The European Securities and Markets Authority (“ESMA”) has opened the door to extending the passport under the Alternative Investment Fund Managers Directive1 (“AIFMD”) to a limited number of non-EU managers and funds marketing to professional investors in the EU. It has also identified several issues regarding the functioning of the AIFMD EU passport which may lead to important changes to AIFMD in the medium-term.
These developments have occurred in the context of ESMA’s publication of its long- awaited:
- advice on the extension of the AIFMD management and marketing passports to non-EU Alternative Investment Fund Managers (“AIFMs”) and non-EU Alternative Investment Funds (“AIFs”), (“Advice”); and
- opinion on the functioning of the marketing passport for EU AIFMs and the national private placement regimes (“NPPRs”), (“Opinion”).
ESMA has sent both its Opinion and Advice to the European Commission, Parliament and Council (the “Institutions”) for their consideration.
Under AIFMD, EU AIFMs managing or marketing EU AIFs benefit from a passport which allows them to carry out managing and/or marketing activities throughout the EU. In contrast, EU AIFMs marketing non- EU AIFs and non-EU AIFMs managing or marketing AIFs within the Member States remain subject to the NPPRs.
AIFMD required ESMA to provide an opinion on the functioning of the AIFMD passport for EU AIFMs and on the NPPRs by 22 July 2015. It also required it to provide its advice on the extension of the AIFMD passport to non-EU AIFMs and AIFs. According to AIFMD, before ESMA can issue positive advice on the extension of the passport, it must consider that there are no significant impediments “regarding investor protection, market disruption, competition and the monitoring of systemic risk”.
On 7 November 2014 ESMA launched a Call for Evidence on the AIFMD passport and third country AIFMs (“Call”). In its Call, ESMA signalled that it has decided to opt for a country-by-country assessment of the potential extension of the AIFMD passport, so as to allow for more flexibility and for a distinction to be made between the very different characteristics of non- EU countries in terms of: the demand for the passport; the access to the markets of these non-EU countries for EU funds and managers; and their regulatory framework as compared to the AIFMD.
For further information see our earlier briefing here.
The Opinion: AIFMD EU Passport and NPPRs
According to ESMA, the delay in implementing AIFMD together with the delay in transposing AIFMD in some Member States made it difficult for it to form a definite assessment of the functioning of the passport for EU AIFMs and the NPPRs. While it concluded that overall there is insufficient evidence to indicate any significant problems regarding these matters, ESMA stated that it would see merit in the preparation of another opinion on the functioning of the passport after a longer period of implementation in all Member States.
Significantly, ESMA also identified several issues in relation to the use of the EU passport, which it suggests merit greater convergence in the definition of the terms used. These include:
- divergent approaches with respect to marketing rules, including inconsistency of fees charged by the national competent authorities where the AIFs are marketed and the definition of what constitutes a “professional investor”; and
- varying interpretations in the different Member States as to what activities constitute “marketing” and what qualifies as “material changes” to the contents of the initial passport notification.
From an Irish perspective, it is noteworthy that several of the responses to ESMA’s Call, which were published as an annex to the Opinion, commented favourably on Ireland’s approach to the AIFMD EU passport, observing that, unlike certain other jurisdictions, Ireland:
- does not apply fees and charges for exercising the marketing passports;
- honours passport notifications from other Member States without imposing additional requirements or fees or requiring additional time or requesting additional information.
The Advice: Passport Extension
ESMA’s advice focused on the potential extension of the passport for managers and funds in the US, Guernsey, Jersey, Hong Kong, Switzerland, and Singapore: these being the only jurisdictions in respect of which ESMA had a sufficient level of information for the purposes of its assessment methodology.
ESMA concluded that there are no significant obstacles to the extension of the passport to Guernsey and Jersey, while Switzerland will remove any remaining obstacles once it has enacted pending legislation.
In contrast, ESMA advised delaying the extension of the passport to the US, Hong Kong and Singapore. Specifically, ESMA advised that:
- the decision on the extension of the passport to US managers should be delayed until such time as conditions which might lead to a distortion of competition are addressed (including market access conditions and reporting obligations). As regards the investor protection criterion, ESMA could have benefitted from having more time to assess the detailed information it received on the US regulatory framework;
- it needed more time to analyse the materiality of potential differences between the Hong Kong regulatory framework and AIFMD, as it did not have complete information on that framework. It is also unclear whether there is a level playing field between EU and non-EU AIFMs as regards market access;
- there was insufficient evidence to assess the extent to which several of its assessment criteria are fulfilled in the case of Singapore.
According to ESMA, it will continue to work on its assessment of other non-EU countries not covered in its Advice, with a view to delivering further submissions to the Institutions in the coming months.
Comment and Next Steps
Regarding the functioning of the EU passport, the issues raised by ESMA may lead to changes in the AIFMD regulatory framework in the medium term:
several responses to the Call considered that the issues raised by ESMA were (significantly) inhibiting the passport’s effectiveness. In this respect, it is worth noting that AIFMD requires the European Commission to start a general review of AIFMD by 22 July 2017, which may result in a proposal for AIFMD II.
ESMA’s positive advice on the extension of the AIFMD passport to Guernsey, Jersey and potentially Switzerland means that the Commission now has three months in which to adopt a delegated act providing for the passport’s extension. The Parliament and Council then have a further three months in which to object to the delegated act.
Notwithstanding ESMA’s positive advice, it is not at all clear that the passport will in fact be extended to Guernsey, Jersey or Switzerland in the immediate future. First, in its Advice ESMA itself suggests that the Institutions may wish to consider waiting until it delivers positive advice on a sufficient number of non-EU countries before extending the passport, taking into account such factors as the potential impact on the market that a decision to extend the passport might have. Second, it is unclear whether the Commission has the power to extend the passport on a country-by-country basis under AIFMD.
For other non-EU jurisdictions, it appears to be business as usual for the moment and the majority of non-EU managers seeking to market funds in Europe must continue to comply with the NPPRs. While ESMA intends to continue assessing non- EU countries on a batch basis, it is unclear how long this process will take. At this stage, it is far from certain whether or when ESMA will recommend the passport’s extension to all major asset management and fund jurisdictions.
On the domestic front it is worth noting that, on 15 June 2015, the Central Bank of Ireland (“Central Bank”) published the fourteenth edition of its AIFMD Q&A, in which it stated that Irish AIFs established as professional investor funds or qualified investor AIFs may continued to be managed by non-EU AIFMs under the Central Bank’s existing transitional arrangements until at least 22 October 2015. After this time “this position will be revisited and, if necessary, revised to align it with the European Commission’s decision and any transitional arrangements provided”. In view of the fact that, for the moment, any Commission delegated act to extend the AIFMD passport can only apply to Jersey and Guernsey and shortly, Switzerland, and that it will then be subject to a three month waiting period, the Central Bank may decide to extend the application of these transitional arrangements.
Overall, the general satisfaction with the manner in which Ireland has implemented AIFMD expressed in the responses to ESMA’s Call, is very encouraging and provides a further basis for Ireland’s position as Europe’s leading hedge fund domicile and the world’s largest hedge fund administration centre.