The UK Financial Services and Markets Act 2000 (the 'FISMA') imposes important restrictions on the marketing by firms authorised under it ('FISMA-authorised firms') of English limited partnerships and other investment funds which have not been authorised by the UK's Financial Services Authority ( the 'FSA') or, in the case of non-UK investment funds, approved by it for marketing to the general public. Investment funds which have not been authorised or approved (technically, “recognised”) by the FSA are referred to below as 'unregulated funds” (technically, 'unregulated collective investment schemes'); the term 'investment fund' or 'collective investment scheme' also normally includes portfolios which are managed in parallel.
Scope of the Marketing Restricitions
The FISMA continues and, indeed, expands the special restriction on the marketing of unregulated funds, including unregulated private equity or venture capital investment funds (together, 'private equity funds'), which was imposed on authorised firms by the Financial Services Act 1986 (the 'FS Act'), which it replaced on 1 December 2001. FISMA – authorised firms which contravene this marketing restriction (the “scheme promotion restriction”) are subject to an unlimited fine and (even if they had not been negligent) must indemnify “private persons” (as defined) who consequently invested in the fund against any resulting loss. The FISMA also continues and expands the FS Act's general restriction (the 'financial promotion restriction') on the marketing of investments (including interests in investment funds) by companies or other firms (including non-UK securities, private equity or venture capital firms) which are not authorised under it; all marketing communications by them must be 'approved' by a FISMA-authorised firm, and like the firm's own communications must contain specified disclosures, unless an exemption applies. Both the FISMA's marketing restrictions apply in principle on a world-wide basis and not just in relation to investors in the United Kingdom, as was normally the case under the FS Act.
Restrictions cover all marketing communications even if outside the UK
The FISMA provides that, absent an exemption, both its marketing restrictions apply to all marketing communications, regardless of the medium used for the marketing; they therefore apply to all communications, whether oral, in writing, by email or on a website. The scheme promotion restriction therefore normally applies to all scheme promotion communications made in or from the United Kingdom. Like the financial promotion restriction, it also normally applies to scheme promotion communications originating (that is, made from) outside the United Kingdom if they are 'capable of having an effect' in the United Kingdom. This clearly covers communications to prospective investors in the United Kingdom. It also covers scheme promotion communications made from outside the United Kingdom to prospective investors who are also outside the United Kingdom, if they relate to UK unregulated funds (and in particular English limited partnerships, as the names of the limited partners have to be filed with the Companies Registry in the United Kingdom) and, possibly, also non-UK unregulated funds where the subscription proceeds are to be received in the United Kingdom.
It is important always to remember that oral communications can contravene the scheme promotion restriction, even if they are not cold calls. For example, there is no general exemption for solicited calls from outside the United Kingdom if the unregulated fund being marketed is operated or managed inside the United Kingdom (typically, an English limited partnership). In contrast to the position under the FS Act, an oral communication which contravenes the FISMA's marketing restrictions is now punishable by an unlimited fine and (in the case of the financial promotion restriction) imprisonment, even if it is true and not misleading.
Exemptions do not apply to all cross-border marketing or most marketing to high net worth individuals in the UK
The FISMA provides that exemptions from the scheme promotion restriction can be granted either by the UK Treasury or, where the unregulated fund is not to be marketed to the general public, by the FSA. Any 'general public' exemptions relating to cross-border marketing therefore cannot be granted by the FSA and accordingly they are provided by the Treasury, which has also helpfully granted many other exemptions (which are set out in the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001, as amended).
Many exemptions are provided by the Treasury from both marketing restrictions, including important exemptions for marketing to qualifying investment professionals and qualifying large companies and trusts (as under the FS Act); in addition, as is for the first time normally necessary, it has provided an exemption for qualifying marketing to prospective investors outside the United Kingdom, although the exemption does not apply to cold calls. The Treasury and the FSA have also granted other exemptions which apply only to the scheme promotion restriction and the Treasury has also provided many exemptions which apply only to the financial promotion restriction (which are set out in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001, as amended). Subject to these exemptions, however, the FISMA’s two marketing restrictions will often apply even if the marketing is by a non-UK branch to a prospective investor who is also outside the United Kingdom. Regrettably, there is still no general exemption for marketing to high net worth private individuals in the United Kingdom, although there are specific exemptions which may cover some of them (see Marketing to qualifying high net worth individuals or sophisticated investors below).
