Legal Alerts/11 Jun 2020

Topical Regulation Affecting Alternative Investment Fund Managers

There are several regulatory changes, that are currently being prepared or that will shortly become effective, and that will affect alternative investment fund managers:

• Under the Finnish Act on Preventing Money Laundering and Terrorist Financing (444/2017, the “AML Act”), companies and other entities must file details on their ultimate beneficial owners (“UBOs”) to the Finnish Trade Register no later than 1 July 2020. Alternative investment fund managers (“AIFMs”) should consider this, for example, in relation to the alternative investment funds (“AIFs”) that they manage.
• A directive (2019/1160/EU) (the “Directive”) amending the Alternative Investments Funds Managers Directive (2011/61/EU) (the “AIFMD”) has been adopted on 20 June 2019. These changes will affect the marketing of AIFs and must be implemented by Member States by 2 August 2021.
• A regulation (2019/1156/EU) (the “Regulation”) amending the regulation on key information documents for packaged retail and insurance-based investment products (2014/1286/EU) (the “PRIIPs Regulation”) was adopted on 20 June 2019. These changes extend a transitional period until 31 December 2021 and affect the requirement to produce key information documents for AIFs marketed to non-professional clients.
• The European Securities and Markets Authority (“ESMA”) has published on 2 September 2019, guidelines regarding liquidity stress tests (“LSTs”) of investment funds (the “Guidelines”). The Guidelines will become applicable on 30 September 2020 and apply to AIFMs that manage leveraged closed ended funds.
• A new regulation (2019/2088/EU) (the “ESG Regulation”) on sustainability-related disclosures in the financial sector was adopted on 27 November 2019 and will apply as of 10 March 2021, with some exceptions. The ESG Regulation brings new reporting obligations for all AIFMs.
• New Finnish Act on Taxation of Certain Hybrid Arrangements (1567/2019) (the “Hybrid Mismatch Act”) is applied from tax year 2020 onwards (i.e. in financial periods ending on 1 January 2020 and after) and it may limit tax deductibility of expenses in certain hybrid mismatch situations.

Each of the above is discussed in some more detail below.


The Definition of ultimate beneficial owners

The AML Act defines an UBO as a natural person who either (a) owns directly or indirectly more than 25% of shares of the company, (b) holds directly or indirectly more than 25% of voting rights in the company, or (c) otherwise exercises control over such company. This also applies to other types of entities, such as limited partnerships. The AML Act provides for presumptions for determining direct and indirect ownership, and if the UBO may not be determined based on the above, the UBO(s) is considered to be the company’s or other entity’s board of directors or general partner, CEO or a person in a corresponding position.

Notification to the Finnish Trade Register

Under the AML Act companies and other entities already registered must file notifications regarding their UBOs to the Finnish Trade Register no later than 1 July 2020. The information on UBOs must be updated whenever the details change. Companies and other entities being incorporated must file the notification once the entity has been registered with the Trade Register. The notification on UBOs is as a general rule filed using the Trade Register’s online service.

Considerations for AIFMs

Determining an UBO may require a case by case evaluation particularly in relation to AIFs structured as limited partnerships. Such an AIF, its general partner and the AIFM may also have partially the same and partially different UBOs depending, among others, on the fund’s investors and the share classes and voting rights in the AIFM and general partner companies. UBOs may include indirect shareholders of said companies and their board members or CEO (but may at least in principle also include, for example, the board members or CEO of a significant investor in the AIF). Particularly where a fund exercises control in its portfolio companies, it will also be relevant to assess how the portfolio companies report their UBOs.


Definition of pre-marketing

Until now, only “marketing” has been regulated by the AIFMD, the meanings of “marketing” and “pre-marketing” have been unclear, and the interpretations have varied between the Member States. The Directive seeks to harmonise these differences through introduction of a definition of “pre-marketing”.
The Directive defines pre-marketing as a direct or indirect provision of information on investment strategies or investment ideas supplied by an EU AIFM or on its behalf to professional investors domiciled or registered in the EU in order to test their interest in an AIF that is not yet established, or that is established, but not yet notified for marketing in accordance with the AIFMD.
The definition implies that the concept of “pre-marketing” will be restricted to professional investors only, and accordingly this may mean that preliminary discussions with non-professional investors would no longer be allowed before approval to the appropriate marketing notification.

Pre-marketing documentation

The new rules specify what documentation and information may be provided to (professional) investors in pre-marketing phase. Such information must not be sufficient to allow investors to commit to make an investment, and must not contain subscription forms or similar documents, offering documents of a not-yet-established AIF in a final form), or constitutional documents, a prospectus or offering documents of a not-yet-established AIF in final form. Draft offering documents “shall not contain information sufficient to allow investors to take an investment decision and shall clearly state that: (a) they do not constitute an offer or an invitation to subscribe to units or shares of an AIF; and (b) the information presented therein should not be relied upon because it is incomplete and may be subject to change.”

