Blog
Happy 2023 SRMO, Blog readers! We’re starting off the year with a tongue-in-cheek Blog tinged with humour that we hope brings a smile to the face of anyone in legal & compliance.
Open Letter to all Financial Regulators (National Competent Authorities):
“Did you know that there is a wide-ranging regulatory exemption under your country’s fund marketing regulations called the ‘Everybody’s doing it exemption’ (aka regulatory carve-out/free-pass/green light/total law & regulation waiver)? Maybe you weren’t aware of this special exemption, but – good news – we are told it does in fact exist. Everywhere and anywhere. Applicable to any country.”
In this Blog, our CEO shares some insight into practical implementation of cross-border fund marketing regulations by sales teams, competitor due diligence and the role of compliance, while debunking a key industry Myth.
What is the ‘Everybody’s Doing it Exemption’?
If we had a dollar/pound/euro (pick a currency) for every time we’ve heard “But EVERYBODY’S doing it!” over the past two decades as an excuse by sales for non-compliance with local marketing regulations, we would be retired millionaires (or maybe even billionaires) sitting on a beach somewhere sipping a refreshing adult beverage.
The “Everybody’s Doing It Exemption” is a belief we have observed by sales teams as a justification to waive local marketing regulations for their AIF marketing efforts.
The way cross-border marketing compliance works is as follows:
The AIFM’s compliance team instructs their sales teams on the regulations for marketing their AIF in any local jurisdiction. If the sales team is unfamiliar with certain marketing restrictions and/or doesn’t want to follow these marketing rules, pushback can result with sales informing the compliance team, “Everybody is doing the opposite compliance model to what you just told me. If everybody else is doing X, then why do we have to do Y?”
Examples of feedback we have seen in our bespoke compliance advisory include:
- TAIWAN (sales team feedback to compliance): “Everybody (all foreign AIFMs not licensed by Taiwan’s FSC) including all the General Partners (GPs) we know are marketing foreign AIFs (non-Securities Investment Funds) onshore in Taiwan to all types of Taiwan investors during fly-in visits to Taiwan. Nobody is appointing a licensed fund distributor (SICE, SITE, etc.) or filing any fund filings with SITCA. If everybody (foreign unlicensed AIFMs) is marketing foreign AIFs onshore in Taiwan freely during fly-in visits, why do we have to follow a different compliance model?”
- JAPAN (sales team feedback to compliance): “Everybody (all our foreign Private Equity AIFM competitors) is setting up local offices in Japan doing broker-dealer (sales) activities of foreign funds (AIFs) onshore in Japan, promoting funds to Japanese investors of all types. None of our competitors have applied for an FIBD (Financial Instruments Business Dealer) license. If all our PE competitors can set up non-licensed offices in Japan to market AIFs onshore to Japanese investors, then why can’t we do the same?”
Establishing the “Everybody’s Doing It” (Competition) Fact Set
AIFM compliance teams are typically responsive to sales team concerns and want to understand the fact set behind their feedback. The goal is to create practical business model implementation of AIF marketing regulations at mitigated risk levels to safeguard the business.
Compliance will try to get detailed facts about the competitor’s business and compliance model in said country, to confirm their actual business and compliance activities, license position, etc.
Invariably, when compliance says “Prove it”, sales can only provide superficial detail about a competitor’s compliance model and/or innuendo (hearsay information). Frequently, the result is a vague, unverifiable fact set.
That’s why it’s always advisable to check local regulations first before you market your fund in any country, to confirm all the fund and/or licensing registration requirements for your fund distribution business model. This up-front research can give you a better perspective to understand if your competition is compliant with local regulations (or not). Read our Blog Post: Marketing Compliance: What you Need to Know.
We should also clarify that “Everybody’s doing it” could potentially mean that the competition is fully compliant with local fund marketing regulations- but this requires confirmation of the actual business & compliance model (fact set) of the competition. In other words, “Everybody’s doing it” doesn’t necessarily mean that the competition is in breach of the law.
Distinction between Marketing Regulatory Exemptions, Market Practice & “Everybody’s Doing It”
It is important to distinguish between market practice, regulatory exemptions and “Everybody’s Doing It”:
- Regulatory Exemptions: This term refers to a country’s official regulatory exemptions recognised by regulators and codified in the fund marketing and licensing regulations. It’s black letter law.
- A good example of AIF marketing regulatory exemptions is the “Institutional Investor Exemption” in Singapore, whereby Singapore’s regulator MAS permits offshore marketing of AIFs to “Institutional Investors” (as defined under Singapore rules) under regulatory exemptions from fund registration and licensing registration requirements.
