The Alternative Investment Fund Managers Directive (AIFMD) required ESMA to review, by July 2015, how the arrangements under AIFMD for marketing AIFs have worked, with an assessment of the National Private Placement Regimes (NPPR) and advice on whether to introduce a passport for non-EU AIFMs and for the marketing of non-EU AIFs. ESMA's advice urges the European Commission not to make hasty changes.

ESMA's task

Article 67 of the AIFMD requires ESMA to issue to the European Parliament, Council and Commission:

  • an opinion on:
    • how the passport has functioned for EU AIFMs managing and/or marketing EU AIFs;
    • how EU AIFMs have marketed non-EU AIFs;
    • how non-EU AIFMs have managed or marketed AIFs under the NPPR; and
  • advice on the application of the passport to:
    • the marketing of non-EU AIFs by EU AIFMs; and
    • the management or marketing of AIFs by non-EU AIFMs.

Following ESMA's views, the Commission could decide to implement a passport for marketing of non-EU AIFs and management and marketing of AIFs by non-EU AIFMs to operate initially alongside NPPR and potentially, from 2018 onwards, to replace the NPPR regime.

What ESMA did

ESMA sought views from market participants in November 2014 and published responses it received in January 2015. Broadly, respondents:

  • supported the passport in principle;
  • said the NPPR can work well and supported continuing it;
  • noted obstacles in the current NPPR caused by differences in conditions and fees between Member States;
  • noted that because of differing interpretations, or lack of regulatory guidance, some firms are not willing to take the risk on any contact with investors in certain Member States even where it is clear the contact is reverse solicitation;
  • called for consistent NPPR;
  • suggested there should be no additional fees, conditions or gold-plating;
  • encouraged a consistent "depositary-lite" regime; and
  • demanded clarity on the scope of "marketing" and "reverse solicitation".

ESMA's advice

On 30 July, ESMA published its advice and opinion, with covering letters to the EU authorities.

Main messages

ESMA's predominant view is that it is too soon after implementation of the AIFMD to give a definitive opinion on how the various NPPR have been working, and whether there should be a third-country passport, and ESMA recommends a further report after a longer period. It assessed Guernsey, Hong Kong, Jersey, Singapore, Switzerland and the US. It concluded the passport could be extended now to Jersey and Guernsey, and also to Switzerland as legislative change there will remove any outstanding hurdles. However, it is still working through certain concerns in relation to the other three jurisdictions and wants to assess several more. In view of this, it thinks the Commission may delay extending the passport until it can introduce it for a "batch" of jurisdictions.

What ESMA assessed

ESMA chose the six jurisdictions which it felt were the most active jurisdictions in terms of marketing to EU residents, and with which many of the EU regulators are used to dealing. It assessed each jurisdiction, as required by the AIFMD, in terms of the existence and effectiveness of Memoranda of Understanding (MoUs), Financial Action Task Force assessment, investor protection, competition, potential market disruption and the monitoring of systemic risk.

ESMA explains how it has assessed each element, and the difficulties of making assessments where the third-country laws differ significantly from the AIFMD model.

A country-by-country approach

ESMA explains it felt a country-by-country approach was appropriate and sets out how, despite significant work, it has reached a definitive opinion on only three of the six countries. It also points out that in some cases, its advice cannot be considered "positive", which is one of the prerequisites for the Commission to adopt delegated acts to bring the relevant articles of the AIFMD into force. Moreover, ESMA intends to continue its exercise for many more jurisdictions, until it has surveyed all non-EU countries it thinks are relevant.

For this reason, ESMA recommends the Commission may wish to wait until there are enough positive advices, given the extent of the changes that introducing a third-country passport will bring.

To indicate the scale of work, ESMA has identified the following non-EU countries as the domicile of non-EU AIFMs that market AIFs in the Member States examined and/or domiciles of non-EU AIFs marketed in the Member States examined:

  • Australia
  • Bahamas
  • Bermuda
  • Brazil
  • British Virgin islands
  • Canada
  • Cayman Islands
  • Curacao
  • Guernsey
  • Hong Kong
  • Isle of Man
  • Japan
  • Jersey
  • Mexico
  • Mauritius
  • Singapore
  • South Africa
  • South Korea
  • Switzerland
  • Thailand
  • USA
  • US Virgin Islands

At present, ESMA feels it has sufficient information to make an assessment in relation only to six jurisdictions.

A regulatory approach

ESMA also points out that its advice has considered solely regulatory issues, and that the Commission is likely also to wish to consider tax issues and anti-money laundering and counter-terrorist finance regulation in the relevant jurisdictions insofar as ESMA's assessment has not already done so.

