Dr. Oliver Zander
Introduction
Until 2 August 2021, the assessment of marketing measures in the area of closed-end funds was essentially based on Section 302 of the old version of the German Investment Code (KAGB). Section 302 KAGB was then comprehensively amended by the Fondsstandortgesetz (Fund Location Act) so that now, in addition to the provisions in Section 302 f. KAGB, the provisions in Art. 4 (1), (4) and (5) of Regulation (EU) 2019/1156 also apply when AIFs advertise to private investors. In addition to these provisions, § 63 WpHG, Art. 44 and 46 of Regulation (EU) 2017/565, BT 3 of MaComp, § 14 FinVermV as well as the guidelines of ESMA must be observed. In addition to the actual marketing, Section 306b KAGB also regulates the so-called pre-marketing.
In the following, the essential duties of the sales department in the marketing and pre-marketing phase will be presented.
Duties in the marketing phase
The basic rule is that all marketing communications must be recognisable as such and their content must be honest, unambiguous and not misleading (Section 63 (6) WpHG).
A. Marketing communication
A marketing communication is any communication addressed to potential investors of UCITS and AIFs which aims to persuade the addressees to purchase a fund unit. Pure image advertising is not covered. In addition to traditional advertising in flyers, advertisements or on posters, marketing communications also include, in particular, press releases, interviews, video presentations etc. It does not matter whether the communication is printed or only in electronic form. Also communications via the so-called social media (Facebook, LinkedIn, Xing etc.) or blogs fall under the term marketing communication. In contrast, all legally required documents such as the fund prospectus, the key investor information, annual and semi-annual reports, general company notices, articles of association, trust agreement, etc. do not fall under marketing communications in ESMA’s view. Mere short messages on social media that refer to the website of the provider but do not themselves contain any information on a specific AIF are also not to constitute marketing communications. Communications in the context of pre-marketing, described in more detail below, are also not covered by the otherwise rather broad concept of marketing communications.
B. Recognizability and disclaimer
A marketing communication must be recognisable as such for the addressee. BaFin has so far taken the view that it is not necessary to title an advertisement, which is recognisable as such anyway, as “advertising”. ESMA now sees this differently. It requires that in every marketing communication the term “marketing advertisement” is placed in a clearly recognisable position. Furthermore, each marketing communication must contain a disclaimer. ESMA proposes the following text:
“This is a marketing advertisement. Please read the prospectus / key investor information of the [name of the AIF] before making a final investment decision.”
However, ESMA recognises that such a disclaimer does not fit every marketing communication. For example, if it is a short online message, a banner or a short video, the insertion of the term “#marketing ad” is sufficient.
Any marketing communication referring to a specific retail fund must mention that a prospectus or the key investor information exists and where it can be obtained. The advertising for such funds must normally contain hyperlinks to these documents if this is possible in the specific advertising so that the retail investor can easily find the information. It must also be shown that distribution may be discontinued by the management company at any time.
C. Honest, clear and not misleading
Whether information is honest, clear and not misleading must be assessed from the perspective of the addressee. Especially with regard to retail investors, care must be taken to ensure that the terms used in advertising are generally comprehensible to retail investors. Essential statements must be expressed clearly. No essential statements may be omitted (requirement of completeness). The statements must be formulated in a way that is comprehensible to the target group. Misleading statements give the addressees the impression of circumstances that do not correspond to reality. Essential points must not be obscured or toned down. The information must be up-to-date. It must be written in a uniform language; multilingual texts are not permitted. For AIF marketed in Germany, German is the mandatory language. The information in the marketing communication must be consistent with the information contained in other documents such as the prospectus, a flyer or the key investor information (requirement of consistency). In particular, the marketing communications must not relativise the information contained in the prospectus or in the key investor information. Especially in sales talks, it is not uncommon to relativise the long list of risk information contained in the prospectus – this may just be permissible for the sales talk, but this is not permitted for promotional communications. The name of the distributor must be mentioned. In the case of information on tax treatment, it must be stated that this depends on the personal circumstances of the respective client and may be subject to change in the future. If specific details of a fund are given, the type of product (acquisition of units/shares as opposed to acquisition of an underlying asset such as land) must also be stated, at least vis-à-vis retail investors. The investment policy (what does the fund acquire specifically?) must then also be described. Accordingly, when indicating the use of leverage in advertising, the way leverage works, including the specific risks associated with it, must be described.
A reference to BaFin should be avoided. In any case, the impression must not be created that BaFin has economically examined the investment.
In the case of short promotional messages – such as those common in social media – the message should be kept neutral. A reference can be made there to where more detailed information can be obtained.