In light of the foregoing, it is clear that documents, such as limited partnership agreements or private placement memorandums, in final form must not be distributed in the pre-marketing phase, but it remains unclear when information in such documents becomes sufficient to allow investors to take an investment decision. It is apparent that mere labelling of documents as “drafts” or stating that the documents do not constitute an offer would not be sufficient.

Restrictions on reverse solicitation

Until now, providing information regarding an AIF to an investor following the investor’s own enquiry has not been considered marketing (the so-called “reverse solicitation” rule).
However, under the Directive, any subscription by a professional investor within 18 months of the AIFM having begun pre-marketing activities will be considered to be a result of marketing of that AIF. The definition is not quite clear on whether or not the evaluation is investor-specific or not (i.e. it is not clear whether pre-marketing to one investor would mean that the “reverse solicitation” rule could not apply to another).

Additional amendments

In addition to the above, the Directive:
• requires an AIFM to make a free-form pre-marketing notification and to keep adequate records of pre-marketing;
• restricts the right of an AIFM to engage third parties to carry out pre-marketing of an AIF;
• introduces explicit rules on de-notification of AIFs within the Member States, which on the other hand entails a 36-month’s suspension period during which the AIFM may not pre-market “similar investment strategies or investment ideas” in that Member State (whether this will restrict the pre-marketing of genuine successor funds remains unclear);
• when marketing to non-professional investors, requires AIFMs to make available “facilities” e.g. to arrange the provision of information to investors and act as a contact point for communicating with the competent authorities.

Entry into force

As noted above, the Directive has been adopted by the European Parliament and the Council of the European Union on 20 June 2019. The Directive has entered into force on 1 August 2019. The Member States shall adopt and the Directive by 2 August 2021. The Finnish government has not yet proposed a bill in relation to this.


KIID and PRIIPs KID; Extension of transitional provisions

The application of the PRIIPs Regulation started on 1 January 2018. As a rule, the PRIIPs Regulation requires a key information document (“PRIIPs KID”) to be provided by AIFMs to non-professional investors to whom the AIFM is marketing an AIF. However, the PRIIPs Regulation contains transitional provisions that give an AIFM the option to still use so-called key investor information documents (“KIID”) in case the home Member State of such AIFM requires the AIFM to provide a KIID to non-professional investors of the AIF (Art. 32 of the PRIIPs-Regulation). KIIDs, which have originally been implemented and used for UCITS funds, are not as regulated as PRIIPs KIDs and have been considered by some as being less cumbersome to draft than PRIIPs KIDs.

The transitional provisions of the PRIIPs Regulation mentioned above were originally set to end on 31 December 2019, but the Regulation has prolonged the transitional time until 31 December 2021. For Finnish AIFMs intending to market their AIFs to non-professional clients this means that they can still utilize KIIDs and are not yet required to draft PRIIPs KIDs.

Considerations for AIFMs

Although the exception and the transitional provisions as such are rather clear, some uncertainties are related to this. Firstly, the PRIIPs Regulation does not provide whether the exception is in force only within the Member State in question (in this case Finland) or if the KIID may be used also if the AIF is marketed to other Member States regardless of whether the national legislation in such Member State includes a similar exemption allowing the AIFs to continue to use the KIID.
Secondly, the Finnish government bill provides that the AIFM must comply with its choice between the KIID and the PRIIPs KID for each AIF and may not change between these documents in relation to such AIF once it has made its choice. Notwithstanding this, due to the term of the transitional provisions it could be interpreted that the AIFM should be required to provide a PRIIPs KID to non-professional investors after 31 December 2021, regardless of whether or not a KIID would have been provided prior to that. This would most likely be the case at least if the marketing of the AIF and its fundraising continues after such date, and should be taken into account when the fundraising period of an AIF will continue after 31 December 2021.


New requirements imposed on fund managers

The Guidelines apply to various types of funds, such as UCITS funds, open ended AIFs, and leveraged closed ended AIFs, imposing new requirements for fund managers to comply with regarding risk management and the use of stress tests. The Guidelines are recommendations by nature, but it is expected that the Finnish Financial Supervisory Authority will require relevant Finnish fund managers to comply with the Guidelines.