Scheme promotion restriction also applies to EEA firms
Although the FISMA imposes the scheme promotion restriction only on FISMA-authorised firms, the FSA has applied it also in specified circumstances to qualifying non-UK firms from the European Economic Area (the European Union, Iceland, Liechtenstein and Norway), although it has not done so very clearly. Non-UK EEA firms will qualify if they are nationals of an EEA member state (other than the United Kingdom) and are not FISMA-authorised. Any financial promotion communication made by them in the course of a securities, banking or insurance business lawfully carried on by them in their home member state will be exempted from the FISMA's financial promotion restriction (unless it is a cold call).
They are allowed to market to prospective investors under this special 'non-UK EEA firm' exemption, however, only if they comply with the FSA's 'form and content' rules and also the scheme promotion restriction. The scheme promotion restriction will therefore apply to them if they want to market interests in unregulated funds from their home member state (but seemingly not from other member states) to prospective investors in the United Kingdom (or seemingly anywhere else, even if outside the EEA) outside the normal exemptions from the FISMA's financial promotion restriction (in particular, to high net worth private individuals in the United Kingdom).
Wide meaning of 'marketing'
Although I refer in this article to 'marketing' interests in private equity funds, the scope of the scheme promotion restriction is in fact rather wider. The FISMA's marketing restrictions cover communications which invite or 'induce' prospective investors to buy (or, in the case of the financial promotion restriction, sell) FISMA investments and 'induce' can in practice mean making statements which may lead people to buy (or sell) FISMA investments, even if that was not intended by the firm making the statement (the 'communicator'). When, during the passage of the Financial Services and Markets Bill through Parliament, the Conservative Party's Treasury Team proposed an amendment to require intent, a Government Minister (Lord McIntosh) stated in Parliament that in the context of the FISMA’s marketing restrictions 'inducement' had a promotional element and therefore already required intent; we must hope that the courts take the same view, as indeed the FSA has made clear that it does. It is therefore sensible to regard “marketing” as including making statements of fact which might persuade people to buy interests in a particular unregulated fund.
Under the scheme promotion restriction, FISMA-authorised firms also cannot 'approve' financial promotion communications relating to unregulated funds if they cannot make the financial promotion communication themselves in the same circumstances, as a result of the scheme promotion restriction; 'marketing' therefore also includes approving financial promotion communications relating to unregulated funds which are to be made by companies or other firms which are not FISMA-authorised. In addition, the FSA has prohibited FISMA-authorised firms from approving oral or other 'real time” financial promotion communications (see New terminology below) and therefore they can be made by persons who are not FISMA-authorised only within the Treasury's exemptions from the financial promotion restriction. The FSA is seemingly not allowed to regulate the form and content of these 'exempted' communications (or to impose restrictions on them, as in the case of 'direct offer' communications) even if the communication is made by a FISMA-authorised firm when marketing an unregulated fund (which the FSA can of course normally regulate), although the FSA rule-book states that particular financial promotion rules may still apply.
Marketing Different Types of Investment Fund
The typical investment vehicle used for private equity funds is an English limited partnership, which is always an unregulated fund and so always subject to the scheme promotion restriction. Indeed, a private equity fund subject to the scheme promotion restriction is typically an unincorporated entity (such as an English or Cayman Islands limited partnership), even if investors cannot require the fund to redeem or repurchase their interests and the fund does not do so, or arrange for them to be purchased, in practice (and so even if the fund is not open-ended). In addition, a limited liability partnership (a new form of investment vehicle recently introduced in the United Kingdom) is also subject to the scheme promotion restriction in the absence of an exemption, whether or not investors can require the partnership to redeem or repurchase their interests, or the partnership does so, or arranges for them to be purchased, in practice, even though it is structured as a body corporate; it is unclear whether this similarly applies to non-UK limited liability partnerships which also are bodies corporate.
