It’s been almost three years since the Alternative Investment Fund Managers Directive (“AIFMD” or “Directive”) – a far-reaching EU-level regulation of managers of any funds marketed in the EU that do not fall within the “UCITS” category – was implemented in most European jurisdictions. In exchange for a panoply of new restrictions and requirements, AIFMD offered – and has delivered – an EU-wide “passport” to managers and funds, allowing them to distribute their funds throughout the EU based on a single registration in the manager’s home country, subject only to local marketing requirements.
As part of the AIFMD package, non-EU managers and funds are shielded from having to comply with the Directive but are also denied the right to use the passport, with this “dual regime” meant to last about two to five years. In the meantime, the only path to access the EU market continues to be through the much-criticized patchwork of national private placement regimes (“NPPRs”).
Although the extension of the passport was initially intended to occur in 2015, this extension was subject to the European Securities and Markets Authority ("ESMA"), which provided a formal opinion on the extension's feasibility and advisability. Ultimately, after gathering information from EU and non-EU stakeholders on the functioning of the existing passport (limited to EU managers and funds), NPPRs and the potential extension of the passport to non-EU countries, ESMA’s opinion was that the passport should not be extended yet.
This is not entirely bad news: When the passport is finally extended, its use will come with a price, in the form of compliance with the provisions of AIFMD. Eventually (by 2018), the Directive calls for the phasing out of NPPRs, at which point the only way to sell non-EU funds will be via the passport, which means all non-EU managers selling funds in the EU will have to comply with AIFMD.
We’re not there yet. For now, ESMA has opted for a country-by-country assessment regarding extension of the passport to specific jurisdictions. To date, ESMA has assessed six jurisdictions (Guernsey, Hong Kong, Jersey, Singapore, Switzerland and the U.S.) and has stated that it considers that no obstacles exist to the extension of the passport to Guernsey and Jersey. Switzerland is in the process of enacting legislation to remove obstacles to its acceptance into the club as well, but for the remaining jurisdictions – Hong Kong, Singapore and the U.S. – no definitive view has been reached. Watch this space.
But even with a positive ESMA assessment, non-EU countries will have to wait until ESMA has delivered positive advice on a “sufficient” number of countries, as ESMA’s opinion also warned against the adverse market impact that a decision to extend the passport to only a few non-EU countries might have. ESMA’s rationale is the lack of hindsight on the effects of AIFMD, given the short time period that has elapsed since its adoption and the unforeseen complications around implementation.
ESMA won’t be able to put off the decision forever – as mentioned, the private placement regimes are supposed to be phased out by 2018, leaving the passport as the only available marketing mechanism. In the meantime, non-EU managers must continue to market AIFs domiciled outside the EU subject to national private placement rules, which impose requirements that vary from fairly light to quasi-AIFMD. Non-EU managers will accordingly need to keep checking the requirements in each jurisdiction in which they market funds and to ensure compliance with the relevant registration, marketing and solicitation rules that might apply.