The European Securities and Markets Authority (“ESMA”) has today published its advice to the European Union (“EU”) law-making institutions on whether the passport provided for by the Alternative Investment Fund Managers Directive (“AIFMD”) ought to be extended to non-EU alternative investment fund managers (“AIFMs”) and non-EU alternative investment funds (“AIFs”). It concludes in its advice that the passport should be applied to Guernsey, Jersey and Switzerland.

Background

The AIFMD passport is currently only available to authorised EU AIFMs and EU AIFs, while marketing by non-EU AIFMs and marketing of non-EU AIFs is governed by national private placement regimes (“NPPRs”). Pursuant to the AIFMD, ESMA is required to issue advice to the European Commission (“Commission”), the European Parliament and the Council of the EU (“Council”) on the application of the passport to the marketing of non-EU AIFs by EU AIFMs and the management and / or marketing of AIFs by non-EU AIFMs in the EU. The advice published today by ESMA (the “Advice”) follows a call for evidence issued in November 2014, which confirmed that ESMA had decided to opt for a country-by-country assessment of the potential extension of the AIFMD passport. ESMA has used the feedback received from the call for evidence, together with its own research, insights and data received from national competent authorities and market intelligence, to carry out a detailed assessment of six non-EU countries, ie, the United States, Jersey, Guernsey, Switzerland, Hong Kong and Singapore.

ESMA’s Advice – AIFMD Passport Extension

ESMA assessed each of the six jurisdictions listed above under the headings of ongoing compliance with memoranda of understanding; the expectation of good supervisory cooperation; investor protection; competition; potential market disruption and the monitoring of systemic risk.

Following on from this analysis, ESMA advises that the AIFMD passport should be applied to the following third country jurisdictions: Guernsey, Jersey and Switzerland.

The six jurisdictions assessed by ESMA were selected pursuant to a number of factors including: (a) the amount of activity already being carried out by entities from these jurisdictions under NPPRs; (b) the experience of national competent authorities in EU member states (“Member States”) in dealing with their counterparts in these jurisdictions; and (c) the level of engagement by interested parties in these jurisdictions with ESMA during the preparation of its assessment.

These six jurisdictions had been drawn from a broader list of third countries identified, which had included the Cayman Islands. However, ESMA requires a sufficient level of information about each relevant non-EU jurisdiction in order to apply its assessment methodology, and in this regard considered it inappropriate to issue advice for any non-EU jurisdiction which had not satisfied this.

ESMA found that no obstacles exist regarding the extension of the passport to Guernsey and Jersey. With respect to Switzerland, ESMA found that there would be no significant obstacles impeding the application of the passport upon the enactment of pending Swiss legislation to strengthen the Swiss regulator’s ability to share information with EU regulators.

ESMA was unable to reach a definitive view on Hong Kong, Singapore or the United States of America due to concerns around regulatory issues, competition and a lack of sufficient information to assess these jurisdictions at this time. ESMA aims to finalise the assessments of Hong Kong, Singapore and the United States “as soon as practicable”.

Next Steps

In the coming months, ESMA will continue to assess other non-EU jurisdictions not covered in the Advice. For those non-EU jurisdictions with which there are currently no supervisory cooperation arrangements in place for the purposes of the AIFMD, ESMA will continue efforts to agree a memorandum of understanding with the authorities concerned.

ESMA states that its Advice has been sent to the Commission, the European Parliament and the Council for their consideration on whether to activate the extension of the passport to Guernsey, Jersey and Switzerland. Under the AIFMD, the Commission is required to adopt a delegated act within three months of receipt of positive advice from ESMA on the extension of the AIFMD passport (the “Delegated Act”), which would specify the date when non-EU AIFMs managing EU AIFs will be required to seek authorisation under AIFMD and when AIFMs can market non-EU AIFs on a passported basis in the EU.

However, ESMA suggests in its Advice today that the Commission may “wish to consider waiting until ESMA has delivered positive advice on a sufficient number of non-EU countries” before triggering the legislative procedures outlined by AIFMD to avoid “any adverse market impact” that the decision to extend the passport to only a few non-EU countries might have.

NPPRs

It is worth noting that, within three years of the entry into force of the Delegated Act referred to above, ESMA must issue further advice to the Commission, the European Parliament and the Council as to whether NPPRs should be terminated in all Member States (ie, as early as 2018). Regarding an assessment of the current functioning of NPPRs under the AIFMD, ESMA has also published an opinion in this respect today. In its opinion, ESMA states that the short period of time that has elapsed since the implementation of AIFMD, together with the delays in certain Member States, makes a definitive assessment of the NPPRs difficult and, on that basis, ESMA recommends that there is merit in undertaking a further assessment after a longer period of implementation in all Member States has elapsed.

Comment

ESMA has clearly taken a very considered approach to its duty to assess the relevant third countries in the context of the passport, and to deliver its advice to the European Parliament, the Council and the Commission. In order to develop its opinion and recommendations, it has rigorously examined and applied the requirements of the AIFMD, and has carefully evaluated the input and data received from national competent authorities, non-EU authorities, the IMF and industry in order to support and underpin its methodology and assessment. This is understandable and appropriate in the circumstances, in particular where investor demand for regulated AIF product requires a consistent standard of regulation and oversight with respect to managers and funds operating under the AIFMD brand.