On 27 September 2021, BaFin announced that it is applying the guidelines on marketing communications published by ESMA on 2 August 2021 under the Regulation on cross-border distribution of funds published in 2019.
1. What and whom do the ESMA guidelines regulate?
The guidelines are addressed to fund management companies and specify the requirements for marketing communications within the European financial system as laid down in Art. 4 of the Regulation.
Contrary to what the title of the ESMA Guidelines might suggest at first glance, the guidelines lay out rules not only for cross-border marketing, but for all marketing communications, both non-public and public in nature, with regard to UCITS as well as AIFs. The guidelines provide examples of marketing communications which make it clear that the term is to be interpreted very broadly and, in case of doubt, covers all material. Only legal and regulatory documents and information – e.g. the prospectus, key investor information document (KIID), key information document (KID), periodic reports, fund contracts -, corporate communications, non-fund related short communications and pre-marketing information or communications are excluded.
2. Essential regulations
The following are just some of the requirements set out in the guidelines.
a) Identification as such of marketing communications
Marketing communications must be identified as such, which must generally be done by means of a prominent disclosure of the terms “marketing communication”. The communication should include a disclaimer, unless this would be inappropriate in view of the format and length of the marketing advertisement. Excessive cross references to legal and regulatory provisions should generally be avoided.
b) Description of risks and rewards in an equally prominent manner and information on risks and rewards
If potential benefits are advertised in marketing communications, the associated risks must also be presented together with the benefits and in terms of content and form in a comparable manner. A presentation of the risks in a footnote and/or in the small print is not permitted.
The risk classification used in the KIID or KID must also be used in the marketing advertisement.
The risks presented in the legal/regulatory information documents should also be reflected in the marketing notifications.
c) Fair, clear and not misleading character
Marketing communications must be understandable to the target audience and consistent with other documents available. When marketing to retail investors, certain additional requirements must be met.
Statements must be based on objective and verifiable sources, which should be quoted.
Comparisons with other funds are generally to be limited to comparable funds, i.e. funds with similar investment policies and similar risk and return profiles.
d) Information on costs
Where reference is made to costs, an explanation shall be given of how these impact the amount of the investment and the expected return.
e) Information on past performance and expected future performance
Information on past performance should be based on historical data. The reference period and the source of the data should be mentioned and a disclaimer should be included in the marketing announcement. For funds for which key investor information documents (KIIDs) are prepared, the previous 10 years must be disclosed, otherwise 5 years, with the disclosure to be based on complete 12-months periods. A supplement for the current year may be added. The disclosure of past performance based on simulations is only permitted to a limited extent.
There are also numerous requirements for the presentation of future performance, such as disclosure of performance for a time horizon consistent with the recommended investment horizon, the inclusion of a disclaimer and, in the case of exchange-traded funds, disclosure of the regulated markets on which the fund is traded.
f) Information on sustainability-related aspects
For sustainability-related funds, a link to the website where the relevant information is filed in accordance with Regulation 2019/2088 (Disclosure Regulation/SFDR) has to be included. Information on sustainability-related aspects should not outweigh the extent to which sustainability-related features or objectives are part of the fund’s investment strategy. Thus, a marketing advertisement that only highlights the sustainability aspects of a fund, even though it is not exclusively sustainable, is likely prohibited.
g) Public marketing of funds subject to approval
A fund that is subject to approval may not be referenced in a public marketing communication until after the approval has been granted.
h) Parallels to MaComp
The parallels with BT 3.3 MaComp (presentation requirements for information addressed to retail and professional clients) cannot be overlooked.
There, too, a balanced presentation of the potential benefits and risks and, with regard to the performance, the disclosure of a minimum period and in annual segments is generally required.
Insofar as fund management companies already follow MaComp based on a best practice principle, the implementation effort required due to the guidelines should be limited.
Violations of Art. 4 of the Regulation may result in fines of up to EUR 200,000. This possible sanction was introduced in the Investment Code (Kapitalanlagegesetzbuch) by the Fund Jurisdiction Act (Fondsstandortgesetz) and will significantly gain in importance with the entry into force of the ESMA Guidelines, as Art. 4 of the Regulation does not contain any precise requirements and such requirements have only now become tangible with the Guidelines.
3. Entry into force and outlook
The Guidelines will enter into force six months after their publication in all official languages on ESMA’s website, i.e. at the beginning of February 2022. This does not leave much time to ensure that marketing communications comply with the requirements of the Guidelines going forward. The Guidelines do not comment on whether marketing communications in place at the time of entry into force will be grandfathered. Especially since the underlying Article 4 of the Regulation has already been applicable for a longer period of time and the Guidelines only specify said provisions, this should not be the case. Therefore, this likely triggers additional implementation effort for fund management companies.
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