By: Ian Brown
Many third countries have applied for AIFMD passport extensions. The recent ESMA recommendations granted passports (with restrictions) to some and denied others.
ESMA has now confirmed that it sees no impediments to extending the AIFMD passport to some of the countries it was reviewing including Canada, Guernsey, Japan, Jersey and Switzerland. Guernsey, Jersey and Switzerland were of course provisionally approved for the passport extension in July 2015. Third countries must meet equivalence with EU rules if their domestic funds are to enjoy the benefits of the AIFMD passport. Non-EU AIFMs and AIFs are allowed to market in the EU but they must be fully compliant with the national private placement regimes (NPPR) of each country they are marketing into. The multitude of regulatory regimes and occasional gold-plating in individual member states can obviously add to the workloads and cost overheads at non-EU AIFs and AIFMs. EU-based AIFMs simply need to register with their member state of reference (MSR) to passport freely across the EU.
Other jurisdictions have received backing from ESMA along with some constructive policy recommendations:
- There were no major obstacles to Hong Kong and Singapore enjoying AIFMD passporting rights, although both must change their current policies that only allow access by UCITS from certain member states.
- Australia was also told that access to the AIFMD passport was likely on the basis that the Australian Securities and Investment Commission (ASIC) affords all EU member states “class order relief” from its regulatory framework. This relief is already available to a handful of EU member states.
- The US, the most sizeable asset management market in the world, has also been told there are no major obstacles standing in the way of it obtaining the passport for funds marketed to accredited investors through non-public offerings. ESMA cautions that a passport extension to US funds marketed to professional investors via public offerings could lead to an “un-level playing field between EU and non-EU AIFMs”.
ESMA told offshore jurisdictions including Bermuda and the Cayman Islands that an AIFMD marketing passport cannot be assured at present. Both countries are introducing regulatory reforms and ESMA said it cannot make any decision on the passport until the rules are finalized. The Cayman Islands, for example, is currently enacting a dual funds regime similar to that of the Channel Islands whereby fund managers can either attain AIFMD equivalence or rely on the status quo. In addition, ESMA states that the absence of an AIFMD-like regime in the Isle of Man makes it difficult to assess whether investor protection criteria are sufficient to warrant granting the passport.
The hesitation by ESMA to confirm the status of the Cayman Islands, which is the primary domicile for many of the world’s hedge funds and private equity managers, is problematic. AIFMD rules state both the location of the manager and domicile of the fund must be equivalent if it is to enjoy full passporting rights across the 28 member state bloc. Therefore, many US managers with Cayman Islands-based fund structures will still need to market through NPPR to EU investors based on ESMA’s current advice.
Another challenge lies with the constitutional status of the UK. A “Brexit” (depending on the outcome of UK-EU negotiations) could force the UK to resubmit an application for AIFMD equivalence as it may find itself designated a third country. In theory, the UK has transposed AIFMD into national law, but the politics inside the EU may be sufficiently hostile that equivalence is not assured or automatic.
The findings will now be considered by the European Commission, the European Council and the European Parliament. As NPPR expires in the next few years, more countries will face ESMA assessments. Equivalence will probably be granted over due course to more countries, but the process will likely be slow. SS&C GlobeOp offers a range of services to assist managers in meeting AIFMD requirements with minimum cost and disruption. For more information contact firstname.lastname@example.org.