On July 19, 2015, the European Securities and Markets Authority (ESMA) published its advice in relation to the application of the Alternative Investment Fund Managers Directive (AIFMD) passport to non-EU Alternative Investment Fund Managers (AIFMs) and non-EU Alternative Investment Funds (AIFs) in twelve countries.
The ESMA advice continues the country-by-country approach of the ESMA advice dated July 30, 2015 we informed about in a previous client info. ESMA revisits the non-EU countries examined therein and takes a look at six additional non-EU countries. Other than in their previous advice they now suggest that the U.S. is generally a country eligible for the passport subject to certain restrictions.
What does this mean in practice?
ESMA's advice is a condition for the introduction by the Commission of the non-EU passport for crossborder management and marketing by non-EU AIFMs which generally shall occur within three months following receipt of the advice. The impact of ESMA's advice is important in particular with respect to marketing activities in Germany by non-EU AIFMs.
Marketing into Germany by non-EU AIFMs with seat in passport eligible countries
Once the Commission introduces the passport regime the following will have to be considered by non-EU AIFMs located in such "passport eligible" non-EU countries:
- Non-EU AIFMs will be able to market in all EU Member States based upon the AIFM authorization to be obtained in the so called "Member State of Reference" which requires complying fully with the AIFMD requirements. The "Member State of Reference" cannot be determined freely at the AIFM's discretion but has to be determined, among others, by the geographical focus in which the AIFM intends to develop effective marketing.
- In Germany such introduction of the passport for non-EU AIFMs will have the automatic effect of abolishing the national notification regime (sometimes also referred to as private placement regime) for the non-EU AIFMs in countries that are eligible for the passport. Such non-EU AIFMs could then only market by using the passport (which means that they have to apply for an authorization in the Member State of Reference and be fully AIFMD compliant).
Marketing into Germany by non-EU AIFMs with seat in countries which do not qualify for the passport
There has been uncertainty as to whether non-EU AIFMs with seat in countries which are not recognized as passport eligible countries will continue to be able to rely on the national notification / private placement regime. The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) has indicated orally that they intend to continue to permit the national notification regime to apply for such AIFMs based in countries which are not yet eligible for the passport. This is actually helpful but BaFin has not yet released an official publication of such view.
Having performed a country-by-country assessment of Guernsey, Hong Kong, Jersey, Singapore, Switzerland, Canada, Australia, Japan, Bermuda, Cayman Islands, the Isle of Man and the United States on the relevant regulatory issues, ESMA concludes:
- No obstacles exist to the extension of the AIFMD passport to Canada, Guernsey, Japan, Jersey and (once pending legislation is enacted) Switzerland.
- If the European Commission extends the passport to the United States, the Commission may consider certain restrictions (e.g. only funds marketed to only professional investors and no public offering).
- There are no significant obstacles to the extension of the AIFMD passport to Australia, provided certain relief provisions (class order relief), currently available only to fund managers from the UK and Germany, are extended to all EU Member States.
- With respect to Hong Kong and Singapore ESMA does not give an unreservedly positive assessment. In relation to AIFs, there are no significant obstacles to the extension of the AIFMD passport to AIFs in Hong Kong and Singapore. However, Hong Kong and Singapore facilitate the access of UCITS from only certain EU Member States to retail investors in their territories.
- ESMA cannot currently give definitive advice in respect of Bermuda, Cayman Islands, or the Isle of Man.
It is unclear to us, why ESMA assessed access to the markets in non-EU jurisdictions also under the aspect of how EU AIFs can be marketed in such non-EU jurisdictions to retail investors given that the third-country passport only relates to marketing to professional investors.
II. IN DETAIL
1. United States
While ESMA recommended in its previous advice to delay the extension of the AIFMD passport to the United States until better market access is granted by U.S. authorities to EU AIFMs/AIFs, ESMA now seems to be in favor of an extension but suggests to implement certain restrictions.
ESMA suggests three alternatives of restrictions to which the passport could be linked:
- Granting the AIFMD passport only with respect to U.S. funds dedicated to professional investors to be marketed in the EU by AIFMs not involving any public offering. This would match the access conditions for EU AIFMs in the U.S. the closest. The difficulty is that the AIFMD does not define marketing in terms of public and non-public offerings; OR
- Granting the AIFMD passport only with respect to U.S. funds the investors of which are only professional investors as defined in AIFMD (professional investors would often not include high net worth individuals and so called semi-professional investors); OR
- Granting the AIFMD passport only with respect to U.S. funds which are not mutual funds (under the 1940 Investment Company Act). Mutual funds are open-ended companies with some similarities to UCITS.
2. Hong Kong
With respect to Hong Kong ESMA came to the conclusion that in relation to AIFs, there are no significant obstacles regarding the extension of the AIFMD passport to Hong Kong.
The main concerns relate to marketing to retail investors. But given that the AIFMD passport only allows non-EU AIFMs to market to professional investors in the EU we do not see why ESMA considers this to be an obstacle to give a positive assessment for Hong Kong.
ESMA has also finished its assessment of Singapore and came to the conclusion that in relation to AIFs, there are no significant obstacles regarding the extension of the AIFMD passport to Singapore.
As in the case of Hong Kong the main concerns relate to marketing to retail investors.
ESMA came to the conclusion that there are no significant obstacles regarding the extension of the AIFMD passport to Australia.
However, ESMA mentions as precondition that an Australian exemption (class order relief) from an authorization requirement (Australian financial services licence – ASFL) for, amongst others, foreign fund managers is available to AIFMs from all EU Member States. So far only AIFMs from Germany and the UK can obtain such an exemption. The Australian Securities and Investments Commission (ASIC) indicated its willingness to discuss an extension of the class order relief to all EU Member States.
ESMA came to the conclusion that it cannot give any advice at the moment especially regarding the aspects of investor protection and effectiveness of enforcement. Currently Bermuda is in the process of implementing regulatory provisions similar to the AIFMD and further enforcement provisions. A final assessment is not possible before a final version of these provisions is available.
6. Cayman Islands
ESMA came to the conclusion that it cannot give any advice at the moment especially regarding the aspects of monitoring of systemic risks and effectiveness of enforcement. The Cayman Islands are preparing new legal provisions and regulatory policies in that regard. A final assessment is not possible before a final version of these provisions is available.
7. Isle of Man
ESMA came to the conclusion that it cannot give a final assessment within the given timeframe. The absence of provisions comparable to the AIFMD makes it more difficult to assess the level of investor protection.
Additionally, some EU Member States are considered as "designated territories" facilitating marketing to retail investors, but most of them are not. The Isle of Man Financial Services Authority (IOMFSA) indicated that they would have no objection to extending the list of designated territories to all EU Member States.
III. NEXT STEPS
After reviewing ESMA's advice the European Commission should publish delegated legislation with a view to implement the non-EU passport within three month (at least regarding those non-EU countries successfully passing ESMA's assessment). However, ESMA suggests to wait until it has given positive advice for a "sufficient" number of countries without providing any specification. ESMA will continue to work on its assessment of other non-EU countries not covered in this advice with a view to delivering further advice.
For those relevant non-EU jurisdictions with which no supervisory cooperation arrangements are currently in place for purposes of the AIFMD (memorandum of understanding – MoU), ESMA will continue its efforts to agree on a MoU with the authorities concerned.
In light of Brexit a fast implementation of third-country rules could be desirable. This is less clear for U.S. AIFMs with marketing activities in Germany.
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.