Blog
Law firms advising “reliance” on Reverse Solicitation: Is this sufficient protection as a sales practice?
Since 2006, Global Sales Compliance (GSC) has worked closely with AIFM/Asset Manager marketing and sales teams to ensure compliant sales practices with cross-border marketing rules.
Many clients have asked us, “Our law firm has signed off on our ability to 'rely' on reverse solicitation as a sales practice. Isn’t that enough protection for our marketing compliance program? Are we 'safe' from the 5-key distribution risks: sanctions, litigation, investor rescission rights claims, business franchise and reputation risks?”
For more than two decades, we have investigated hundreds of client queries with our legal counsel network in 70+ countries about the sales practice called “reverse solicitation”, aka “reverse enquiry” or “passive solicitation”.
In the fourth of a series of blogs on Reverse Solicitation, we share some insights into this sales practice. (Read our third post in the series: Reverse Solicitation: Is it a Safe Harbour?)
Reverse Solicitation as a sales practice
Reverse solicitation is a sales practice whereby the potential investor contacts the fund manager (AIFM/Asset Manager) and requests information on the fund manager’s fund (or financial services) on an unsolicited basis. This sales practice was intended by the regulators to be an example of a carve-out to local regulations on solicitation of financial products or services so long as the contact with the investor was genuinely unsolicited by the fund manager. (Read our first post in the series: What is Reverse Solicitation?)
Reverse Solicitation: law firm advice vs. regulator intent
Here’s how the system of cross-border marketing regulations works: the national regulator implements/passes the legislation at local country level. Law firms in that jurisdiction interpret the legislation in legal advice to the Client. National regulators (and the supranational European financial regulator ESMA) generally expect that the legal advice provided by law firms accurately reflects the regulator’s intent for that legislation as consistent with the “letter and spirit” of the law.
In fact, ESMA is currently examining reverse solicitation as a sales practice. Several National Competent Authorities (NCAs) across the EU/EEA believe that fund managers are claiming reverse solicitation to circumvent AIFMD passporting and NPPR notification rules, which raises concerns about investor protection. Reverse solicitation is in the crosshairs in region EU/EEA at both the supranational (ESMA) and local (NCA) level, so stay tuned for further developments.
What is “throwaway legal advice”?
The word “throwaway” can denote “casual, careless, ill-considered, nonchalant, offhand” and to a certain degree “superficial”. When we refer to “throwaway legal advice” we are referring to non-substantive, casual advice/guidance that the legal advisor believes will be well-received or telling the client what they want to hear regardless of accuracy, regulator intent or depth of analysis.
We advise clients to be discerning about their choice of law firm providing legal advice about cross-border marketing practices including reverse solicitation. At GSC we only work with high-ethic law firms who provide legal advice to our clients that’s consistent with the regulator’s intent and within the “letter and spirit” of the law.
We have observed a phenomenon over two decades of client advisory as follows: There are some commercially driven, low-ethic law firms who provide what we term “throwaway legal advice” to clients about their cross-border distribution model to “just rely on reverse solicitation in region EU/EEA (for example)”. This implies that the sales practice is a carve-out or exemption from AIFMD/NPPR requirements without providing the client with in-depth analysis about the risks of reverse solicitation, what the “initiative test” means, procedures for documentary evidence (proof) and the regulator’s intent for this sales practice.
How clients interpret Reverse Solicitation “throwaway legal advice”
Many times the AIFM/Asset Manager wrongly interprets this “throwaway legal advice” from commercially driven law firms that reverse solicitation is a “free pass”, that fund managers don’t have to comply with AIFMD/NPPR (for example), that this is a sales practice without risk, that fund managers are exempt from compliance with local laws and regulations, that reverse solicitation can be used repeatedly with multiple clients in multiple jurisdictions, that fund managers in practice can focus on form (reverse solicitation letters to the file) and not substance (continuing to make outreach to the investor, breaching the initiative test) and that they can call Reverse Solicitation the fund manager’s “fund distribution model”.
A VERY strange phenomenon.
Protect your cross-border marketing compliance program
Reverse Solicitation was not intended by the regulator (neither at the national or supranational level) to be a “distribution model”, that is, used on a massive basis. If any low-ethic, commercially driven law firm advises you to “just rely on reverse solicitation” (without compliance with local fund marketing laws) as your fund distribution model, then run away fast.
Furthermore, there is no “reliance” on reverse solicitation as a bullet proof regulatory carve-out and exemption. It is always possible for the AIFM/Asset Manager to get sanctioned by the local regulator and/or sued by the investor even in the case of legitimate cases of genuine (unsolicited) reverse solicitation.
We advise clients to focus on compliance with cross-border marketing rules at all times and only use reverse solicitation in genuinely unsolicited circumstances on a very limited, one-off basis to mitigate the 5-key distribution risks for cross-border marketing.
(See our blog about the 5-Key Distribution Risks for cross-border marketing.)
Begin exploring SRMO now
Sales Road Maps Online®: “Transforming marketing compliance®”