On 30 July 2015 the European Securities and Markets Authority ("ESMA") recommended the deferral of the extension of the AIFMD1 passport to non-EEA2 alternative investment fund managers ("AIFMs") and alternative investment funds ("AIFs").
ESMA went on to advise that the EC3 wait until ESMA has delivered positive advice on a sufficient number of non-EEA countries before considering extending the passport to any non-EEA countries.
It is clear that ESMA has conducted a significant exercise in developing a framework to consider not only the 44 countries with which European regulators have signed Memoranda of Understanding in respect of the AIFMD ("MoUs"), but also seven other key non-EU jurisdictions that do not yet have MoUs in place. The publications of 30 July 2015 are just the first step in this process.
While it is encouraging that two countries have been given positive recommendations (with a third very close to finalisation), 48 countries remain outstanding. These include some significant jurisdictions and some of the largest investment manager and investment fund centres in the world, including Australia, Bermuda, Brazil, British Virgin Islands, Canada, Cayman Islands, Japan, Russia and the USA (China and India do not yet have MoUs in place).
ESMA's advice confirms that the Cayman Islands is by far the most prominent jurisdiction for funds being marketed into the EEA.
Based on an analysis of the criteria that ESMA has used in its assessment, and the Cayman Islands' recently announced AIFMD-consistent "opt-in" regulatory regimes, the Cayman Islands is expected to be ideally placed for a favourable recommendation from ESMA in due course.
ESMA also advised that, although the AIFMD was still in its early stages, as yet no major issues had been identified with the ongoing operation of the existing EEA national private placement regimes in conjunction with AIFMD (the "NPPRs").
While the ESMA advice is notable for a number of reasons, it will remain business as usual for managers looking at fund domicile options.
In terms of managers looking to access investors worldwide, both outside and inside the EEA, we see little in the ESMA publications of 30 July 2015 to alter the existing market approach of matching choice of domicile with the expectations and requirements of the relevant investor base. Managers will continue to be able to market their Cayman Islands and British Virgin Islands funds in the EEA using the existing NPPRs. The use of EEA domiciled funds (e.g. Irish QIAIFs) and EEA AIFMs will continue to be the best option for managers seeking to avail themselves of fully passportable AIFMD products and parallel offerings.
Opinion and Initial Advice
On 30 July 2015, ESMA issued an opinion of 95 pages (the "Opinion") and advice totalling 172 pages (the "Initial Advice") to the EC relating to the AIFMD.
The Opinion assessed the functioning of the AIFMD EEA passport and the NPPRs.
The Initial Advice reviewed the application of the AIFMD passport and whether it should be extended to non-EEA countries and, if so, which countries it should be extended to.
ESMA has taken a "country-by-country" approach in the Initial Advice, and singled out Guernsey, Hong Kong, Jersey, Singapore, Switzerland and the USA for initial assessment.
ESMA has, in addition to the countries assessed for the Initial Advice, 38 further non-EEA countries (with MoUs in place) still to assess, including Australia, Bermuda, Brazil, British Virgin Islands, Canada, Cayman Islands, Japan and Russia.
This inevitably means that non-EEA jurisdictions will be considered by ESMA on a phased basis. Going forward, we anticipate that additional advice and opinions will be issued by ESMA to the EC until ESMA's work on all 44 non-EEA jurisdictions (with MoUs in place) is complete.
Cayman Islands ready for ESMA Assessment
Annex 8 to the Initial Advice provides statistics which confirm the Cayman Islands as by far the most prominent jurisdiction for funds being marketed into the EEA (See Annex 8 of the Initial Advice).
It is worth noting that, according to the figures in Annex 8, the Cayman Islands is home to substantially more AIFs and AIFMs registered in the EEA under Articles 36 and 42 of the AIFMD than the rest of the six jurisdictions that were assessed by ESMA combined.
Although ESMA's statistical analysis highlights the significant numbers of Cayman Islands based funds being marketed into the EEA, ESMA has not yet assessed the Cayman Islands.
The Cayman Islands' recently announced AIFMD-consistent regimes should, based on an analysis of the criteria that ESMA is looking for as part of its assessment process, see the Cayman Islands ideally placed in due course for a favourable recommendation from ESMA and positive extension decision from the EC.
Assessed but Delayed
For many managers who use Cayman Islands based funds, an extension of the AIFMD passport to the Cayman Islands may not be of practical interest until the AIFMD passport is also extended to the jurisdiction in which the manager is based.
In relation to the USA, ESMA advises "the [EC] to delay their decision on the application of the passport to the U.S. until such time as conditions which might lead to a distortion of competition are addressed" and "notes that it could have benefited from having more time to assess the detailed information it received on the U.S. regulatory framework".
