natural persons, typically high net worth individuals or at least mass-affluent investors. In such a scenario, the bank is able to provide investment advice to its investor, based on established practices for selling other investment products. The bank should have a written investment advisory agreement for use with retail clients, it should have appropriate information materials, its personnel should be sufficiently training and certified to provide investment advice, etc. For such a bank, explicitly providing investment advice is no considerable extra effort compared to just providing a client with a suitability assessment. Indeed, it would be highly unusual to assess and confirm the suitability of an investment product and then not to recommend such an investment.
AIFMs, on the other hand, do not typically sell their products to natural persons directly, but they use investment firms as their distributors. For the distribution of their products to institutional investors, however, they often use their own highly qualified internal sales force, and more rarely use third party distributors. The targeted “institutional investors”, however, are not always professional clients in the meaning of MiFID II. Rather, even large German institutional investors investing into AIFs (including ELTIFs) may, under MiFID II, be retail clients, which, as a consequence, must receive a suitability assessment from the AIFM. (As a German peculiarity, these institutional investors, which include occupational pension schemes, municipalities, foundations, etc., are so-called semi-professional investors under the Capital Investment Code, which implements the AIFMD, but they are – unless they have become “opt-up professionals” retail clients under MiFID II.) The AIFMD product passport, as implemented in German law, allows for the selling of AIFs also to German semi-professional investors, but as regards information requirements, they have to be treated as retail investors. That is the reason why these semi-professional investors also have to be provided with, for instance, a key information document per the Packaged Retail and Insurance-based Investment Products Regulation.
In a scenario where the AIFM wishes to sell an ELTIF to, e.g., an occupational pension scheme (Versorgungswerk), it must provide the investor with a suitability assessment, but it may wish to avoid rendering investment advice. Why? Because unlike investment firms used to rendering investment advice, even AIFMs with a “MiFID II top-up licence” for investment advice often do not have the required contracts, up-to-date forms, and trained staff necessary for providing investment advice in line with MiFID II requirements. If an AIFM were considered to have provided investment advice, but without observing the rules of conduct and organizational requirements under MiFID II, then the investor may subsequently be able to claim damages in case the ELTIF performs worse than expected.
So, the “million-dollar question” is: How can an AIFM provide clients with a suitability assessment without creating the erroneous impression that it wishes to render investment advice? After all, assuming the product is suitable for the investor, the AIFM wants the investor to purchase its fund, and thus it will – implicitly or explicitly – entice the investor to make the investment.
A mere written disclaimer in a presentation booklet to the effect “nothing in this document constitutes investment advice” is certainly not sufficient to avoid the qualification of a client communication as investment advice. Rather, the AIFM should make it very clear at the outset that it does not “recommend” an investment, as the AIFM has not conducted a full-scale investigation of all of the investor’s financial circumstances, asset-liability ratios, correlations with other assets the investor holds, etc., and that it is the investor’s task to perform such an analysis.
In practice, making this distinction and allocation of roles clear to investors is going to be challenging for the sales staff facing the client, but it is indispensable both to avoid regulatory sanctions and potential damage claims from investors.
Publication
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
Publication
Artificial intelligence (AI) raises many intellectual property (IP) issues.
Publication
We are delighted to announce that Al Hounsell, Director of Strategic Innovation & Legal Design based in our Toronto office, has been named 'Innovative Leader of the Year' at the International Legal Technology Association (ILTA) Awards.
Subscribe and stay up to date with the latest legal news, information and events . . .
© Norton Rose Fulbright LLP 2023