The French Financial Markets Authority has reaffirmed its strict interpretation of what constitutes reverse solicitation

French Financial Markets Authority, Enforcement Committee (Commission des sanctions), Decision No. 4 dated 26 April 2022 (SAN-2022-05)¹

The Enforcement Committee of the French Financial Markets Authority (Autorité des Marchés Financiers, “AMF”) recently reaffirmed² its strict and in concreto assessment of the concept of reverse solicitation as an exception to the prohibition of the marketing of alternative investment funds (“AIFs”) in France without AMF prior authorization.

Key takeaways

In you plan to rely on reverse solicitation, particular attention should be paid to the following aspects:

• It must be demonstrated that the client effectively initiated the solicitation (without any prior solicitation, including through general advertising, i.e., emailing, invitations to conference, etc.).
• The solicitation should be unforeseen and should designate a specific (named) AIF (i.e., clearly identified).
  
• The provision of templates or pre-completed “reverse solicitation letters” is to be avoided.

Note: From the AMF’s perspective, a pre-existing agreement between an alternative investment fund manager (“AIFM”) and a distributor, where the AIFM remunerates the distributor based on the level of subscriptions, such as finders’ fees would prevent the distributor from being able to successfully argue a genuine case of reverse solicitation.

Regulatory background

The marketing of AIFs, undertakings for the collective investment in transferable securities (“UCITS”) and investment services regulated under Directive 2014/65/EU (“MiFID 2”) is highly regulated throughout the European Union, and particularly in France.

As an exception to this marketing regime, (i) subscriptions for units or shares in AIFs or UCITS, and (ii) the provisions of MiFID investment services, can be lawfully made on a reverse solicitation basis, provided certain strict conditions are met.

Reverse solicitation definitions

Reverse solicitation (in the context of MiFID investment services) is defined by the French legislator (based on the provisions of EU law) as the provision of an investment service by a third-country firm at the sole initiative of a client, it being specified that it is forbidden to market financial instruments or investment services other than those for which the client has initiated the provision (see article L. 532-51 of the French Monetary and Financial Code implementing article 42 of the MiFID 2).

Reverse solicitation (in the context of the marketing of AIFs and UCITS) is defined by the AMF as “the purchase, sale or subscription of units or shares of a UCITS or AIF in response to a client’s unsolicited request to purchase a specifically designated UCITS or AIF, provided that the investor is authorized to do so.” (see AMF Position-Recommendation DOC-2014-04, section 1).

The dispute

A French distributor registered as a conseiller en investissements financiers (“CIF”) advised several French retail investors to subscribe for units in two German AIFs. Such funds had not been authorized for marketing in France. The CIF argued at length that no unauthorized “active” marketing of the units had taken place on the grounds that the advice and the investments resulted from the clients’ reverse solicitation.

The AMF refused to accept the CIF’s argument that this was a genuine instance of reverse solicitation, citing its usual in concreto assessment of reverse solicitation. The AMF also reaffirmed the above-mentioned key takeaways.

The decision and sanctions

The AMF considered that the CIF had violated its obligation to carry out its activity with the competence, care and diligence required in the best interests of its clients, and pronounced the following sanctions:
-     a reprimand (blâme) and a financial penalty of EUR 150,000 against the French company registered as a CIF; and
-     a ban on the CIF from acting as a financial investment advisor for five years as well as a financial penalty of EUR 50,000 against the individual operating the company registered as a CIF.

Note: The decision also sanctioned certain breaches of AML-CFT obligations applicable to the CIF that are not relevant for this OnPoint.

Conclusion
This recent decision re-affirms the AMF’s strict interpretation of what it considers “reverse solicitation”, and care needs to be taken to ensure that the AMF’s key considerations are followed if you plan to rely on this argument.

Footnotes

1) French Financial Markets Authority, Enforcement Committee (Commission des sanctions), Decision No. 4 dated 26 April 2022 (SAN-2022-05)
See the French Financial Markets Authority's Press release.

2) These considerations are not new and had already been provided in a previous decision (AMF, Decision No. 8 dated 30 April 2021, SAN-2021-08) and mentioned in a letter sent by the AMF to ANACOFI (a French professional association supervising distributors) on 12 September 2019.