In the normal case, however, a company or other body corporate (such as a Delaware limited partnership) is not a collective investment scheme (and therefore not subject to the scheme promotion restriction) unless it qualifies as an 'open-ended investment company' (as defined). It will be an open-ended investment company if, apart from being incorporated, it qualifies as a collective investment scheme (which most investment companies will do) and a reasonable investor intending to acquire shares or other securities in it would 'expect' that he could realise his investment within a 'reasonable period' and would be 'satisfied' that he could do so at a price based wholly or mainly on its net asset value. This is an objective test which is applied at the relevant time (typically, when considering who the investment fund can be marketed to) and does not relate to any particular actual investor.
As indicated above, the reasonable investor can form his expectation from what happens in practice, even if the rules of the investment fund do not provide him with any option to redeem or have his shares repurchased. If the investment fund makes it clear that it would in practice allow him to redeem or have his shares repurchased, or if it announces a share buy-back programme or that it has arranged for a third party to buy them if requested, that may be enough to give the investor a reasonable expectation of being able to realise his investment. The FSA intends to issue in the near future detailed guidance on whether an incorporated investment fund qualifies as an open-ended investment company (and so is subject to the scheme promotion restriction). Hopefully, if an investor has to wait for much longer than six months before he receives his money, that will not be regarded as a 'reasonable period'; accordingly, the incorporated investment fund will not qualify as an open-ended investment company and therefore will not be subject to the FISMA's scheme promotion restriction.
In addition, a UK open-ended investment company (technically, an “investment company with variable capital”, or “ICVC”) is authorised by the FSA on incorporation and accordingly is not an unregulated fund ; it is therefore also not subject to the FISMA's scheme promotion restriction.
The Treasury's Exemptions
The Treasury has provided its exemptions from the scheme promotion restriction (and indeed those from the financial promotion restriction) by reference to the type of communication which is made. Accordingly, we have to get used to new terminology. Communications which involve interactive dialogue (typically, a conversation, whether in person or by telephone) are referred to as 'real time communications'; other communications (typically, by letter, fax or email or on a website) are referred to as 'non-real time communications'. Even though the scheme promotion restriction applies to all real time communications, many more exemptions apply where the communication is solicited than where it is a cold call (technically, an “unsolicited real time communication”); 'solicited' is defined very narrowly and does not even include marketing done on a visit or in a conversation initiated or requested by the person being marketed to unless it was clearly anticipated when the visit or conversation was initiated or requested and the firm was not asked about it for the first time during the visit or conversation.
Marketing to persons outside the UK
The FISMA provides that, subject to exemptions, the scheme promotion restriction applies wherever the prospective investor is. However, the Treasury has provided a very important cross-border exemption, although it does not apply to cold calls which are made from the United Kingdom or, even if they are made from outside the United Kingdom, relate to unregulated funds operated or managed in the United Kingdom. This 'non-UK recipients' exemption applies when the prospective investor approached is outside the United Kingdom, even if the communicator is himself inside the United Kingdom. For this purpose, a company or other entity is outside the United Kingdom if the branch making or receiving the communication (or, if different, the employee or other individual making or receiving the communication on its behalf) is outside the United Kingdom. Importantly, the exemption covers marketing to high net worth private individuals outside the United Kingdom.
The communication is exempted from the scheme promotion restriction if it is addressed to a specified person outside the United Kingdom (whether in a conversation or by letter, fax or email), even if it is also made to persons in the United Kingdom. Indeed, in my view, cold calls can in fact be made to qualifying investment professionals or qualifying large companies or trusts (whether they are inside or outside the United Kingdom), despite their exclusion from the 'non-UK recipients' exemption, even if the FISMA-authorised firm makes them from the United Kingdom and they relate to UK unregulated funds. This is because the separate “investment professionals” or 'large companies or trusts' exemptions (see Marketing to investment professionals and large companies or trusts below) cover all communications to them (even if they are outside the United Kingdom) and these exemptions can be combined with the “non-UK recipients” exemption.
