On 31 July 2015, the European Securities and Markets Authority (ESMA) published its Advice on the application of the AIFMD (Alternative Investment Fund Managers Directive) passport to non-EU Alternative Investment Fund Managers (AIFMs) and Alternative Investment Funds (AIFs) and its Opinion on the functioning of the passport for EU AIFMs and the national private placement regimes (NPPRs). The Advice and Opinion, required under AIFMD, have been sent to the Commission, Parliament and Council for their consideration on whether to activate the relevant provision in the AIFMD extending the passport through a Delegated Act.
ESMA Advice – Extension of AIFMD Passport to non-EU AIFMs and AIFs
ESMA conducted a country-by-country assessment, as this allowed it flexibility to take into account the different circumstances of each non-EU jurisdiction regarding the regulatory issues to be considered i.e. investor protection, competition, potential market disruption and the monitoring of systemic risk.
ESMA assessed six jurisdictions: Guernsey, Hong Kong, Jersey, Singapore, Switzerland and the United States of America. These were selected based on a number of factors including the amount of activity already being carried out by entities from these countries under the NPPRs, EU national authorities’ knowledge and experience of dealing with their counterparts and the efforts by stakeholders from these countries to engage with ESMA’s process.
The Advice concludes that no obstacles exist to the extension of the passport to Guernsey and Jersey, while Switzerland will remove any remaining obstacles with the enactment of pending legislation, in particular the provisions on cooperation under the Federal Act on Stock Exchanges and Securities Trading (SESTA). This could potentially pave the way for these three countries to be included in the first wave of third country passports.
No definitive view has been reached on the other three jurisdictions due to concerns related to competition, market disruption, regulatory issues and a lack of sufficient evidence to properly assess the relevant criteria.
As mentioned above, the Advice and Opinion will now be considered by the European Commission, Parliament and Council.
In the meantime, ESMA will continue to work on its assessment of other non-EU countries not covered in this advice with a view to delivering further submissions in the coming months. These include Australia, Bahamas, Bermuda, Brazil, British Virgin islands, Canada, Cayman Islands, Curacao, Hong Kong, Isle of Man, Japan, Mexico, Mauritius, Singapore, South Africa, South Korea, Thailand, United States of America, and the US Virgin Islands. 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 its efforts to agree a MoU with the authorities concerned.
ESMA’s recommendation is that it has to deliver positive advice on a sufficient number of non-EU countries, before a passport should be introduced in order to avoid any adverse market impact that a decision to extend the passport to only a few non-EU countries might have.
ESMA Opinion – Functioning of the EU AIFMD passport and NPPRs
In relation to the timing of the assessment of the functioning of the EU passport and the NPPRs, ESMA considers that the delay in the implementation of the AIFMD together with the delay in the transposition in some Member States make a definitive assessment difficult. ESMA would see merit in the preparation of another opinion on the functioning of the passport and the NPPRs after a longer period of implementation in all Member States (although the latter is linked to the decision to be taken by the European Parliament, the Council and the Commission on whether to extend the passport to one or more non-EU countries in the meantime).
However, even at this early stage, ESMA has identified several issues in relation to the use of the EU passport. These issues include:
- divergent approaches with respect to marketing rules, including heterogeneity of fees charged by the NCAs where the AIFs are marketed and the definition of what constitutes a “professional investor”;
- varying interpretations of what activities constitute “marketing” and “material changes” under the AIFMD passport in the different Member States.
With that in mind, ESMA sees merit in greater convergence in the definition of these terms. Nevertheless, ESMA is of the view that there is insufficient evidence to indicate that the AIFMD EU passport or NPPRs have raised major issues in terms of the functioning and implementation of the AIFMD framework.
Its preliminary view is that, given the short time period that has elapsed since the implementation of the AIFMD in Member States, a definitive assessment of their functioning is difficult and would recommend preparing a further opinion after a longer period.