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For the past two decades, Global Sales Compliance (GSC) has worked closely with AIFM/Asset Manager marketing and sales teams to provide compliance advisory and sales practices guidance on cross-border marketing rules.

During this experience, we have heard various feedback about cross-border marketing compliance from the industry generally as well as clients. 

Generally speaking, there is a lot of confusion and misperceptions in the financial services industry about cross-border marketing compliance, thus fuelling “myths” which we aim to dispel. 

In the second of our series of blogs on Key Myths of Marketing Compliance, we examine the next 5 industry-wide myths we’ve seen. See our first blog post in the series, Key Myths about Marketing Compliance: Part I.

What is a myth?

A myth can be defined as “a widely held but false belief or idea” a “misrepresentation of the truth” or a “popular belief or tradition that has grown up around something or someone”. 

These myths in relation to cross-border marketing compliance generally serve to create a false sense of security in that no laws apply to cross-border marketing and/or that this activity is risk-free.

Myths: The power of repetition

Sales compliance myths that are repeated over and over without any clarification by regulators or law firms become almost tradition-like and generally accepted industry-wide practices. This is where myths become dangerous in relation to cross-border marketing compliance.

Below are a mix of actual and implied statements we have heard made by financial services industry players including fund managers, financial institutions and distributors about cross-border marketing compliance. These widely held mythical beliefs become excuses for non-compliance with local marketing regulations.

MORE SALES COMPLIANCE MYTHS

Myth #6: “Reliance” on Reverse Solicitation. “We don’t want to go to the trouble of registration, passporting, notification, filings or other regulatory requirements in (x jurisdiction). This is too much work. Our distribution model is Reverse Solicitation. We’ve got all the investors’ reverse enquiry letters/emails to the file, so Reverse Solicitation for us is a free pass to operate in all countries (without compliance with local marketing regulations).”   

Myth Dispelled: There is no “reliance” on reverse solicitation as a waiver of fund marketing regulations, reverse solicitation is not a distribution model and it cannot be used as an excuse for non-compliance with local country marketing regulations. See our blog post series on the topic:

• What is Reverse Solicitation?
• Reverse Solicitation: What is the Initiative Test? 
• Is Reverse Solicitation a Safe Harbour?
• Reverse Solicitation: Beware of Throwaway Legal Advice

Myth #7: Fly-in visits and general capabilities. “We (the sales team) will make a fly-in visit to meet with potential investors in the jurisdiction. We will not promote any funds or our financial services (Separate Managed Accounts) during our visit and will instead only present and use ‘General Capabilities Presentations’.”

Myth Dispelled: In practice, it is nearly impossible for sales to say in the box called, “General Capabilities” during fly-in meetings with potential clients with the intent to try and avoid triggering local fund/financial services marketing regulations. The logical question investors will say is, “Your investment capability sounds interesting. Now tell me about your investment vehicles.”

Myth #8:  “License borrowing”. “We (the AIFM/Asset Manager) have multiple legal affiliates in several jurisdictions within the same parent company. Some of our affiliates have a regulated license registration with the local country regulator and others do not. Our unregulated affiliates will conduct regulated activities in other countries under an SLA/Secondment Agreement between them and our regulated affiliate (borrowing their license). These intracompany agreements (SLAs) are acceptable by the regulator in the country where we are conducting regulated activity cross-border.”

Myth Dispelled: Regulators generally take a dim view of “license borrowing”. Regulators always apply the substance test to regulated activity conducted in their jurisdiction-is the regulated activity conducted in that jurisdiction by a suitably licensed and regulated entity? 

Myth #9: Sanctions enforcement. “We (the AIFM/Asset Manager/distributor) are unlikely to get sanctioned by the local regulator in practice for breaches of fund marketing regulations.  Some of these regulations are a bit heavy-handed/strict. Are we really going to jail for 10 years (in a certain Asia jurisdiction) for breaches of fund marketing or licensing regulations?”

Myth Dispelled: The level of potential sanctions in each jurisdiction generally indicates the local regulator’s willingness to enforce their sanctions for breaches of their local marketing regulations. Because the enforcement penalties in many countries are not publicised, what we have seen in practice is that local country regulators will take action when the investor contacts them to file a complaint against the entity conducting the breach. If the regulator gets involved in remedial action against the perpetrator of the breach, this could increase the AIFM/Asset Manager/distributor’s 5-Key Distribution Risks. Read our blog post: 5-Key Distribution Risks for cross-border marketing. 

Myth #10: Likelihood of lawsuits filed by Clients (for AIFM/Asset Manager breaches of marketing regulations).  “Clients, especially institutional investors, will never sue us.” 

Myth Dispelled: Think again. Everything is fine when investors are seeing positive returns in their investment in the AIFM/Asset Manager’s fund or financial service.  However, when investors lose money, they can become disgruntled and initiate litigation which is frequently accompanied by rescission rights claims as well as complaints to their local regulator. If AIFMs/Asset Managers breached local laws on marketing in selling the fund to the investor, this effectively means you are handing out “free puts” to investors. These puts are “free” to the investor but potentially expensive to the fund manager. 

Read our blog posts: Mind -- but close -- the Marketing Compliance Gap and 5-Key Distribution Risks for cross-border marketing. 

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