01 | ESMA has published its opinion and advice on applying the AIFMD marketing passport to non-EEA managers and funds
On July 30, 2015, the European Securities and Markets Authority (ESMA) published its advice on the application of the EEA marketing passport under the Alternative Investment Fund Managers Directive (AIFMD) to non-EEA managers (AIFMs) and funds (AIFs), and its opinion on the functioning of the passport for EEA AIFMs and national private placement regimes (NPPRs). In the coming months, this development will likely trigger significant changes in the legal framework for non-EEA AIFMs marketing or managing AIFs in the EEA.
02 | ESMA’s advice may lead to introduction of a passport for some non-EEA AIFMs but also to elimination of some NPPRs
The AIFMD created an EEA-wide passport for EEA AIFMs to market and manage EEA AIFs across all Member States, but denied this benefit to non-EEA AIFMs until at least late 2015. Currently, non-EEA AIFMs can market AIF interests to EEA investors only where permitted by applicable NPPRs and subject to compliance with certain AIFMD disclosure and transparency obligations.
The AIFMD required ESMA to publish its advice on the application of the EEA marketing passport to non-EEA AIFMs and its opinion on the functioning of the passport for EEA AIFMs and NPPRs by July 23, 2015 and requires the Commission – if ESMA’s advice is positive – to adopt a delegated act applying the EEA passport to non-EEA AIFMs and AIFs within three months. Although the AIFMD permits Member States to maintain their NPPRs, the laws of several key Member States will eliminate the NPPR route to market upon application of the AIFMD passport to non-EEA AIFMs and AIFs.
03 | ESMA’s advice is ambiguous
In its opinion on the AIFMD passport for EEA AIFMs and the functioning of NPPRs, ESMA concluded that there is insufficient evidence to indicate that the AIFMD EEA passport and NPPRs have raised major issues in terms of the functioning and implementation of the AIFMD framework. ESMA stated it would see merit in the preparation of another opinion on the functioning of the passport and NPPRs after a longer period of implementation in all Member States.
In its advice on extending the AIFMD passport to non-EEA AIFMs and AIFs, ESMA conducted a country-by-country assessment for six jurisdictions – Guernsey, Hong Kong, Jersey, Singapore, Switzerland and the United States (US). ESMA concluded positively that no obstacles exist to the extension of the passport to Guernsey and Jersey, with Switzerland expected to remove any remaining obstacles soon. ESMA offered no definitive advice on Singapore, Hong Kong or the US, but expressed concerns over competition, regulatory issues and a lack of sufficient evidence to properly assess the relevant criteria.
To avoid any adverse market impact that a decision to extend the passport to only a few non-EEA countries might have, ESMA noted that the Commission may wish to consider waiting until ESMA has delivered positive advice on a sufficient number of non-EEA countries before introducing the passport. ESMA’s advice could be viewed as currently being unclear, in that ESMA gives a positive advice in relation to three countries but nonetheless suggests that the Commission not adopt a delegated act extending the passport to any non-EEA AIFMs at this time.
04 | ESMA’s approach creates significant legal uncertainty
ESMA’s proposed approach raises significant legal issues. The AIFMD does not contemplate ESMA issuing separate advice on a country-by-country basis. Thus, although ESMA apparently plans to issue further advice in relation to the US, Singapore, Hong Kong and possibly other jurisdictions, the AIFMD provides no clear authority or timetable for such advice.
Similarly, the AIFMD contemplates that the Commission must adopt a delegated act extending the passport if ESMA’s opinion is positive. The AIFMD does not contemplate that ESMA’s advice could be incomplete, and it does not authorize the Commission to delay extending the AIFMD passport where ESMA’s opinion is positive or to adopt multiple delegated acts in a phased approach.
The Commission has not yet clarified what action it proposes to take in response to ESMA’s ambiguous opinion and advice.
05 | How the Commission responds to ESMA’s opinion could have significant implications for non-EEA AIFMs and AIFs
ESMA’s approach leaves the Commission with several options, each of which raises legal and practical issues.
