On 19 July 2016, the European Securities and Markets Authority (ESMA) published its latest Advice 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). ESMA concluded that there are no significant obstacles to extending the passport to Canada, Guernsey, Japan, Jersey and Switzerland, but several more countries failed to attain unqualified approval and it is still not clear whether and when the passport regime for non-EU AIFMs and AIFs will come in to force. You can download ESMA's full report for further detail.
The latest report follows on from ESMA’s initial Advice on 30 July 2015 where ESMA recommended that Guernsey, Jersey as well as Switzerland, subject to removing certain obstacles with the enactment of legislation, be given access to the AIFMD third country passport. No definitive view was reached on Hong Kong, Singapore and the United States and ESMA indicated that it required more time to complete its assessment for these countries. For further details see our earlier briefing on ESMA's AIFMD passport opinion.
ESMA has now assessed 12 non-EU jurisdictions against the regulatory criteria to be considered, namely investor protection, competition, potential market disruption and the monitoring of systemic risk. It delivered positive, unqualified advice in respect of Canada, Guernsey, Japan, Jersey and Switzerland, concluding that no significant obstacles exist to the extension of the passport to these jurisdictions.
Qualified approval has been given to Australia, Bermuda, Cayman Islands, Hong Kong, Singapore and the United States, while ESMA noted that the Isle of Man did not have in place any AIFMD-like regime. The main obstacles noted in respect of these jurisdictions are as follows:
Hong Kong and Singapore
ESMA noted that both jurisdictions operate regimes that facilitate the access of UCITS from only certain EU Member States to retail investors in their territories.
ESMA required the Australian Securities and Investment Committee (ASIC) to extend to all EU Member States the ‘class order relief’, which is currently available only to some EU Member States, from some requirements of the Australian regulatory framework.
With respect to the competition and market disruption criteria, ESMA considered there was no significant obstacles for funds marketed by managers to professional investors which do not involve any public offering. However, ESMA considered that in the case of funds marketed by managers to professional investors which do involve a public offering, a potential extension of the AIFMD passport to the US risked an un-level playing field between EU and non-EU AIFMs. The market access conditions which would apply to these US funds in the EU under an AIFMD passport would be different from, and potentially less onerous than, the market access conditions applicable to EU funds in the US and marketed by managers involving a public offering. ESMA suggested, therefore, that the EU institutions considered options to mitigate this risk.
Bermuda and the Cayman Islands
ESMA was not in a position to give definitive Advice with respect to the criteria on investor protection and effectiveness of enforcement since both countries are in the process of implementing new regulatory regimes and the assessment will need to take into account the final rules in place.
Isle of Man
As noted above, ESMA found that the absence of an AIFMD-like regime made it difficult to assess whether the investor protection criterion is met.
In terms of next steps, the Advice 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 the Bahamas, Bermuda, Brazil, British Virgin Islands, Curacao, Mexico, Mauritius, South Africa, South Korea, Thailand 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. Given that only 12 of the 22 relevant jurisdictions identified have been assessed by ESMA, with only 5 receiving an unqualified positive assessment, it is not clear whether and when the passport regime for non-EU AIFMs will come into force. It is also not possible to predict whether the UK, which has voted to leave the EU, would pass ESMA’s assessment, bearing in mind that ESMA advised the EU authorities to delay their decision on the application of the passport to the US until such time as conditions which might lead to a distortion of competition were addressed – the terms of the future trade relationship between the UK and the EU could be crucial to this.
An additional uncertainty hanging over this is the provision in Article 68 of the AIFMD under which, if the passport for non-EU AIFMs and AIFs is brought into force, consideration is to be given after 3 years to terminating the national private placement regimes so that passporting becomes the only and mandatory way of marketing AIFs to professional investors in the EU. Any such decision would be about 5 years away on current timetables. At least until then it seems clear that non-EU AIFMs will be able to market in the EU under Article 42 of the AIFMD, although ESMA unhelpfully suggests that there may be some element of doubt about this.