The communication is also exempted if it is made through the mass media (for example, an advertisement in a newspaper, on the television or radio or on a website) but, normally, only if specified conditions are met (see Conditions for marketing through the mass media below). The exemption normally applies only if the communication is aimed only at persons outside the United Kingdom; however, the exemption will nonetheless apply even if the communication through the mass media is also aimed at persons in the United Kingdom, provided that the persons in the United Kingdom to whom it is addressed are only qualifying investment professionals or only qualifying large companies or trusts (but seemingly not both). Although the position is not clear, the exemption applies in my view even if the communication can also be seen or heard by other persons in the United Kingdom, for example, non-qualifying newspaper readers, (even though such persons are seemingly defined in the Order as “recipients” of the communication).
Marketing to investment professionals and large companies or trusts
As indicated in Marketing to persons outside the UK above, the scheme promotion restriction does not apply to any communications made only to investment professionals (whether within or outside the United Kingdom); a similar exemption also applies if the communication is made only to qualifying large companies or trusts or other specified “high net worth persons” (who do not include private individuals, however rich they are). In both cases, the communication can also be made to targets permitted under other exemptions. In addition, if the communication is made through the mass media, specified conditions must normally be met (see Conditions for marketing through the mass media below).
An 'investment professional' is a FISMA-authorised firm, a government or local authority or a professional investor in unregulated funds; strangely, non-UK securities firms, banks or insurance companies are not 'investment professionals' if they are not FISMA-authorised (although the Treasury may be willing to include them). A large company will qualify as a permitted target of scheme promotion communications if it is in a “group” (as defined and including parent undertakings and their subsidiary undertakings, which terms are wider than 'parent company' and 'subsidiary') and the group includes a company with issued share capital or net assets of at least £5million (or, if the company or a parent undertaking has more than 20 members, at least £500,000). A trust will qualify if the aggregate value of the cash and FISMA investments included in the trust property is £10million or more (or has been £10million or more at any time during the preceding year).
Conditions for marketing through the mass media
Both the 'non-UK recipients' exemption and the exemptions for marketing to investment professionals and qualifying large companies or trusts will only clearly apply to marketing through the mass media if specified disclosures are made. There must also be 'proper systems and procedures' in place to prevent the investment fund interests to which the scheme promotion communication relates being acquired from the communicator (or a group company) by anyone (or, in the case of the 'non-UK recipients' exemption, anyone in the United Kingdom) who is not covered by a relevant exemption (even if he is an existing client of the group company).
Each of the exemptions can apply even if not all the conditions are met but the detail of the exemption varies in each case. For example, (except in the case of communications using the 'non-UK recipients' exemption) the mass media communication can also be aimed at persons falling within any other exemption; presumably, those persons can also acquire them, even though that is not stated expressly in the case of the 'investment professionals” exemption. Even if the scheme promotion communication is in a non-UK newspaper or other publication or on a non-UK website or TV or radio station, that is only evidence that it is aimed only at non-UK recipients, not conclusive proof.
Marketing to qualifying high net worth individuals or sophisticated investors
Although there is no general exemption for marketing to high net worth private individuals who are in the United Kingdom, they can be solicited (except by cold calls) under the 'non-UK recipients' exemption (see above) if they are not. The Treasury has also provided limited exemptions for marketing certain kinds of unregulated fund to qualifying (technically, certified) high net worth individuals (except by way of a cold call) and qualifying (technically, certified) sophisticated investors (although it is unclear whether the exemption applies in relation to 'sophisticated' companies or merely sophisticated individuals). In each case, there must be a certificate confirming that they satisfy the requirements (in the case of high net worth individuals, income in the preceding financial year of £100,000 or net assets held during the whole of that year, other than their primary residence and any loan secured on it, of £250,000). In addition, the certificate must have been signed within the preceding twelve months by the individual's accountant or employer (in the case of high net worth individuals)and within the preceding three years by a FISMA-authorised firm which is not the firm operating the unregulated fund being marketed or selling interests in it to the prospective investor (in the case of sophisticated investors).