Tear-jerking statements (“the best fund”, “safe investment”) are to be avoided. When referring to external sources, the source and, if relevant, the period to which the source refers must be indicated.
In its Circular 05/2018 (WA) – Minimum requirements for the compliance function and further conduct, organisation and transparency obligations (MaComp) of 19 April 2018, BaFin has compiled a wealth of examples under BT 3.3.1 and 3.3.2 that illustrate the principles presented.
D. Opportunities and risks
If the marketing communication emphasises the advantages of an investment, the communication must also contain a reference to the risks. This reference must be made in a fair and clear manner and in particular in the same font size so that the reference is sufficiently clear. A reference in a small footnote would therefore not be permissible. ESMA recently requires that the reference to the risks must be in the same place as the reference to the opportunities and that a reference to another document containing the risk information should not be permissible. Therefore, if the marketing communication emphasises special advantages of the investment, it must at least specifically state the material risks. References to other documents must be used sparingly. The principle of proportionality applies to the presentation of opportunities and risks: the more opportunities are presented, the more risks must be described. ESMA suggests that opportunities and risks be compared in a table.
Where the risk profile of a fund is disclosed in advertising, this should refer to the same risk classification as that contained in the key investor information.
Insofar as an AIF is advertised for retail investors, the advertisement must clearly indicate the illiquid nature of the investment if the investment is indeed illiquid. This corresponds to the previous reference to the lack of fungibility of the investment.
E. Compare
Comparisons with other funds or asset classes must be meaningful and presented in a fair and balanced manner. The sources used for the comparison as well as the assumptions used for the comparison shall be disclosed in the advertisement.
According to ESMA, a comparison of the advertised fund with other investments must be limited to those funds that have a similar investment policy and a similar risk and return profile. If this principle is deviated from, the differences between the funds must be adequately explained. This is basically a further concretisation of the requirement that communication with potential clients must be honest.
The presentation of a ranking of different funds is also permitted if the funds are similar in terms of investment policy and risk and return profile and if the relevant period for the ranking, which must be at least 12 months, is indicated.
F. Costs
If the advertisement refers to the costs associated with the fund for purchasing, holding and selling, this reference must be sufficiently detailed to enable the investor to assess the economic impact of these costs on the amount of the investment and the expected returns. Care must be taken here to ensure that the information is consistent with that provided in other documents.
G. Presentation of the performance
For the presentation of the performance of a fund, Section 44 (4) et seq., BT 3.3.4 MaComp and the ESMA guidelines contain very detailed requirements. In each case, clear reference must be made to the reference period of the information and the source of the information as well as to the fact that past performance is not a reliable indicator of future performance. In the case of foreign currency funds, the risk of currency fluctuations must also be pointed out. It must also be indicated whether the performance is simulated or actual. In the case of simulated performance, it must be ensured that the assumptions for the simulation are based on the performance of at least one financial instrument or a financial index which essentially corresponds to the circumstances of the fund. Number BT 3.3.4.1.8 of the MaComp contain a wealth of further detailed rules on the composition of a simulated past performance. The communication of a performance may not be in the foreground of the advertisement. When indicating gross values, it must also be stated how commissions, fees and costs affect the performance. Any foreign currency risks must be mentioned.
I. Information on past performance
In principle, past performance must cover a period of at least five years. If the fund has a shorter past performance, the performance must cover the entire period. As a rule, the performance must be expressed in absolute or relative percentage terms. Absolute value indications (e.g. in euros) are possible if such an indication is appropriate. The performance must always be stated for a period of 12 months at a time. According to the new guidelines of ESMA, funds that prepare a KIID within the meaning of Regulation (EU) 583/2010 shall present a preceding period of ten years. In doing so, ESMA wants to align the conditions for advertising notices with the regulations for the KIID. Insofar as a fund must prepare a PRIIPs KID, this requirement is not yet to apply. However, this may change in the future.
If there have been past events that have had a material impact on the past performance of the fund, these events must be disclosed in the promotional communication. ESMA proposes in its new guidelines the use of the following wording to be included in the promotional communication in relation to past performance representations:
“Past performance is not indicative of future returns.”
These statements shall precede any representation of past performance.
II. information on future performance
If the advertisement contains forecasts about the expected future performance, this forecast must not be based on a simulated past performance and must not refer to such a past performance. A performance simulated for the past may therefore not simply be extrapolated into the future. Rather, the forecast must be made on the basis of assumptions supported by objective data. The assumptions must be reasonable, which means that they must be checked for plausibility. Any forecast must also indicate sensitivities. This means that alternative scenarios in the event of different – especially also negative – market conditions must be described.