Key ESMA observations

Before explaining its assessments of the six jurisdictions, ESMA specifically notes:

  • that the NPPR will continue alongside the passport, at least during a transitional period, once the passport is introduced; and
  • that the Commission must address the position of sub-threshold third-country AIFMs before it can introduce the passport. It notes the AIFMD talks of "authorisation" for third-country AIFMs but does not address "registration".

The US

ESMA's advice is to delay the passport pending resolution of competition issues, and also notes it needed more time properly to assess key investor protection issues. The advice concludes:

  • the MoU is working well;
  • US laws are relatively similar to the AIFMD in key areas. However, it has concerns over the non-binding nature of complaints handling arrangements, the self-custody system and the remuneration rules. It also noted the IOSCO comments on certain perceived shortcomings in US securities laws. Generally, ESMA felt it needed more time to assess the real effects of the differences between US regulation and the AIFMD;
  • while it is possible for EU AIFMs to market funds in the US, often by registering a US fund under the Investment Company Act 1940, it is hard to market to retail investors in the US, and there are limited options for managers that do not wish to establish a US fund. ESMA is also concerned about the possible effects of the Volcker rule on EU asset managers;
  • there is a risk that there would be an unlevel playing field in terms of market access if the AIFMD passport were introduced, because of the US regulatory requirements for registration entailing costs. So ESMA says there should be no passport until the US addresses this; and
  • US reporting standards are extensive but differ significantly from AIFMD requirements.

Guernsey and Jersey

ESMA considered Guernsey and Jersey separately, and identified areas of both similarity and difference in their laws. Overall, its advice is that there are no significant obstacles regarding investor protection, competition, market disruption and the monitoring of systemic risk impeding the application of the AIFMD passport to Guernsey or Jersey.

It considers:

  • the MoUs are working well;
  • investor protection measures meet requirements and in many areas mirror or are similar to the AIFMD, or the authorities have indicated changes they could make; and
  • there are no competition or market disruption concerns.

Hong Kong

ESMA found insufficient evidence to assess key aspects of the Hong Kong regulatory environment, and noted concerns over competition and reciprocal arrangements. As a result, it needs more time to finalise its assessment.

It considers:

  • the MoU is working well;
  • there is insufficient evidence of key investor protection requirements and organisational measures;
  • there is a risk of an unlevel playing field, and evidence that Hong Kong does not treat all EU regulators in the same way.


Once Switzerland has brought in a change to its laws that will improve regulatory co-operation, ESMA sees no significant obstacles regarding investor protection, competition, market disruption and the monitoring of systemic risk impeding the application of the AIFMD passport in Switzerland.

It considers:

  • there is no evidence the MoU is not working, but some provisions in the Federal Act on Stock Exchanges and Securities Trading might prevent effective information sharing. However, these provisions are being amended from January 2016;
  • the investor protection, organisational and remuneration requirements are sufficiently comparable to the AIFMD; and
  • there is no evidence of competition issues and Switzerland already has MoUs in place with interested EU jurisdictions to enable marketing to retail investors.


ESMA considers that, overall, it has insufficient information to assess many of the required criteria, so recommends the European authorities delay a decision on whether to apply the AIFMD passport to Singapore.

It considers:

  • there is insufficient evidence of how the MoU operates to assess whether it is effective;
  • overall, Singapore laws seem adequate but in some areas ESMA does not have enough information; and
  • only five jurisdictions can currently sell UCITS into Singapore, but it is not clear whether any other EU jurisdictions have applied to be able to do so.

Other jurisdictions

ESMA received information about Malaysia, Egypt, Chile, Peru, India, China and Taiwan that suggested it is less difficult to sell EU UCITS or AIFs in these countries than elsewhere, but cannot make an assessment yet, not least because there are no formal MoUs in place. Also, there is not enough evidence that these jurisdictions would be interested in their AIFs being marketed in the EU.

ESMA's opinion

Alongside its advice, ESMA was required to publish an opinion on the operation of the passport.

Main messages

ESMA's key concern was that because of delays in AIFMD implementation, and longer delays in its transposition in some Member States, it is too soon to make a proper assessment. It says there would be merit in a further opinion after a longer period post-implementation across the EU.

However, even at this stage, it notes several themes from responses to its call for evidence:

  • divergent approaches with respect to marketing rules, including
    • fees charged by the authorities where the AIFs are marketed;
    • the definition of what constitutes a “professional investor”; and
    • varying interpretations of what activities constitute “marketing” and “material changes” under the AIFMD passport in the different Member States.

ESMA recommends greater convergence in the definition of these terms.

However, it concludes there is not enough evidence to suggest that either the passport or the NPPRs have raised significant issues in the functioning of the AIFMD.