The two exemptions apply only if specified disclosures are made, the certified high net worth individual or sophisticated investor has signed a confirmation of his status (within the preceding twelve months) and other conditions are met. In particular, the 'certified sophisticated investor' exemption applies only if the certificate covers unregulated funds and the 'certified high net worth individual' exemption applies only if the unregulated fund invests directly (and not through, for example, a feeder fund) 'wholly or predominantly' in 'unlisted companies' (as defined, and not including companies whose shares are subject to a UK public offer or a qualifying marketing arrangement). These two new exemptions are very detailed and it is unclear how much they will be used in practice, especially as (unless there is a published list, as the Treasury expects) the firm marketing the unregulated fund must first find out if the proposed investor qualifies for them, and it cannot tell him the reason why it is asking if that will itself involve the firm making a scheme promotion communication.
Marketing to financial journalists and others
There are also other exemptions provided by the Treasury which may be helpful in particular cases. In particular, there are exemptions for communications to financial journalists and for a 'one-off' communication to a particular prospective investor, as long as it is not part of an 'organised marketing campaign' (which has not been defined and so is very wide).
The FSA's Exemptions
Marketing to market counterparties or non-private customers
The FSA has also provided various exemptions. In contrast to the Treasury’s exemptions, the FSA’s exemptions do not differentiate between different types of marketing (in particular, they all apply even to cold calls). However, this is perhaps because they are all subject to the FSA’s general prohibition on FISMA-authorised firms making cold calls (especially in the case of private individuals, unless, exceptionally, they are existing customers who would expect to receive a cold call); the prohibition does not apply, however, if the communication would be exempted from the financial promotion restriction or is made to a person the firm has taken reasonable steps to verify is a 'market counterparty' (as defined in the FSA Glossary) or a 'non-private customer' (now referred to as an 'intermediate customer').
The FSA's exemptions include its traditional exemptions for marketing to 'market counterparties' and to “non-private customers”, which are similar to the Treasury’s “investment professionals” and qualifying large companies or trusts but also include most overseas securities firms, banks and insurance companies. However, a company will now only qualify as an intermediate customer on the 'size' test if the company, a parent company or a subsidiary has paid up share capital or net assets of £5million, even if the company or parent company has over 20 investors (although the FSA will hopefully provide a reduced threshold of £500,000 in this case).
Marketing to directors and employees
In addition, the FSA has granted a very helpful exemption for marketing unregulated funds to group directors or employees, which is intended to cover co-investment arrangements. These are arrangements under which directors and employees (or former directors and employees) of the private equity firm or a group company, or members of their immediate family, (together, 'eligible employees') can co-invest through an unregulated fund (typically, a limited partnership) in parallel with another unregulated fund (typically, also a limited partnership) managed by the communicator (or a group company) for group companies, clients and institutional investors, although the wording of the exemption is a little unclear. The exemption applies even if the eligible employees invest in their parallel investment fund through a personal holding company or a family trust.
This is in addition to the FSA's long-standing exemption for marketing to eligible employees a qualifying limited partnership, where the eligible employees are to be limited partners; the limited partners are, however, no longer to be confined to them, as under the FS Act, and they can therefore include (as is often desired) one or more group companies or consultants.
Marketing to existing unregulated fund investors
The FSA has also continued its traditional exemption for marketing to persons who are (or within the previous 30 months were) investors in another unregulated fund with a 'substantially similar' investment policy and risk profile. However, a similar exemption granted by the Treasury for marketing to current investors in an existing unregulated fund operated by the communicator applies in relation to the marketing of any other unregulated fund (except by a cold call), and therefore may be more helpful in practice in particular cases.
