Financial services regulation and COVID-19 video diaries: Issues affecting asset and fund managers – Part 3

My name is Ilian Petrov and this is Part 3 of our video diaries of the impacts of COVID-19 on the asset and fund management sector. In this video diary, I will begin by talking about some of the impacts in relation to fund raising and marketing, following which I will briefly touch upon the impacts on managers’ clients and investors and discuss some of the actions that managers can be taking to alleviate concerns.

With respect to fund raising and marketing, one of the biggest impacts from the pandemic and the accompanying travel restrictions and social distancing recommendations is that road shows and on-site visits and in fact, any face-to-face meetings are likely to be, if not already, delayed or cancelled. Although video and conference calls have become more common, they are not a replacement of the networking and informal discussions that take place during these events. This impact is not just limited to managers currently fund raising or funds due to begin fund raising. Operational funds may need to raise additional funds for follow on investments or to support investee companies and as such, managers need to consider how this can be best achieved in the most efficient and timely manner, for example, in the form of tap issue or strategic investments. Clearly, changes to marketing strategies are required and managers will now be relying more heavily on online marketing strategies. On this, know that managers may find that some of their clients or prospective investors are filtering out emails that reference COVID-19 or the coronavirus so that it is important that email correspondence is reviewed with this in mind. In addition, for fund managers who rely on reverse solicitation exemptions, this reliance on online marketing could be problematic. Online marketing strategies tend to be more formal and can make it harder to evidence genuine reverse solicitation if written communication trails undermine this. As such, it is important for fund managers to consider whether future reliance on reverse solicitation could be prejudiced by the proposed contact with prospective investors.

Just very briefly, one other point to flag is that fund raising timelines are likely to be impacted by challenges and delays on the investor side, particularly as regards to investor due diligence, COVID-19 and wider operational resilience, but also in receiving appropriate internal sign offs and signatures.

The final point I want to make on fund raising and marketing is that managers may continue experiencing difficulties on this front into 2021 as a result of the impact of the pandemic on Brexit negotiations. As a reminder, although the UK officially left the EU on 31 January this year, a transition period during which the UK continues to comply with EU rules is scheduled to last until the end of the year after which there will either be a new trade deal between the UK and the EU or no deal. As a result of the pandemic, trade negotiations between the UK and the EU have stalled. Germany, which will take over the rotating EU presidency on 1 July, has indicated that all non-COVID-19 business may have to be dropped completely to allow the block to focus on responding to the virus while the UK government continues to maintain its position that the transition period will end on 31 December regardless of whether the UK has agreed a trade deal with the EU. As such, managers currently relying on passports to market into the EU may need to be on notice to dust off their no deal contingency plans which could involve relying on EU equivalence of the UK’s temporary permission regime, establishing an EU presence, or utilising third party EU distributors.

Now turning to the impact of COVID-19 on managers, clients and investors, it is obvious that these are challenging times for investors and investor confidence generally, with some publicly traded asset managers having seen their share prices fall 20 to 30 per cent from 2020 market highs, large areas of fixed income markets showing signs of stress and talks of a global recession only increasing. As such, to avoid runs on funds and depressing client and investor confidence further, it is important for managers to be seen to be getting ahead of the noise. Not only should managers be prepared for an increased volume of client and investor questions regarding potential disruption to their operations, and areas of increased exposure, they should be actively reaching out to clients and investors on the same and on the actions that they are taking in response. Such communications are especially important considering that the production and delivery of regulatory filings which investors rely on, such as annual and half-yearly accounts and reports could be delayed by the granting of extensions by the FCA. In addition, if managers are considering any changes in underling asset profiles or compositions, as a result of COVID-19 related market instability, they should check whether such changes will trigger client or investor notices and/or disclosure document updates. Speaking of disclosures, just to briefly go back to the fund raising considerations, managers involved in fund raising should be updating their fund and risk disclosure materials to cover COVID-19 impacts.

Finally, some managers might need to update a number of their policies and procedures as a result of COVID-19 such as their BCPs, conflict of interest and valuation and risk management policies and in the spirit of getting ahead of the noise, managers should look to undertake those updates and communicate material changes to clients and investors at the earliest opportunity.