The ESMA guidelines require the following explanation if the forecast is based on past performance or current conditions:
“The scenarios presented are an estimate of future performance based on past knowledge of the performance of this investment and/or current market conditions and are not an exact indicator. How much you actually receive will depend on how the market performs and how long you hold the investment/product.“
Like Article 44(6)(c) of Regulation (EU) 2017/565, ESMA requires a statement that future performance is subject to taxation, which depends on the personal situation of the respective investor and may change in the future. According to ESMA, in connection with the forecast of future performance, it is also necessary to indicate that losses for the investor may also occur in deviation from the forecast, unless there is a capital guarantee for the investor. Number BT 3.3.4.2 of the MaComp contains a number of examples for the design of future-related information in advertising.
H. Sustainability aspects
According to the ESMA guidelines, there is no obligation to include information on sustainability aspects of the advertised investment. Any transparency requirements result solely from the Disclosure Regulation and other related legal acts. An advertisement with sustainability must remain within the framework of what the investment strategy or the investment conditions or the articles of association or the partnership agreement of the respective advertised product stipulates or stipulates. Greenwashing” is also not permitted in advertising messages. Only those funds that comply with Art. 8 or 9 of the Disclosure Regulation may refer to sustainability-relevant aspects in their advertising. Furthermore, it is always necessary to point out that when making an investment decision, not only the sustainability-relevant aspects, but also all other characteristics and objectives of the investment must be critically analysed and evaluated.
Pre-marketing regulations
Pre-marketing is the sounding out of the market for an AIF that has not yet been approved for distribution. Such market sounding is done exclusively for funds that are to be marketed to professional and semi-professional investors. Pre-marketing usually takes place in order to check whether there is interest among potential buyers for a certain product, which is usually described in an overview in a one-pager or teaser, and, if so, how such a product must be structured in detail so that the targeted buyers would also subscribe to it. In extreme cases, such pre-marketing can lead to a situation of “reverse solicitation”, in which the provider of the product no longer actively promotes and sells it after the pre-marketing phase has been completed, but in which the demanders on the market contact the provider on their own initiative, in each case in the hope of receiving the product presented to them in advance. Pure image campaigns in which no concrete product is named do not fall under the regulations of pre-marketing.
Pre-marketing was regulated more precisely by law in § 306b KAGB with the Fund Location Act. Before the Fund Location Act came into force, pre-marketing was not regulated by law and thus permitted.
Pre-marketing is only permitted for the persons specified in section 306b (6) KAGB. These include contractually bound intermediaries within the meaning of section 2 (10) sentence 1 KWG, investment services companies, credit institutions and the KVGs. Financial investment brokers with a licence pursuant to § 34f GewO are not permitted to carry out pre-marketing.
Usually, pre-marketing is carried out by a KVG. The pre-marketing measures must not be so specific that investors can decide to subscribe to the investment solely on the basis of the documents and information provided. Subscription documents may not be presented to investors in the course of pre-marketing. The constituent documents of the investment vehicles, the prospectus and the other offering documents may not yet be presented to investors in final form. A clear statement must be included in the documents provided to investors that the documents are not an offer or invitation to subscribe for units and that the information contained in the documents is not reliable as it may still be incomplete and subject to change. The KVG must take internal measures to ensure that investors are not able to subscribe on the basis of the documents they have received in the course of pre-marketing. The KVG must therefore ask the investors what the basis of the specific subscription is for each individual investor. It must document the measures carried out in the course of pre-marketing. The KVG may only accept those investors who subscribe on the basis of the final, approved sales documents. If a professional or semi-professional investor is contacted for pre-marketing and then subscribes for the relevant investment within a period of 18 months thereafter, the subscription shall be deemed to be a subscription on the basis of pre-marketing and must be notified to BaFin.
The start of pre-marketing must be notified to BaFin within two weeks of commencement.
Final remark
The regulations for sales documents are complex and have become difficult to understand, as the matter is regulated in various legal sources, which even contain contradictory requirements in detail. A legally secure design of the advertising material is therefore difficult. In practice, the solution is to commission auditors specialising in these issues to prepare an expert opinion on the intended advertising material. On the one hand, this clarifies the compliance of the intended advertising material and provides the necessary liability relief for the sales department or the KVGs.
Summary
Distribution and recently even pre-distribution (pre-marketing) are subject to a number of complex and sometimes contradictory regulations. The design of advertising material for a fund is thus difficult. The article presents the essential regulations in detail and describes the procedure to be applied for pre-marketing since last year.