Following its warning last year regarding questionable practices on reverse solicitation ESMA Warns Firms Around 'Reverse Solicitation', Emma Conaty (maples.com), the European Securities and Markets Authority ("ESMA") has issued a letter to the European Commission this week in response to a call for evidence from Brussels on the levels of reverse solicitation in the EU.

Under reverse solicitation, an investment is made by an investor at the exclusive initiative of the investor.

ESMA is concerned that non-EU firms are using reverse solicitation to circumvent single market rules.

Limited information is available from national regulators who so far do not require this data to be reported, other than, for example, Italy and Cyprus. Information provided to ESMA by the Italian regulator CONSOB states that approximately 25% of total subscriptions into funds gathered by Italian asset managers in 2020 were made via reverse solicitation by professional investors. Likewise, the Cypriot regulator CySEC has advised ESMA that 30% of Cyprus-based UCITS management companies and 50% of Cypriot alternative investment fund managers rely on reverse solicitation. This data has led ESMA to consider such levels as being of "significant size".

While Directive 2019/1160 on the cross-border distribution of funds (which came into effect on 2 August 2021) has made some strides in limiting the reliance on reverse solicitation (i.e. requiring an EU AIFM to notify the regulators of its intention to pre-market an AIF and any subscription within 18 months of that pre-marketing requiring a full notification for marketing approval), it does not impose a reporting obligation where no pre-marketing has taken place i.e. where there is sole reverse solicitation.

As the vast majority of regulators have no regulatory reporting obligations for reverse solicitation, the concerns raised by ESMA “could not be confirmed by any tangible data” by national regulators. ESMA is therefore of the opinion that “if there was willingness to fill in this information gap on a more permanent basis at European level, consideration should be given to the introduction of new reporting requirements allowing to collect information on reverse solicitation across the EU”. ESMA is poised in 2022 to facilitate the submission of this data through the notification portal.

ESMA's letter further emphasises the importance of appropriately documenting any reverse solicitation given the ever increasing focus on this area.