Combining the Treasury’s exemptions and the FSA’s exemptions
The FSA’s exemptions can be combined with those of the Treasury. For example, and in particular, the Treasury’s “non-UK recipients” exemption does not allow cold calls to be made to non-UK securities firms, banks or insurance companies which are not FISMA-authorised if they do not qualify for the “large companies or trusts” exemption (because they are for some reason not covered by the “investment professionals” exemption). However, they will normally qualify as “overseas financial services institutions” and therefore will be covered by the FSA’s “market counterparty or intermediate customer” exemption. The FSA’s rules allow cold calls to be made on them.
However, a note of caution. If the firm marketing an unregulated fund wants to use two or more exemptions (whether granted by the Treasury or the FSA), it must be careful that none of the exemptions it proposes to use excludes any other.
Implementation of the Electronic Commerce Directive
Just as private equity fund managers have got used to the new marketing regime introduced by the FISMA, the Treasury has recently announced some important changes which it will soon make in order to bring into UK law the requirements of the EU Electronic Commerce Directive of 8 June 2000, although it has not yet indicated when they will take place. The Directive is intended to open up the EU internal market for 'electronic commerce communications', namely, communications sent by electronic means at the individual request of the recipient. Essentially, this means communications by email (and perhaps the content of a website, at least if it is password-protected) but not communications by fax or telephone or unsolicited communications. In this context, non-real time communications (typically, emails) can be 'unsolicited', even though this is not relevant to the FISMA's two marketing restrictions, and their narrow definition of 'solicited' (see New terminology above) will not apply.
Incoming communications will now be exempted
In order to comply with the Directive, “electronic commerce communications” made by a firm or other person in a member state (other than the UK) of the European Economic Area will be exempted from both the financial promotion restriction and, if it is FISMA-authorised, the scheme promotion restriction. As proposed, the exemption will apply wherever the recipient is, but it may be that the exemption will in due course be restricted to where the communication is made to recipients in the United Kingdom (or, at least, the EEA), as that seems all that is required by the Directive. It is likely that firms which are not FISMA-authorised and want to make 'exempted' electronic commerce communications from an EEA member state other than the United Kingdom will accordingly not be subject to the scheme promotion restriction in relation to them even if they are nationals of that member state, because they will no longer have to comply with the FSA’s financial promotion rules in order to use their exemption (see Scheme promotion restriction also applies to EEA firms).
Outgoing communications will now be regulated
Conversely, outgoing electronic commerce communications made by a FISMA-authorised firm from the United Kingdom to a prospective investor in another member state of the EEA will be excluded from the “non-UK recipients” exemption. Accordingly, a FISMA-authorised firm in the
United Kingdom will not be able to market unregulated funds by an electronic commerce communication to prospective investors in another EEA member state unless a 'domestic' exemption applies (for example, those for communications to investment professionals or qualifying large companies or trusts) or, hopefully, the communication is unsolicited. Although the Financial Secretary (Ruth Kelly MP) stated on 12 June 2002 in the House of Commons committee debating these changes that they went no further than was required by the Directive, which would mean that they would not apply to unsolicited communications, this was not spelled out expressly in the Treasury’s draft statutory instrument effecting these changes in relation to outgoing communications but only in relation to incoming communications. Subject to local rules, a FISMA-authorised firm can therefore market an unregulated fund (under the 'non-UK recipients' exemption) by an electronic commerce communication sent to high net worth private individuals if they are in, for example, New York but (unless they are properly certified) not if they are in Paris or Rome, at least if it is sent at their request.
Charles Abrams (firstname.lastname@example.org) is Head of the Financial Services Group at SJ Berwin. He was a legal adviser to the Conservative Party’s Treasury Team on the Financial Services and Markets Bill and the main Treasury Orders made under it including the Financial Promotion Order referred to in the above article. He was a member of the APCIMS, CBI and City of London Law Society committees which reviewed the Bill and the Treasury and FSA consultation papers relating to it. He is the author of A Short Guide to the Financial Services and Markets Act 2000 (CCH New Law, 2000) and is a co-author of Guide to Financial Services Regulation (CCH Editions, Third Edition 1997).