On 18 July 2016 the European Securities and Markets Authority (ESMA) published its advice to the European Parliament, the Council and the Commission on the application of the Alternative Investment Fund Managers Directive (AIFMD) passport to non-EU Alternative Investment Fund Managers (AIFMs) and Alternative Investment Funds (AIFs) in twelve non-EU countries: Australia, Bermuda, Canada, Cayman Islands, Guernsey, Hong Kong, Isle of Man, Japan, Jersey, Switzerland, Singapore and the United States.

ESMA assessed each country to determine if the memorandum of understanding with the local non-EU regulator is working efficiently (assuming there is one) and whether there are significant obstacles regarding investor protection (including depositary safekeeping requirements), market disruption, competition, and the monitoring of systemic risk.

No Significant Obstacles: Following its assessment, ESMA has taken the view that there are no significant obstacles impeding the application of the AIFMD passport to Switzerland, Guernsey, Jersey, Japan and Canada.

Qualified Opinions: ESMA gave a qualified opinion in relation to Hong Kong, Singapore, Australia and the United States.

It is curious that ESMA focussed on accessing the retail market when assessing EU AIFMs marketing funds into these countries on a reciprocal basis because AIFMD explicitly deals with professional investors only. ESMA emphasized the differential regimes under United States law relating to “public offerings” (which private funds marketing in the US typically seek to avoid) as opposed to private offerings and the requirement and expense of local filing requirements. ESMA expressed the view that the EU legislature may wish to consider granting the passport to US domiciled funds but only to (i) those targeting professional investors which exclude a US “public offering”; (ii) funds that are not registered as mutual funds under the Investment Company Act of 1940; and/or (iii) funds that restrict their marketing activities locally and in the EU to “professional investors” as defined under AIFMD.

No Definitive Advice: For Bermuda and the Cayman Islands, ESMA was unable to provide definitive advice until a final version of an AIFMD-like regime is implemented in those countries. ESMA noted that both countries intend to implement legislation later this year which will provide additional enforcement powers but ESMA cannot complete its assessment of the effectiveness of enforcement in those jurisdictions until legislation is adopted. Assuming both countries implement AIFMD compliant legislation, it seems that a positive opinion will be forthcoming.

ESMA was of the view that the Isle of Man lacked the same degree of investor protection mechanisms as other countries and declined to give a view on the effectiveness of enforcement due to the “nature and timeline of the assessment”. The Isle of Man is therefore left somewhat in limbo.

ESMA is proceeding to assess other jurisdictions and, where required, agree a memorandum of understanding which is a pre-requisite for AIFMD compliance.

Next Steps for Countries on the “Positive List: This will depend on the approach that the EU legislature adopts. If the EU Commission decides that passporting will only be activated when definitive opinions have been delivered on all relevant countries or a sufficient number of countries then there may be further delay before activation of the passport. On the other hand, if the passport is activated for the countries that have received positive opinions then this would be a step forward albeit that it would place AIFMs and AIFs in the approved countries at a competitive advantage when compared with counterparts in countries for which assessments are ongoing.

If a passport is granted in respect of a particular country this means that (i) EU AIFMS may manage and market funds domiciled in that non-EU country on a passported basis in the EU; and (b) AIFMs regulated in the non-EU approved country may manage AIFs domiciled there or in the EU and apply to the relevant EU regulator for full authorisation under AIFMD. Following authorisation, the non-EU AIFM would be able to market those funds on a passported basis into the EU.

The crux of the matter for non-EU AIFMs is that in both cases they must apply for full authorisation under AIFMD to the appropriate EU regulator which may prove an unattractive proposition.