The Guidelines in Brief

The aim of the LSTs is to provide fund managers with information to help ensure the fund is sufficiently liquid and to strengthen the fund manager’s ability to manage the liquidity also in difficult circumstances (such as weakened market conditions).
The Guidelines recommend that LSTs are documented as a part of the fund’s risk management framework and set out detailed principles on how fund managers should design and build LST models for their funds to evaluate liquidity risks arising from the assets and liabilities of the fund in order to get a strong understanding of such risks. The Guidelines include instructions on e.g. governance principles, frequency of the LSTs and how to handle the results. In practice, the principle-based approach means that it gives flexibility on creating LST models since it enables the fund managers to consider the specific characteristics of each fund. The Guidelines adapt the application of LSTs to the nature, scale, and complexity of the fund.


New regulation on sustainability-related disclosures

The principal aims of the ESG Regulation are to allow investors to make more informed investment decisions by being able to compare more easily different financial services and products from the perspective of sustainability, and also to ensure consistency in the disclosure and transparency obligations with which they are required to comply. The ESG Regulation applies to all AIFMs and other “Financial Market Participants” (as defined in the ESG Regulation) and imposes certain new reporting obligations on such Financial Market Participants.

New reporting obligations

In short, the ESG Regulation provides the following requirements for all AIFMs:
• to publish information on their website about their policies on integrating sustainability risks in their investment decision-making process and investment advice;
• to publish information of adverse sustainability impacts at entity and fund level on their website;
• to include in their remuneration policies (and publish on their websites) information on how their remuneration policies are consistent with the integration of sustainability risks; and
• to make certain pre-contractual disclosures relating to (a) the manner in which sustainability risks are integrated into their investment decisions and investment advice, and (b) the results of the assessment of the likely impacts of sustainability risks on the returns of the financial products they make available or advise on.

If the AIFM manages an AIF, which has sustainable investments as its objective or invests in products that promote environmental or social characteristics, certain additional disclosure obligations apply (e.g. certain sustainability-related disclosures in periodic reports).

Review of the Non-Financial Reporting Directive

The directive on non-financial reporting (2014/95/EU) (the “NFRD”) has regulated non-financial reporting since 2018. The NFRD currently applies to large listed companies, banks and insurance companies with more than 500 employees, and requires companies to disclose information about (i) environment, (ii) social and employee issues, (iii) human rights and (iv) bribery and corruption, provided that the company assesses the aforementioned to be material. The NFRD did not achieve its objectives and is therefore now subject to review and potential revision, which may result in a change in the reporting obligations (including a broader scope of the NFRD) in order to improve the disclosure of non-financial information.


Overview of the new rules

The Hybrid Mismatch Act implements the cross-border hybrid mismatch rules set forth in the EU directive on amending the ATAD as regards hybrid mismatches with third countries (the ATAD 2, 2017/952/EU). The purpose of the Hybrid Mismatch Act is to prevent any double deductions and loss of tax revenue arising from non-uniform tax systems.
The Hybrid Mismatch Act identifies different types of hybrid mismatch arrangements that may involve a double deduction, a deduction without inclusion and non-taxation without inclusion and resolves such situations by applying rules regarding the denial of deduction or inclusion of income in the taxable base in order to neutralise the effects of the hybrid mismatch in question.
The provisions of the Hybrid Mismatch Act cover a large variety of different hybrid mismatch situations, as a result of which the applicability of the provisions to certain cross-border arrangements should be carefully analysed. We have presented below an example of a situation relating to Finnish AIFs in which the Hybrid Mismatch Act could be applied.

Finnish limited partnership may constitute a hybrid mismatch

In respect of AIFs, one thing that may trigger the Hybrid Mismatch Act is the tax treatment of a Finnish AIF formed as a limited partnership (in Finnish: kommandiittiyhtiö) in the country of residence of the AIF’s foreign investors.

For Finnish tax purposes, the limited partnership is treated as a transparent entity and the partnership’s income is allocated to be taxed as its partners’ income. A hybrid mismatch situation may exist if the AIF’s Finnish target company pays interest to the AIF and the AIF is not treated as a transparent entity in the taxation of its foreign investors in their country of residence, and due to this the AIF’s income is not included in taxable income of the foreign investors in their country of residence. In this case, the intra-group interest expenses of the target company may become partly or wholly tax non-deductible under the Hybrid Mismatch Act.

Therefore, the tax deductibility of interest expenses paid by Finnish target companies to a Finnish AIF formed as a limited partnership should be carefully analysed in light of the Hybrid Mismatch Act from the tax year 2020 onwards (i.e. in financial periods ending 1 January 2020 or after).


Borenius’ lawyers are available to assist in addressing any questions you may have regarding the above. Please feel free to contact any of the Borenius’ attorneys listed in this alert or those with whom you usually work.

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Additional information

Paulus Hidén



Henri Ruotsalainen



Heikki Wahlroos



Mikko Vesikivi

Senior Associate