On 19 July 2016, the European Securities and Markets Association (ESMA) delivered its long-awaited (and overdue) advice to the European Commission, Parliament and Council on the extension of the passport under the EU Alternative Investment Fund Managers Directive (AIFMD) to non-EU countries (so called “third countries”).
The third-country passport would allow managers in third countries to manage and market funds throughout the EU, in exchange for compliance with the AIFMD. Currently, passporting is only available to EU managers, with third-country managers wishing to market their funds in the EU required to conduct marketing in accordance with Member States’ fragmented, national private placement rules (unless managers are able to rely on so-called “reverse solicitation”).
A more detailed analysis of ESMA’s advice will be published by Fried Frank, but for now fund managers should note the following headline points:
- ESMA advises that there are no significant obstacles to extending the passport to Canada, Guernsey, Japan, Jersey and Switzerland.
- ESMA is supportive of extending the passport to Hong Kong, Singapore, Australia and the United States, subject to certain caveats.
- ESMA is not yet in a position to provide definitive advice with respect to Bermuda, the Cayman Islands or the Isle of Man.
With respect to the United States in particular, ESMA is of the view that the extension of the passport risks creating an unlevel playing field between EU and non-EU managers as regards market access. ESMA considers that there is a disparity between market access conditions which would apply to US funds marketed to professional investors in the EU under an extended AIFMD passport and market access conditions which would apply to EU funds marketed to professional investors in the US. This is primarily due to certain registration requirements under the US regulatory framework which go beyond those in Europe. ESMA does, however, concede that in the case of funds marketed by managers which do not involve a public offering, market access conditions are broadly comparable. ESMA invites EU legislators to consider a number of options for extending the passport to the US, designed to mitigate this apparent risk, which include:
- granting the passport only to those US funds dedicated to professional investors to be marketed in the EU by managers not involving any public offering;
- granting the passport only to those US funds which are not mutual funds (under the 1940 Investment Company Act); and
- granting the passport only to those US funds which restrict investment to professional investors.
ESMA’s advice will now be considered by the European Commission, Parliament and Council. It remains to be seen what the outcome of this will be and whether the passport will be extended to Canada, Guernsey, Japan, Jersey and Switzerland, before it is extended to the United States (amongst others).