When the pan-European Alternative Investment Fund Managers Directive was being negotiated, some argued that it was a protectionist measure which was likely to – perhaps was even designed to – make it harder for fund managers outside Europe to access European investors. Quite why European law-makers would want to deny their own institutional investors the opportunity to access the diversification and returns available from foreign funds was not entirely clear, but there was, no doubt, a view that EU regulation protected investors from themselves, and they couldn't be trusted to invest in funds managed by less well regulated managers.
Whether the AIFMD constitutes good regulation which makes EU funds materially safer than their foreign counterparts, especially those from countries with their own regulatory regime, is, to say the least, a moot point – and one which was not accepted by several foreign regulators, particularly those in the US. After considerable negotiation, a process was written into the Directive designed to give non-EU fund managers access to the same marketing "passport" as their EU based equivalents, provided (and it was a significant proviso) that the foreign manager submitted to the AIFMD's regulatory rules and became authorised in an EU member state for that purpose. There is a similar delayed process before EU fund managers with non-EU fund vehicles can use the marketing "passport", even though they are already subject to almost all the relevant regulation.
The process leading to this "third country passport" gets going in earnest next week. The 2011 Directive says that by 22 July 2015 ESMA, the pan-European regulator, must deliver advice to the European Commission on whether the passport should be introduced, making a judgement based on a number of different criteria, including investor protection and ability to monitor systemic risk. ESMA is mandated to advise in favour of this, so long as there are no "significant obstacles" to achievement of the specified policy goals. Then, within three months of a positive opinion from ESMA, the Commission must introduce the passport.
The EVCA is among those who have made submissions to ESMA. It encourages adoption of the passport, but also points out that there will be significant issues in establishing it as a viable route to market for many third country fund managers. The problems are many and varied: including the fact that, just as is the case for EU managers, no special "sub-threshold" regime is currently anticipated (not even the passport for sub-threshold EU managers of qualifying venture capital funds) and opting in to the passport is regarded by most small managers, particularly those based outside the EU, as an unreasonable burden; that there is a convoluted and uncertain procedure to determine which of the national EU regulators will authorise and supervise a third country manager; that the AIFMD includes measures which seem out of kilter with global norms, such as prescriptive remuneration rules, and burdensome capital requirements; and it necessitates dual regulation for those based in countries which already have extensive oversight of alternative fund managers, a very unattractive proposition. Most of these problems arise out of the basic structure of the AIFMD rather than being something which can readily be changed in the course of introducing the third country passport.
All of this, the private equity industry argues, means that – even if a workable passport is introduced later this year, at least for some third country managers – it is essential that national regimes allow marketing to continue under private placement rules for both non-EU fund managers and sub-threshold EU managers. Although continuation of these national regimes is, at least for now, a matter for domestic policy-makers to decide, ESMA and the Commission are encouraged to use their influence to ensure that European investors are not denied the opportunity to invest in non-EU funds, or indeed European funds which are managed by non-EU managers.
It remains entirely unclear whether these calls will be heeded, but their importance should not be under-estimated. Those who argued that the AIFMD was not a protectionist measure, and would ultimately establish a level playing field for EU and non-EU based managers wishing to attract European investors, still have some work to do to prove that contention – and much of that work will need to be done in the next few months.
The latest EVCA submission to ESMA is available here.