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ESMA Proposes Reverse Solicitation Reporting Requirement

In December 2021 the new Chair of the European Securities and Markets Authority (“ESMA”), Verena Ross, wrote to the European Commission regarding reverse solicitation in the context of the Cross-Border Funds Distribution (“CBFD”) regime. The letter was issued following a September 2021 request for evidence by the European Commission on the levels of reverse solicitation in the EU.

Reverse solicitation is a principle where a customer in the EU can procure services from a firm that does not have a branch or subsidiary in the bloc and therefore does not have access to a marketing passport. Under the principle, the service is provided at the exclusive initiative of the customer.

The CBFD, which came into effect in August 2021, requires EU AIFMs to notify regulators if they intend to engage in pre-marketing but it did not put in place a reporting obligation where no pre-marketing has occurred, i.e. where there is only reverse solicitation.

ESMA conducted a survey among National Competent Authorities (“NCAs”) asking about the use of reverse solicitation by asset managers. Almost all NCAs advised that they have no readily available information on the use of reverse solicitation either via asset managers or investor associations.

There were some exceptions however with CONSOB in Italy and CySEC in Cyprus collecting data. CONSOB advised that approximately 25% of the total subscriptions in funds gathered by Italian asset managers in 2020 came via reverse solicitation. CySEC found that 30% of Cyprus-based UCITS and 50% of Cypriot AIFMs use reverse solicitation. The CNMV in Spain reported that they did not have any information on reverse solicitation but that 1.36% of the total of assets under management of funds established in Spain are owned by foreign investors and since Spanish funds are hardly marketed outside Spain, this figure could be used as a proxy to assess reverse solicitation in Spain.

With respect to the impact of reverse solicitation on the EU passporting regime, several NCAs believe that reverse solicitation is used in practice to circumvent such rules , which raises some concerns in terms of investor protection but may also create an unlevel playing field between EU asset managers and non-EU asset managers operating in the EU via reverse solicitation.

ESMA stated in its letter to the European Commission that consideration should be given to the introduction of new reporting requirements allowing the collection of information on reverse solicitation across the EU.

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