For Hong Kong, ESMA advises that "more time is needed to analyse the extent to which the potential differences between the Hong Kong regulatory framework and the AIFMD are material to the assessment" and that "it is...not clear whether there is a level playing field between EU and non-EU AIFMs as regards market access".
In relation to Singapore, ESMA advises the EC to "delay their decision on the potential application of the AIFMD passport to Singapore."
Other countries which are home to significant asset management industries, such as Australia, Brazil, Canada, Japan and Russia, are also yet to be assessed.
Extension by the EC likely to be Delayed
ESMA advised that the EC consider delaying extending the passport as follows:
"The European Council, Parliament and the Commission to which this advice is submitted pursuant to Article 67 of the AIFMD may wish to consider whether to wait until ESMA has delivered positive advice on a sufficient number of non-EU countries before triggering the [passport extension procedure]"
This suggestion not only recognises the size of the task involved in the assessment process that ESMA is undertaking, but also the need to avoid unintentionally affecting jurisdictional choice; ESMA specifically refers in the Initial Advice to the need to take into account "such factors as the potential impact on the market that a decision to extend the passport might have."
Status Quo on NPPRs
The Opinion refers to assessment of the functioning of the NPPRs being complicated by delays in the implementation and transposition of the AIFMD in some member states.
ESMA advised that although the AIFMD was still in its early stages, as yet no major issues had been identified with the ongoing operation of the existing NPPRs in conjunction with AIFMD.
Cayman's New AIFMD Regimes
One component of ESMA's assessment of each non-EEA jurisdiction is a review of the country's regulatory regime.
In preparation for ESMA considering the Cayman Islands, the Cayman Islands government ("CIG") issued an Industry Advisory on 15 May 2015 confirming that CIG and the Cayman Islands Monetary Authority ("CIMA") had been working on, and were close to finalising, two new AIFMD consistent regulatory regimes (together, the "New AIFMD Regimes"). CIMA issued a related Statement on the same day.
Following on from these announcements, CIG published two bills (the "Bills") on 10 July 2015 establishing the New AIFMD Regimes. It is expected that the Bills will be approved by the Cayman Islands' Legislative Assembly during August 2015.
The Bills anticipate that the detail of the New AIFMD Regimes will be provided in regulations issued pursuant to each of the Bills (together, the "Regulations"), which are also expected during August 2015
The New AIFMD Regimes, once fully effective and operational, will see the Cayman Islands ideally placed for a favourable recommendation from ESMA and positive decision by the EC.
European Commission Decision
Although the Initial Advice is an important milestone, the actual decision on extension of the AIFMD passport to any non-EEA country rests with the EC rather than ESMA. The EC has discretion whether to accept ESMA's advice in relation to any non-EEA country.
The EC has three months from receipt of the Initial Advice to specify a date when rules relating to the third country passport should become effective for the jurisdiction(s) recommended by ESMA.
That timetable, which is set down by the AIFMD, would see any actual EC decision on AIFMD passport extension waiting until late October 2015 at the earliest. ESMA's Initial Advice explicitly recommends that this deadline be put back until such time as a more significant number of non-EEA jurisdictions have been assessed.
Will the NPPRs be gone in three years?
It is unclear what the potential impact of any future EC decision to extend the passport to a non-EEA country would have on the broader decision as to retention of the NPPRs.
The AIFMD is drafted such that an extension to any one non-EEA country could result in NPPRs falling away across the EEA within three years.
The question of what any such extension will do to NPPRs, and whether any withdrawal of NPPRs will be on a blanket, or country by country, basis will hopefully be clarified by ESMA and/or the EC well in advance of the 2018 date set out in the AIFMD.
Cayman Well Placed for Extension
There has been long-standing reciprocity of access for EEA funds and managers to investors in the Cayman Islands.
The New AIFMD Regimes, combined with this established reciprocity, should place the Cayman Islands in a favourable position for consideration by ESMA and the EC.
The Cayman Islands is home to investment funds managed by the vast majority of the world's top investment fund managers from both within and outside of the EEA.
It follows that there are significant benefits for EEA investors in terms of diversity and product choice in having access to Cayman Islands based funds and managers.
All of this presents a compelling case for ESMA and the EC to properly and promptly consider extension of the AIFMD passport to the Cayman Islands.
Is there action to be taken immediately?
Although there is no action to be taken now, clients with Cayman Islands funds and/or managers with an EEA nexus should look out for further Maples and Calder updates once the Regulations are issued, which we currently anticipate will be during August 2015.
1. Alternative Investment Fund Managers Directive (2011/61/EU)
2. European Economic Area
3. European Parliament, Council and Commission
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.