Blog
Prove our marketing compliance downside risk and Catch me if you Can!
15/10/2024
We recently had an introductory conversation with a potential client which demonstrated some “real time” pervasive myths by some excessive risk-taking AIFMs/Asset Managers in our industry. After 2 decades of client advisory, this feedback really does illustrate that truth is (indeed) stranger than fiction.
Profile: The AIFM is a fixed income alternative investment management firm based in USA, regulated by US regulators, and manages over $5BN in AUMs by fundraising in their AIFs cross-border from many jurisdictions globally. This AIFM fundraises primarily from HNWIs and Family Offices. Our conversation was with top management including the CEO.
In this Blog, we dispel real mythical attitudes some AIFMs/Asset Managers have about their “downside risk” when breaching country fund marketing laws. Here are some of the concerns and questions posed by this AIFM:
- When are we supposed to investigate country fund marketing laws in foreign jurisdictions: ex-post or ex-ante (of our solicitation outreach activity)?
- If we investigated the country’s fund marketing rules after the fact (ex-ante) and accepted investor subscriptions before we figured out we are in breach of the country’s marketing laws, how much trouble are we in now? What’s our downside risk?
- Is there a Grand Master Regulator in the Sky (the regulator equivalent of the Wizard of Oz) who is omnipotent, omniscient, all-knowing and who can see our “bad actor activity” and breaches of country laws?
- What are the consequences of our non-compliance? Will we REALLY get into trouble and what is the likelihood of enforcement?
- Is there a global master list of all lawsuits and sanctions in the entire world ever enforced or litigated against AIFMs/Asset Managers for breaches of country fund marketing regulations? Prove our downside risk!
- Can’t we just follow our competitors and set up offices in foreign countries with “boots on the ground” without checking any local regulations including licensing requirements? Will the regulator single us out with enforcement if our license is not valid while our competitors go scot-free from scrutiny?
Let’s address these “Catch me if you Can” questions with a recap the BASICS of cross-border marketing compliance.
Backdrop: Regulators (or National Competent Authorities, “NCAs”) across the globe are cracking down on breaches of their country’s regulations for a wide range of activities, including for the marketing and sale of financial products to investors in their country.
Many NCAs are tightening regulations to protect their most precious client segments. Historically, regulators have always strived to protect Retail Customers. Now, in many countries the incentive for regulators is to further protect their country’s Pension Funds, Sovereign Wealth Funds and Private Wealth Management (HNWI & Family Office) client segments.
#1: There are country specific rules governing your marketing activities.
Marketing funds cross-border into overseas jurisdictions constitutes a regulated activity. This means that marketers and financial service providers must comply with the local jurisdiction’s rules on the promotion of funds, including solicitation to exempt categories of investors (non-retail clients) and licensing requirements. Read our Blog: Cross-Border Marketing Compliance: What you Need To Know
#2: Regulators expect you to know what their country’s fund marketing laws are and to comply with these regulations for all regulated activity you undertake in their country
NCAs expect you to comply with these marketing regulations – otherwise, why would regulators go to the trouble to draft country marketing regulations? The point is: Compliance with country fund marketing regulations is NOT optional.
#3: Investigate country fund marketing regulations check BEFORE any solicitation happens
Before you send out any marketing collateral, organise a phone call, virtual meeting or send out any email to investors in any country referencing your fund, you need to check that country’s fund marketing regulations BEFORE you initiate any fund promotional outreach in any country.
#4: Burden of Proof: All regulators require YOU to prove your compliance with their country’s laws, not the other way around
If you breach laws in foreign countries for the marketing of your fund, you could be subject to the 5-Key Distribution Risks: Sanctions by the regulator, lawsuits from investors, rescission rights claims from investors, you could lose your business franchise and your reputation could suffer. Why would you want to trigger any of these Distribution Risks?
Read our Blog: 5-Key Distribution Risks for Cross-Border Marketing
#5: Enforcement: How serious are regulators about enforcing their country’s fund marketing regulations?
Many NCAs are very serious about enforcement of their laws in order to protect their jurisdiction’s investors and/or their “golden goose” cottage industry (i.e., HNWI, PWM client segments).
A bellwether indicator of how serious the NCA is about sanctions enforcement is to investigate what sanctions are on the books for breaches of their country’s marketing regulations (especially imprisonment) and/or the level of fines a regulator will impose for “bad actor” activity.
We have identified several countries falling into the category we call “the 10-Year Imprisonment Club” where anyone in breach of these country’s regulations could technically go to jail for 10+ years – these are the regulators whom we label as “sharp teeth” NCAs that really mean business about enforcement of breaches of their regulations as well as serious about investor protections.
#6: Myths Debunked
The notion that regulators and legal enforcement entities (including the justice system on behalf of investors bringing litigation against you) must prove your regulatory breaches is nonsense-the burden of proof is on you to confirm your compliance. Country regulators assume you are within the “regulated activity” net in their jurisdiction as a “rebuttable presumption” for you to prove your compliance with their laws. In other words, you are considered guilty until you prove your innocence (that is, that you’re compliant with the country’s regulations).
There is no such thing as an omniscient and omnipresent “Grand Regulator in the Sky”, allseeing and all knowing, watching your every move in all countries. There is no regulator “Big Brother” who has the burden to prove your breaches of local country laws.
There is also no such thing as a “global centralized database” or list of all sanctions and lawsuits brought by investors against AIFMs/Asset Managers who have breached country marketing regulations. This would assume that all marketing restrictions lawsuit outcomes are made public, reported and centralized in the database, accessible by citizens of any country in the world.
Furthermore, what your competitors and everyone else does in any country doesn’t mean they are compliant. Regulators don’t buy the argument, "Well, company X is doing it, so why can’t we?" This is no regulatory carve-out or excuse for your non-compliance with that country’s regulations. Read our Blog, The “Everybody’s Doing it Exemption”: Fact or Fiction?
Summary
Regulators are increasingly willing to crack down on breaches of their national fund marketing regimes, to protect more than just retail clients. The days of AIFM/Asset Managers ignoring country fund marketing regulations and fundraising cross-border by “flying under the radar” (aka winging it) are over.
Ignorance of country fund marketing laws with the attitude of “prove I’m going to suffer the consequences of our breaches and Catch me if you Can” is no excuse.
Here’s the bottom line impact to the “Catch me if you Can” attitude: If you’ve raised $5BN+ AUMs through the devil may care attitude of “We don’t need to know the country’s laws before we market there”, then practically speaking, you’ve climbed up the distribution risk spectrum to get those AUMs in the door and now you’re running your business at high risk levels.
You’re sitting on a veritable “powder keg” that can explode at any moment – either through regulator’s sanctions, investor lawsuits and/or rescission rights claims. All it takes is one lawsuit or regulatory sanction to blow up your business and bring it down like a house of cards, triggering business franchise and reputation risk. Why would you want to willingly bring down your own business?
The answer: As an AIFM/Asset Manager, you should mitigate your 5-Key Distribution Risks by complying with country fund marketing rules at all times. Protect your business franchise so you can maintain and grow it further by migrating back down the distribution risk spectrum: Build a cross-border marketing compliance platform with robust books and records to prove your compliance.
Compliance DOES grow your business by safely opening new doors cross-border. We’ve got the case studies to prove it.
Get in touch to hear more.