On 30 July 2015, the European Securities and Markets Authority (‘ESMA’) published two papers relevant to the Alternative Investment Fund Managers Directive (‘AIFMD’): an opinion on the functioning of the Passport and National Private Placement Regimes; and advice on the possible extension of the Passport to non-EEA (‘third country') jurisdictions.
AIFMD shook up the European funds market when it was finally implemented in July 2013 and alternative investment fund managers (‘AIFMs’) had to get to grips with the routes available for marketing alternative investment funds (‘AIFs’) in the EEA – being the Passport (where available) or the National Private Placement Regimes. The Passport allows AIFs to be marketed to professional investors across the EEA but is currently only available to EEA AIFs with EEA AIFMs.
CMS has published both A Guide to Passporting under AIFMD and a Guide to Private Placement of Funds to help fund managers steer through the rules and open up their funds to one of the largest markets in the world for capital fundraising.
A provision included in AIFMD obliged ESMA to provide the EU legislators with advice on the extension of the AIFMD Passport to third country AIFs and AIFMs. ESMA’s research in preparation for giving this advice included a Call for Evidence published in December 2014 asking for interested parties to submit their views, to which CMS was one of the respondents.
ESMA’s advice considered whether there existed any significant obstacles to the extension of the Passport to third countries in relation to: investor protection; market disruption; competition; and the monitoring of systemic risk. The advice published by ESMA on 30 July related to only six jurisdictions: Guernsey, Hong Kong, Jersey, Singapore, Switzerland and the United States. The list is a reflection of the short timeframe between the full implementation of AIFMD and the date by which ESMA was required to give its advice.
Guernsey, Jersey and Switzerland
ESMA gave positive opinions on Guernsey and Jersey and, subject to the implementation of proposed legislative changes on 1 January 2016, Switzerland. Guernsey and Jersey both adopted a strategy of allowing local fund managers to opt-in to an authorisation and supervisory regime that effectively copies AIFMD into their domestic laws. This strategy allowed ESMA to quickly and easily conduct a “gap analysis” with respect to AIFMD and conclude that there were no issues.
After a positive opinion from ESMA, the European Commission is supposed to specify within three months whether and when the AIFMD Passport will be extended. However, ESMA has suggested that this decision be delayed until ESMA has delivered positive advice on a sufficient number of countries to avoid any adverse impacts on markets through a piecemeal extension of the Passport. There is therefore no certainty on if or when the Passport may be extended to those third countries.
ESMA did not give a positive opinion on Hong Kong, Singapore and the United States.
ESMA wrote that it needed more time to properly consider whether the United States met the criteria that ESMA had set. This is not surprising given the maturity and complexity of the U.S. regulatory regime. Nonetheless, the analysis that it had been able to conduct revealed the absence under U.S. rules of the requirement for a remuneration code for fund managers comparable to that required by AIFMD. This gap was highlighted by respondents to ESMA’s Call for Evidence, who suggested that the implementation of AIFMD-like remuneration rules for U.S. fund managers might be an obstacle to the successful extension of the Passport to that country. Seemingly, however, the most significant factor in ESMA’s opinion was a concern that extending the Passport to the U.S. would create an unlevel playing field for market access, as it would be easier for U.S. fund managers to market their funds in the EU than for EU fund managers to market funds in the U.S.
Again, ESMA noted that it needed more time and information to develop a proper opinion on Hong Kong. ESMA reports that it is still in contact with the Hong Kong Securities and Futures Commission with a view to gathering more comprehensive information on the Hong Kong regulatory regime. ESMA does report concerns, similar to those it has in relation to the U.S., that the extension of the Passport would create an unlevel playing field.
ESMA again said that it needed more time to properly assess the regulatory regime. ESMA noted the scarcity of information regarding cooperation between EU regulators and the Monetary Authority of Singapore (‘MAS’) and noted feedback that MAS was perceived to act as a gatekeeper for authorisation but then not to take a significant ongoing monitoring role. As with the U.S. and Hong Kong, ESMA thought that extension of the Passport to Singapore could result in unequal opportunities for market access between Singaporean fund managers and EU AIFMs.
Functioning of the existing Passport and National Private Placement Regimes
ESMA’s also issued an opinion on the current functioning of the Passport and the National Private Placement Regimes. In relation to both regimes, ESMA considered that the timeframe between full implementation of AIFMD (yet to be transposed into national law in some jurisdictions) and the publication of its opinion made a definitive assessment difficult. We can therefore expect a further opinion to be commissioned in due course.
In relation to the Passport, ESMA noted divergent approaches taken by different Member States, including with respect to charging fees by host regulators and including with respect to the interpretation of key concepts such as ‘professional investor’, ‘marketing’ and ‘material change’. ESMA sees merit in greater convergence and we can presumably expect clarification from ESMA in due course.
In relation to the National Private Placement Regimes, ESMA considered that there was insufficient evidence to indication that the National Private Placement Regimes had raised any major issues with respect to AIFMD. This is good news since it suggests that the National Private Placement Regimes are unlikely to be abolished in the short term.
In its advice on Hong Kong, Singapore and the United States, ESMA has touched upon political issues such as market access and free trade that may take a concerted political effort (if the will exists) to address. While Guernsey, Jersey and Switzerland, on the other hand, will be relieved to have received a positive opinion, ESMA’s suggestion to delay the extension of the Passport pending further positive opinions being given renders the victory rather hollow for the time being. In relation to the existing Passport, measures from ESMA to assist in standardising the approach taken to key concepts across the Member States will be welcomed.
In the meantime, fund managers outside the EU and EU AIFMs marketing non-EU funds will need to continue to rely on National Private Placement Regimes and European investors’ choice will continue to be restricted. However, it is good news that the National Private Placement Regimes are likely to continue to be available in the short term for AIFMs unable or unwilling to submit to the full scope of AIFMD.