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It’s the Age-Old Debate: Who takes responsibility for investigating local (country) marketing and sales restrictions for the distribution of funds in foreign jurisdictions? Is it the appointed fund distributor or the manager of the fund?

Increasingly, Alternative Investment Fund Managers (AIFMs) and Asset Managers are fundraising outside their home country to access pools of institutional capital from leading investors in foreign jurisdictions seeking unique sources of alpha.

Since 2006, Global Sales Compliance (GSC) has worked closely with AIFM/Asset Manager marketing teams to ensure compliance with cross-border marketing rules. For many years, we have observed the “age-old debate” between the AIFM/Asset Manager and their appointed fund distributor: which party takes responsibility in practice for the investigation of country regulations where the fund distributor is marketing the fund (managed by the AIFM/Asset Manager)?

Age-Old Debate distribution scenario:

• The AIFM/Asset Manager selects an appropriate distributor to market its funds cross- border (internationally).
• For example, the appointed “fund distributor” could be an external third-party distribution channel of a global financial institution, an external third-party marketer specialising in a particular asset class (i.e., private equity) and/or an internal distribution channel appointed by the asset management unit within the same financial institution (i.e., private wealth management channels).
• The AIFM/Asset Manager negotiates the fund distribution agreement with the appointed fund distributor. The distribution agreement usually contains sample compliance attestation language such as:

“The (fund distributor) agrees that it will only make fund offers or sales in accordance with applicable laws in (the domestic and/or foreign jurisdiction).”

Even though the fund distributor confirms in the distribution agreement they will comply with all applicable laws for the marketing of the fund managed by the AIFM/Asset Manager, which party actually investigates the country marketing and sales restrictions?

Any fund marketing activity conducted cross-border in foreign jurisdictions is a regulated activity subject to local rules on marketing. Someone has to investigate the local country’s marketing rules, under the assumption the fund will be marketed in a variety of global jurisdictions.

This investigation in local country’s marketing rules takes time, resources and incurs costs. Each country’s regulations apply to the type, structure and domicile of the fund as well as to marketing practices, so both the fund manager and the fund distributor have potential regulatory exposure. Rarely do fund distributors want to “market blind” in foreign countries without any knowledge of the local country’s marketing rules.

Here’s the Age-Old Debate:

What we have observed in practice is the “responsibility transfer exercise” – aka passing the hot potato – between the fund manager and the appointed fund distributor under the following common scenario:

• Fund Distributor to Fund Manager: “It is your responsibility to confirm marketing and sales restrictions for the fund in each country.”
• Fund Manager to Fund Distributor: “It is your responsibility to confirm marketing and sales restrictions for the fund in each country.”
• Fund Distributor to Fund Manager: “The fund is not our fund -- it is your fund that you manage, so you must take responsibility for checking the country marketing & sales restrictions. We don’t have the resources to investigate selling restrictions in local countries for funds that we represent.”
• Fund Manager to Fund Distributor: “You are the distributor of the fund and you are conducting the solicitation activity for our fund in foreign jurisdictions. You signed up in the distribution agreement to comply with all local marketing rules where you are representing our fund.”
• (Fund Distributor to Fund Manager): “We will only take responsibility for the status of our license in any foreign jurisdiction, but not the marketing & sales restrictions for your fund.”
• (Fund Manager to Fund Distributor): “We will investigate the country selling restrictions for our fund for the jurisdictions listed in the distribution agreement.”

Who has distribution risk exposure?

In reality, both parties are exposed to the 5 key distribution risks. Here is how the risk exposure applies in practice:

Risks for the fund distributor

The fund distributor is the entity actually conducting the fund solicitation activity in each country, so if the distributor is marketing in breach of local fund marketing or licensing rules, sanctions could apply to actual distributor’s salespersons and/or management of the distributor. Many countries have criminal and administrative sanctions on the books for breaches of local laws (imprisonment, fines, etc.). Unfortunately there is no magic waiver called, “We are marketing someone else’s fund in foreign countries so therefore we are exempt from all country marketing rules.”

Risks for the fund manager

The fund manager is the entity managing the assets of the fund. The fund manager’s name is on the fund offering documents, subscription documents and marketing collateral. If an investor invests in the fund manager’s fund that was illegally marketed in their jurisdiction, this could trigger litigation and investor rescission rights claims, as well as business franchise and reputation risks.

In summary, both the fund manager and the fund distributor have distribution risk exposure for fund marketing conducted by the distributor in any country.

We advise all clients that regardless of whether you are doing the fund marketing yourself or hiring someone to do the marketing of your fund cross-border, both parties need to know what the local country marketing rules are and both parties need to comply with those rules.

Age-Old Debate conclusion?

Both parties (fund manager and fund distributor) have “skin in the game”. Both need to know the cross-border marketing rules to effectively work together and comply with local regulations to mitigate both parties’ distribution risks.

See our blog: 5-Key Distribution Risks for cross-border marketing

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