On July 19, 2016, the European Securities and Markets Authority (ESMA) published its advice to the European Commission, the European Parliament and the Council of the European Union on the application of the AIFMD passport to non-EU AIFMs and AIFs (the “Advice”).1 In its Advice, ESMA considered the extension of the AIFMD marketing passport to 12 non-EU countries (i.e., “third countries”).
This Sidley Update follows on from our August 2015 Update,2 in which we discussed ESMA’s previous advice on the possible extension of the AIFMD passport to six non-EU countries (the Previous Advice).3 In its Previous Advice, ESMA gave a positive assessment in respect of Guernsey, Jersey and (pending an amendment to local law) Switzerland, while recommending that any extension to the United States, Singapore and Hong Kong be delayed.
This Sidley Update discusses ESMA’s new Advice, its implications for non-EU AIFMs and some of the key next steps.
The Non-EU Countries Assessed
As invited to do so by the European Commission,4 ESMA has considered the following 12 non-EU countries in its Advice:
- United States;
- Hong Kong;
- The Cayman Islands;
- The Isle of Man; and
As with ESMA’s Previous Advice, each country has been assessed on a case-by-case basis against the criteria of investor protection, market disruption, competition and monitoring of systematic risk. ESMA has also considered how existing Memoranda of Understanding (MoUs) between the relevant non-EU countries and EU Member States have been operating.
Summary of the Advice
In its Advice, ESMA has given positive assessments for Guernsey, Jersey, Switzerland, Canada, Japan, and, subject to an amendment to local law, Australia. This means that, in ESMA’s view, there are no obstacles to the AIFMD third-country passport being extended to these countries.
The United States, Hong Kong and Singapore have also all been granted some form of positive assessment, although these cases are more nuanced and are discussed in greater detail below.
Bermuda, the Cayman Islands and the Isle of Man have not received a positive assessment at this stage and are also discussed below.
Limited Positive Assessments
The United States has received a qualified positive assessment from ESMA as ESMA has recommended that in relation to U.S. AIFs (as opposed to AIFMs) the EU legislators consider granting the AIFMD passport only to:
- U.S. funds dedicated to professional investors marketed in the EU by managers not involving any public offering;
- U.S. funds which are not mutual funds under the 1940 Investment Company Act; and/or
- U.S. funds which restrict investment to professional investors.
ESMA has given a positive assessment in respect of Hong Kong, but only for AIFs and not AIFMs.
Like Hong Kong, ESMA has granted a positive assessment in respect of Singapore, but only in relation to AIFs and not AIFMs.
Countries Not yet Positively Assessed
ESMA has not given a positive assessment for Bermuda at this point in time due to two key events delaying ESMA’s ability to form a definitive opinion:
- the publication of the final version of the new AIFMD-like regime being implemented in Bermuda; and
- the completion of a review by the Bermuda Monetary Authority of the Bermudian investment funds and management framework.
The Cayman Islands
Similarly to Bermuda, ESMA has identified three key events which are delaying its ability to form a definitive opinion as to the Cayman Islands:
- the publication of the final version of the new AIFMD-like regime being implemented in the Cayman Islands;
- the continued development and implementation of a macro-prudential policy framework by the Cayman Islands Monetary Authority (CIMA) (which is expected to take between 12-18 months); and
- the implementation of a pending legislative amendment granting CIMA greater regulatory enforcement powers.
The Isle of Man
ESMA’s primary objection to giving a positive assessment to the Isle of Man is that it has been difficult to assess the investor protection criterion as:
- no AIFMD-like regime exists in the Isle of Man; and
- no IMF Financial Sector Assessment Program has been completed.
The Implications of ESMA’s Assessment
As noted in our August 2015 Update,5 if the AIFMD passport is “activated” in respect of the countries for which a positive assessment has been made (each, a Positive Country):
- an EU AIFM managing an AIF domiciled in a Positive Country would be able to market that AIF throughout the EU on the basis of the AIFMD marketing passport; and
- an AIFM from a Positive Country:
- which manages non-EU AIFs domiciled in a Positive Country may apply to the relevant EU Member State regulator6 for full authorisation under (and be subject to full compliance with) the AIFMD and may then market those non-EU AIFs throughout the EU on the basis of the AIFMD marketing passport; and
- which manages EU AIFs must apply to the relevant EU Member State regulator for full authorisation under (and be subject to full compliance with) the AIFMD; it will then also be able to market those EU AIFs throughout the EU on the basis of the AIFMD marketing passport.
Should the Commission decide not to wait for the remaining non-EU countries to be assessed by ESMA and decide instead to “activate” the passport for the Positive Countries to date, this would in theory make those Positive Countries more attractive as AIF domiciles for EU AIFMs, since such EU AIFMs would be able to market AIFs from those Positive Countries throughout the EU using the AIFMD passport.
As for AIFMs from Positive Countries, it remains to be seen whether they would wish to become fully authorised under the AIFMD (in addition to already being registered with their home country regulators) and be subject to AIFMD remuneration restrictions, single depositary and other rules in order to be able to market their funds throughout the EU using the AIFMD passport.
Importantly, the adoption of the delegated act by the Commission to activate the passport would trigger the three-year period at the end of which ESMA is to issue: (i) an opinion on the functioning of the third-country passport; and (ii) advice on the potential termination of the existing national private placement regimes.
Since Singapore and Hong Kong have not received a positive assessment in respect of AIFMs, and Bermuda, the Cayman Islands and the Isle of Man have not received a positive assessment at all at this point in time, AIFMs from these countries will not be able to market their AIFs throughout the EU using the AIFMD passport. It remains to be seen how the EU legislators consider the options proposed by ESMA in respect of granting the passport to the United States.
As a separate point, since much of ESMA’s review has focused on whether the assessment criteria are met by the non-EU country to an equivalent level as achieved under the AIFMD, it appears that the United Kingdom would be in a prime position to be assessed positively in a post-Brexit scenario since it has been operating the AIFMD framework for a number of years.
The Commission indicated in a letter to ESMA in December 2015,7 that it would take a decision as to the activation of the third country passport once “a sufficient number of countries have been appropriately assessed.” Now that some form of positive assessment has been given in respect of nine states, it remains to be seen whether the Commission will take this next step and draft a delegated act to activate the third-country passport for these countries.
ESMA is to continue its work on the assessment of the next batch of countries to be considered for the AIFMD passport, but with the Commission’s review of AIFMD in July 2017 fast approaching, it will be interesting to see the interplay between that review and ESMA’s ongoing work of assessing the remaining countries.
1 European Securities and Markets Authority, ESMA advice to the European Parliament, the Council and the Commission on the application of the AIFMD passport to non-EU AIFMs and AIFs (July 18, 2016), available here.
2 Sidley Update, AIFMD 2015 Update – Implications of ESMA’s Opinion and Advice on the AIFMD Passport for Non-EU Managers and Funds, available here.
3 European Securities and Markets Authority, ESMA’s advice to the European Parliament, the Council and the Commission on the application of the AIFMD passport to non-EU AIFMs and AIFs (July 30, 2015), available here.
4 Letter from the European Commission to the European Securities and Markets Authority (December 17, 2015), ESMA’s opinion and advice to the European Parliament, the Council and the Commission on the AIFMD passport, available here.
5 See footnote 2.
6 The regulator would be that of the AIFM’s EU “Member State of reference,” the AIFMD provides a test as to how to determine which EU Member State should be that AIFM’s EU Member State of reference.
7 See footnote 4.
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