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AIFM/Asset Managers have a choice of raising investor capital in their funds from investors all over the globe via several distribution methods: direct marketing by the AIFM/Asset Manager’s in-house sales team, engaging a third party distributor to market their funds to institutional investors as well as third party distribution via the distributor’s Private Wealth Management distribution channels, targeting high net worth individuals and/or family offices. Fundraising via Private Wealth Management throws up unique compliance issues.

What are some of the issues AIFM/Asset Managers need to address if they choose to fundraise in their funds from the distributor’s Private Wealth Management channels?

Who’s responsible for checking fund marketing regulations?

It’s the Age-Old Debate: Who is responsible for investigating the local country’s fund marketing regulations?  Is it the AIFM/Asset Manager or their appointed third-party distributor? Technically both parties are responsible for compliance with local fund marketing regulations.  In practice, the third-party distributor typically takes responsibility for their licensing compliance but the AIFM/Asset Manager gets the task of investigating country fund marketing rules. Read our Blog post, The Age-Old Debate: Who Investigates country marketing restrictions?

Do jurisdictions matter as part of our fundraising efforts?

Yes. Marketing funds in any jurisdiction constitutes a regulated activity and is subject to the country’s marketing regulations as well as licensing rules. You need to check the local country fund marketing rules before your in-house sales team and/or your appointed third-party distributor markets your fund in any jurisdiction. Read our Blog post, Cross-Border Marketing Compliance: What you need to know. 

The reason jurisdictions matter is because wherever the “fund solicitation” to the investor takes place is the country of jurisdictional oversight for your fund marketing efforts. In other words, you have to follow the local country’s regulations on fund marketing. Therefore, identification of the relevant jurisdiction’s laws is the key. But sometimes the answer to the question, “Which country’s laws apply to our AIF solicitation?” is not so straightforward. 

Fundraising from institutional investors 

If AIFM/Asset Managers choose to target institutional investors in foreign jurisdictions for fundraising in its funds, the “regulatory jurisdiction analysis” is pretty straightforward: Typically, the institutional investor who is the target of your fund solicitation is resident in a jurisdiction where you will send the fund marketing & subscription documents. The key decision maker (KDM) who will approve the investment in your fund typically resides at investor headquarters in the same country. And the funds to invest in your AIF also come from the same jurisdiction.

For example, if an AIFM targets a Sovereign Wealth Fund in the United Arab Emirates for the marketing of their AIF, the sales team sends the AIF pitchbook into the UAE, the Key Decision Makers (e.g., the CIO) in the UAE approves the investment, then the fund subscription documents are sent into UAE to conclude the transaction. After sale, client servicing then follows, with the AIFM sales team flying into UAE to service the client. 

Fundraising from Private Wealth Management Channels

However, if AIFM/Asset Managers choose to fundraise in your AIF from Private Wealth Management (PWM) Channels, this will involve more compliance work/resources, typically smaller, more numerous fund ticket sizes and potentially more risk than fundraising from larger institutional investors such as Pension Funds or Sovereign Wealth Funds. Read our Blog post: 5-Key Distribution Risks for Cross-Border Marketing.  

That means with PWM Channels, the answer to the question, “Which jurisdiction’s laws apply?” can become much more complicated.

Private Wealth Management Fundraising: Jurisdictional complexity

AIFM/Asset Manager’s compliance departments should be prepared for an influx of confusing requests from their designated third-party distributor PWM channels, asking the AIFM/Asset Manager to approve the transaction in the AIFM/Asset Manager’s fund. The inbound multi-jurisdictional request could look like this:

Private Wealth Manager to AIFM compliance department: “We have an investor interested in your fund: a Chinese National who lives between Hong Kong and Mexico, has a vacation home in Barbados with family offices in Switzerland and USA, private banking relationships in Singapore and a personal investment holding company in British Virgin Islands. Can you please approve this transaction?”

AIFM compliance department to PWM: totally confused… “We’ll get back to you shortly.” 

The AIFM compliance department calls a team meeting: “Which jurisdiction’s laws apply for this transaction? Is it China, Hong Kong, Mexico, Barbados, Switzerland, USA, Singapore or BVI?” 

The answer is, it is all dependent on the compliance fact set analysis. 

AIFMs are at risk of using more resources and incurring more legal costs to service a PWM channel due to the jurisdictional regulatory analysis getting very complicated.  While the PWM example above might be a bit exaggerated, in general, PWM fundraising will always involve more jurisdictional work than a simple 1 country per investor that’s typical of most institutional fundraising. 

Private Wealth Management Compliance fact set analysis: Tips

In order to approve the transaction in your fund from PWM channels, you have to make a judgement call on 3 factors: 

• Who is the investor in substance (the KDM)
• Where (in which jurisdiction) did the fund solicitation take place; (and)
• Which jurisdiction’s laws apply?

Taking the fact set analysis further, it is helpful to understand if that country exempts non-discretionary investment advisory and/or discretionary account management services for the PWM to provide information on your fund as a regulatory carve-out from the country’s regulations on fund solicitation.   

Summary: Fundraising in your fund via Private Wealth Management distribution channels makes a lot of commercial sense to some AIFM/Asset Managers. Just be prepared to encounter a multi-jurisdictional analysis and potentially spend more time, costs and resources to address compliance issues for fundraising via Private Wealth Management distribution channels.

SRMO can help smooth the way to make PWM fundraising easier for your team. With decades of cross-border compliance experience together with our trusted global network of legal Counsels, we are here to help.

Begin exploring SRMO now

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