The Alternative Investment Fund Managers Directive (AIFMD) creates a three-speed Europe. A pan-EU passport for EU domiciled Alternative Investment Fund Managers that authorizes marketing to professional investors, national private placements that must meet minimum regulatory criteria, but as to which national regulation in addition to EU regulation is authorized (so called “gold plating”) and in at least some member states, “reverse solicitations”.

At the moment non-EU funds of non-EU managers (e.g., a Cayman fund of a US domiciled fund manager) are not eligible for passporting. Upon adoption of the AIFMD, the EU determined to task the European Securities Markets Regulator with making the assessments by July 2015: are National Private Placement Regimes working well and whether or not third country managers, such as the U.S. managers and/or Cayman funds, might also gain passporting.

Third-Country Passports

The news here is essentially that sorting out 22 countries identified in Article 67 of AIFMD as candidate jurisdictions for acting as home countries for authorized managers with AIFMD passports will require a country by country analysis. Of the 22, six were attempted by the deadline. But, having worked through only three by the deadline, the European Securities and Markets Authority (ESMA) determined that it needs more time to get a critical mass of “yes” candidates that are eligible for passporting, and that should be accommodated by the EU through legislation. For now, the United States, Cayman, and Hong Kong were looked at but deferred for further study. Guernsey and Jersey were both tapped as “ready now”. Switzerland was evaluated as ready, pending adoption of pending legislation.

The assessment of the United States simply got bogged down on assessing whether the differences between the US regulatory framework and that of the EU under AIFMD are different in material ways. For example the SEC regulation of custody — which does not forbid adviser custody as defined by the SEC seems at odds with the AIFMD requirement of an independent depositary (but might not be, at the end of the day). ESMA also noted that the U.S. law treats mutual funds that are registered under the Investment Company Act differently when it comes to custody than private funds subject to the Advisers Act rule. Further, FINRA and the CFTC also have regulations that ESMA should consider. ESMA noted no presence of remuneration regulation (much to the relief of U.S. fund managers, but potentially a hurdle to obtaining passports for U.S. managers). Also, the SEC is viewed as something of a laggard in adopting international best practices regulation as articulated by the International Organization of Securities Commissions (IOSCO). Interestingly, ESMA expressed concern with respect to parity of access to U.S. markets by EU managers, particularly bank sponsored fund managers that might find the Volker Rule a significant impediment. This lack of parity of market access (i.e., the EU has nothing like the Volker Rule) seemingly weighs against the U.S. case. Ultimately, the U.S. was deferred for further study. However, the degree of difficulty in assessing the United States suggests that it will not gain fast entry into the ranks of the approved third countries eligible to passport.

National Private Placements Assessed

AIFMD took quite a lot longer than anyone expected to be implemented, making the July 2015 deadline too soon for ESMA to express a clear view on National Private Placements. Accordingly, they live until another day, but were not reported on favorably.

National Private Placements were assessed, albeit tentatively, by ESMA, nonetheless. First, ESMA noted that the passport regime is in full force, and widely adopted with 348 AIFMs authorized and passporting (e.g., cross-border marketing a fund formed in the UK, Ireland, or Luxembourg elsewhere in the EU) some 1,678 instances. This led to quite a lot of passporting: 7,868 Alternative Investment Funds passported during the same period, mostly out of the UK, Ireland, and Luxembourg.

National Private Placements, however, are also an interesting story and contrast. During the same period noted above, across the entire EU, 1777 non-EU AIFMs marketed alternative investment funds in all 27 Member States using the National Private Placement regime set out in AFIMD (i.e., Article 42(1)), but of these, 1013 were marketed in the UK. A mere 64 were applications by non-EU AIMF’s to market on a national private placement basis in other member states of the EU other than the UK. This comports with our own anecdotal evidence that national private placements outside of the UK are subject to impediments often referred to as regulatory “gold plating”. But gold plating outside the UK has not proved a show stopper. Of the 4,356 AIFs privately placed in the EU, only 2,657 were privately placed in the UK. Thus, some relatively small number of non-EU firms are very active in non-UK national private placements and have worked through the gold plating. Plainly, it can and is being done. Our anecdotal evidence suggests that the focus of the intrepid managers has been on Germany. It is also clear that nearly all of the non-EU managers are U.S.-based, and almost all of the non-EU funds are based in Cayman, with U.S. funds a distant second place.

Bottom line: ESMA has decided that it needs more time to think about the future of National Private Placements, and that it intends to revisit them and make a new definitive recommendation, eventually. One thing seems clear, ESMA will simultaneously evaluate whether the passport can be extended to third countries.

Given the overall tone of ESMA’s views on the United States as a potential regime for passporting, U.S. firms are well advised to anticipate that they will need to continue to work though utilization of national private placements and/or partnering with EU AIFMs for the foreseeable future