Feedback on Surveys

ESMA found that:

  • 7868 AIFs were notified for marketing under Article 32 AIFMD, mainly from the UK, Luxembourg and Ireland. 348 AIFMs used the management passport;
  • no supervisory authorities reported significant investor protection issues, or problems with requests for assistance;
  • at the time of ESMA's survey, Croatia, Latvia, Italy and Poland did not allow EU AIFMs to market non-EU AIFs, and none of these jurisdictions, or Greece or Hungary, allowed any marketing by non-EU AIFMs;
  • 12 Member States allowed non-EU AIFMs to manage EU AIFs;
  • 300 EU AIFMs were authorised to market non-EU AIFs under Article 36 and 1146 non-EU AIFs were marketed under the article;
  • 1777 non-EU AIFMs marketed under Article 42, over 1000 of them in the UK. 4356 AIFs were marketed under the article, over half of them in the UK; and
  • no specific difficulties were reported by any supervisor. Opinion on Functioning of EU Passport

As noted above, ESMA thinks it is too early to give a meaningful opinion on how the passport has operated. However, it notes issues even at this early stage, which it says have made what should have been an easy process difficult. It summarises these, as reported to it by respondents to its call for evidence, as:

  • fees charged by national authorities where the AIFs are marketed, and the different levels of these fees and their opacity;
  • the time taken before passport rights can be exercised in the different Member States, which should be standardised;
  • additional national requirements compared to the provisions of the AIFMD (for example, the need for a centralising agent);
  • inconsistent interpretation of what activities constitute “marketing” under the AIFMD passport (and the differences compared to the definition of “reverse solicitation”). Some Member States consider a fund is "marketed" only after all fund documents are final and therefore ready for an investor to subscribe, while others may say even initial discussions between fund managers and investors regarding potential fund strategies or structures might be considered to be marketing;
  • Although annex IV of the AIFMD gives details of the information/documents needed for the passport notification, many authorities have not yet issued template notification letters, and for those that have, in some cases the level of required information varies widely
  • there is uncertainty on material changes that may cause modifications of fund documentation; and
  • some respondents complained of new barriers since the transposition of AIFMD by some Member States.

Opinion on Functioning of NPPR

Again, ESMA finds it is too soon to make a meaningful assessment of how well the NPPR is functioning and whether it should be turned off in favour of the non-EU passport.

Most respondents, while noting some problems in practice with the NPPR, said it should stay, probably for all non-EU jurisdictions but at the very least for those that would not benefit from the passport (if introduced).

Some respondents noted that some jurisdictions were now harder to access on a private placement basis than before the AIFMD. Others noted the difficulties in applying NPPR because they vary so much. Some noted that in selected Member States, where the Article 42 process had not been gold-plated, private placements could continue, but other EU markets had effectively closed their doors to non-EU funds and managers.

Again, respondents commented on varying notions of "marketing", "pre-marketing" and the scope of "reverse solicitation". Many identified Member States in which private placements were easily possible, those which had moderately gold-plated their requirements and those that had made private placements practically impossible.

So what?

The fundamental message from ESMA is that it is too soon to look at changing the AIFMD. Not only has the short period between implementation of the AIFMD (and in some cases, the continuing lack of full transposition) made it hard or impossible for ESMA to gather meaningful amounts of evidence, but also firms from both inside and outside the EU are still getting used to the new regime.

A passport for non-EU AIFs and AIFMs?

Since ESMA has gone so far as to conclude that Jersey, Guernsey and Switzerland meet the criteria for mutual passporting, in some ways it seems a shame to delay introducing it. But ESMA's point that the Commission should consider waiting until more jurisdictions have received a positive assessment also has merit. ESMA also notes the risks of adverse market impact that might result from a decision to extend the passport to only a few non-EU countries.

What should the Commission do?

ESMA was at pains to point out many of the comments it received in response to its call for evidence are not its views and it does not endorse them. So the fact that it has specifically noted the confusion in the scope of key terms, notably "marketing" and "reverse solicitation", suggests the Commission should consider a definitive interpretation of these terms.

Also, the widely divergent practices and gold-plating for existing passporting applications needs review. While inconsistences in NPPR, and the effective closure of some markets, are frustrating to many non-EU AIFMs who find themselves now unable to carry out activities that were possible pre-AIFMD, Member States have the right to impose these conditions. But more consistency within the EU under the AIFMD provisions that currently apply to passporting would be welcome.


It seems the Commission may spend its time more wisely considering how it can clarify certain terms and inconsistencies of national interpretation before it considers the practicalities of granting the third-country passport to some jurisdictions.

It is also clear that the merits of the third-country passport has to be assessed on a country-by-country basis, as ESMA has done, otherwise it will not be possible for ESMA to give the advice and opinion the AIFMD requires. It logically follows that unless and until there is reason to grant the passport to enough third-countries, the NPPR must stay.

For now, we wait to see whether, within the three months the AIFMD allows, the Commission decides to make the passport operational in respect of Guernsey, Jersey and Switzerland. ESMA's view is clearly that it should wait.