First, the Commission could follow ESMA’s suggestion to defer taking any action to extend the AIFMD passport to non-EEA AIFMs and AIFs until ESMA issues a positive advice in relation to more jurisdictions beyond Guernsey, Jersey and Switzerland. As noted, this approach is arguably inconsistent with the AIFMD, and in any case the AIFMD provides no procedure or timetable for such a strategy. If the Commission follows this approach, however, the status quo would be maintained for the near to medium term.
Second, the Commission could adopt a delegated act extending the AIFMD passport only to AIFMs and AIFs from Guernsey, Jersey and Switzerland and delay taking action on AIFMs and AIFs from other jurisdictions until ESMA issues further positive advice relating to them. This approach would also be questionable under the AIFMD. More signficantly, under national laws implementing the AIFMD, extension of the passport to AIFMs and AIFs from some jurisdictions could lead to elimination of the NPPRs in some key Member States for non-EEA AIFMs and AIFs from all jurisdictions.
Third, the Commission could conclude that, although ESMA’s advice was positive only in respect of some jurisdictions, it should adopt a delegated act applying the AIFMD passport to non-EEA AIFMs and AIFs from all eligible jurisdictions, notably including the US. This approach would arguably be more consistent with the AIFMD, but extending the passport to AIFMs and AIFs from countries that have not received a specific positive endorsement from ESMA could also be challenged and in any event would be highly controversial.
06 | The AIFMD passport would be a mixed blessing for non-EEA AIFMs
Extending the AIFMD passport will be, at best, a mixed blessing for non-EEA AIFMs. Non-EEA AIFMs registering under the AIFMD to benefit from the passport would become subject to substantially all the obligations of the AIFMD, including those relating to capital requirements, depositaries and remuneration, on a global basis. Whether this step would be worthwhile will vary from AIFM to AIFM depending on the importance of the AIFMD passport to their marketing strategies and on the available alternatives. Those alternatives include continuing to market under NPPRs (which may be more limited following extension of the passport) or creating an EEA-based registered AIFM to market AIF interests to EEA investors.
07 | The Commission’s delegated act will need to address a number of important issues for the AIFMD passport to provide a workable alternative
For the non-EEA AIFM passport to be an attractive option, the Commission’s delegated act will need to address a number of important issues, including grandfathering and transition rules, the procedures for selecting a ‘Member State of reference’ where the non-EEA AIFM will be regulated, and the proportionate application of onerous EEA rules to global fund structures. It is far from clear how the Commission intends to address these issues.
08 | ESMA’s approach appears to be based on a protectionist, trade-based agenda that may block future change
In the AIFMD, the EU legislator deliberately omitted a country-by-country determination of equivalence as a condition to EEA market access, although such mechanisms are a common feature of other EU legislation. ESMA’s application of this equivalence-based approach to the AIFM opens the door to accusations that this reflects a protectionist or free-trade agenda in response to claims that EEA AIFMs do not enjoy comparable access to US and other international markets. Since the US is highly unlikely to change its approach to fund regulation to resemble the EU’s (as Guernesy, Jersey and Switzerland have done), based on ESMA’s current approach it is unclear when or how ESMA could adopt a positive opinion on extending the passport to US AIFMs or AIFs. ESMA’s claim that it lacked sufficient time or information on the US system has been questioned, since the US system is well known, and the US has had by far the world’s largest fund industry for many years.
09 | US AIFMs may face the worst of all worlds
If the Commission adopts a delegated act extending the EEA passport for some but not all non-EEA AIFMs, other non-EEA AIFMs, in particular US AIFMs, may face the worst of all worlds, without access to the EEA passport but also more limited access under NPPRs. For these AIFMs, taking advantage of the AIFMD passport, imperfect though it is, will not be an option. Instead, their only alternatives will be to further limit their marketing activities in the EEA or to estabish EEA affiliates that will be required to be authorised and regulated as AIFMs in their home Member States.
10 | Next phase in 2018
How ESMA and the Commission handle this initial phase will set the stage for the next phase in late 2018. At that point, depending on ESMA’s opinion on the success of the passport, the Commission may adopt a delegated act to completely terminate NPPRs, resulting in the AIFMD passport becoming the sole and mandatory regime for non-EEA AIFMs wishing to access the EEA’s €15.5 trillion asset management market without establishing their own EEA AIFM or contracting with a third-party manager.