- Market Practice: This term refers to a country’s marketing practices that the local country regulator is aware of and does not tend to prosecute or intervene with sanctions, so long as the marketer complies with the parameters of acceptable market practice after taking legal advice. Market practice as acknowledged by the local regulator can be official or unofficial “tolerated” practice (or practices against which the regulator will not intervene).
- A good example of a country market practice is the unofficial interpretation of South Korea’s private placement regime for initial “low key marketing” of AIFs to Korean QPI (investors) prior to the appointment of a licensed fund distributor and compliance with AIF private placement fund registration with South Korea’s regulator FSS. There are guidelines that AIFMs should follow to utilize this particular market practice to keep their risk mitigated (limits on offers, specific definitions of target clients, etc.).
- “Everybody’s Doing It”: This phrase reflects a perception that, due to the fact that others are conducting business in a certain way – even if this method is illegal or non-compliant with local regulations – then that business practice (as perceived) must be perfectly acceptable to the regulator, especially if the practice has not (yet) been prosecuted. This myth implies a complete and total waiver of all rules because “others are doing it”.
- A good example is the industry Myth that if the AIFM is AIF fundraising from “Friends and Family”, then this is a regulatory carve-out and no marketing rules apply to this activity. Read our Blog Post: Fundraising from Friends and Family: Is this a regulatory carve-out?
Is there a valid 'Everybody’s Doing It Exemption' acceptable to regulators?
No, not unless the competition’s activities comply with local regulations.
We are not aware of one regulator ANYWHERE who would agree that just because others are non-compliant with their laws and are breaking the rules, that it is perfectly fine for others to do the same.
It is a complete MYTH, which you can believe at your own peril. Read about other Industry Myths in our Blog Posts: Key Myths about Marketing Compliance Part I and Part II.
What are AIFMs’ risks to follow the crowd?
It is important for AIFMs to understand the business models of their competition. But if other AIFMs are breaking local laws on marketing regulations, does that mean it is OK for the AIFM to also break local country’s laws?
We advise AIFMs to get the facts: Understand your competitor’s business model, but also get good quality legal advice from knowledgeable law firms about the marketing regulations in each country. And then comply with those regulations.
Ignoring local fund marketing regulations is a high-risk business development strategy and can trigger the 5-Key Distribution Risks. Read our Blog Post: 5-Key Distribution Risks for cross-border marketing.
An 'Everybody’s Doing It' case study
This isn’t just a mistake that small companies (AIFMs) make.
When a leading industry US private equity firm sent its sales teams into Kuwait to market their funds onshore to a Kuwait institution in breach of Kuwait’s private placement regime and licensing regulations – possibly using the rationale that “Everybody’s doing it” – there was blowback to that non-compliant fundraising strategy.
This US PE firm suffered a very contentious, drawn-out lawsuit from the Kuwait institutional investor who suffered losses on their investment in the PE firm’s fund.
The Kuwait investor’s litigation claim was based on the assertion that the US PE firm breached Kuwait’s laws when marketing their fund to the Kuwaiti investor without a license or fund registration. Therefore all fund contracts between the Kuwaiti investor and the US PE firm were null and void.
We understand Kuwait’s regulator, CMA became aware of this breach. For this particular US PE Firm, the fallout went beyond the legal action of this one investor. Litigation risk triggered industry reputation and business franchise risk as well.
So who wants to follow the crowd and trigger 5-Key distribution risks if the crowd is breaking the law?
Like your mother said, if everybody else jumped off a bridge, would you do it too?
Summary: Understanding your competition is important. So is compliance with local fund marketing regulations when marketing your AIF cross-border. Just because your competitors are breaking the law does not make it right or safe for you to follow suit.
Our advice: Check the country regulations in advance before conducting any fund solicitation activity in foreign jurisdictions and comply with these rules. Where you want to deviate from local fund marketing regulations, make a balanced, risk-based business and compliance decision and incorporate market intelligence on the competition.
Just bear in mind that “Everybody’s doing it” doesn’t necessarily mean the competition’s activities are legal or compliant with local laws. Don’t take the “Everybody’s doing it” at face value as a free-pass, total rule waiver or green light because you could be subjecting your precious business franchise and hard-earned reputation to risk.
We are here to help. We’re still putting that dollar/pound/euro in the “Everybody’s Doing It” retirement jar.
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