On 30 July 2015 the European Securities and Markets Authority ("ESMA") released some advice with respect to a selected group of third countries to the European Parliament, the Council and the Commission on the possible extension of the AIFMD passport to apply to third country AIFMs and AIFs and its opinion on the functioning of the passport for EU AIFMs and the national private placement regimes.
ESMA's advice is a condition for the introduction of the passport by the Commission which generally shall occur within three months following receipt of the advice. Such passport means on the one hand that the third country manager gets an authorization to market funds in Europe (and to manage EU funds) without having to comply with national requirements provided it complies fully with all AIFMD rules and on the other hand such introduction of the passport for third country managers will have the automatic effect in Germany of abolishing the national notification regime (sometimes also referred to as private placement regime). Third country managers could then no longer market in Germany unless they are fully AIFMD compliant. The impact of ESMA's advice is therefore important.
However, in its publication on Thursday, ESMA has not given general advice on third countries, but has instead conducted a country-by-country assessment of only six jurisdictions with respect to the main regulatory issues to be considered, namely investor protection, competition, potential market disruption and the monitoring of systemic risk.
The AIFMD provides that the Commission shall adopt a delegated act within three months following receipt from ESMA of its positive advice and opinion. But because the advice only includes a few countries ESMA has suggested that the Commission should wait to extend application of the passport until ESMA has delivered positive advice on a sufficient number of third countries, so as to avoid any adverse market impact that could be caused by a decision to extend application of the passport to only a few third countries. ESMA does not give any guidance as to when its advice is considered to be on a sufficient number of countries so that timing for the introduction of the passport is currently open.
I. Summary of ESMA Advice
Having performed a country-by-country assessment of Guernsey, Hong Kong, Jersey, Singapore, Switzerland and the United States on the relevant regulatory issues, ESMA concludes that no obstacles exist to the extension of the passport to Guernsey and Jersey, while Switzerland will remove all remaining obstacles once pending legislation is enacted. ESMA has not taken a definite view on Hong Kong, Singapore and the United States.
1. Guernsey and Jersey
ESMA is of the view 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 and Jersey.
ESMA is of the view that no significant obstacles impeding the potential application of the AIFMD passport to Switzerland will remain once certain amendments to the Swiss Federal Act on Stock Exchanges and Securities Trading (SESTA) are enacted relating to cooperation with foreign financial market supervisory authorities.
3. Hong Kong
ESMA has not completed its assessment of Hong Kong. ESMA notes that it has received insufficient information submissions on the Hong Kong legal framework with regard to investor protection, competition, market disruption and the monitoring of systemic risk.
Whether the Hong Kong legal framework provides a level playing field between EU and third country AIFMs with regard to market access if the AIFMD passport is granted is likewise not clear from the evidence submitted. In particular, the Hong Kong legal framework may provide for differences in treatment of EU AIFMs from different EU jurisdictions: Only some EU Member States are considered as "acceptable inspection regimes" by the Hong Kong Authority.
ESMA notes that it has also received insufficient information submissions on the legal framework in Singapore needed to assess investor protection, competition, market disruption and the monitoring of systemic risk as well. ESMA thus also recommends delaying a decision on Singapore. In particular, the apparent requirement of a "sufficient nexus with Singapore" in the form of assets under management of at least approximately €335 million could prove to be an anti-competitive barrier to market entry.
5. United States
ESMA is of the view that the decision to extend the AIFMD passport to the US should be delayed until better market access is granted by US authorities to EU AIFMs/AIFs. At present, ESMA sees a risk that extending the AIFMD passport to the US could create an uneven playing field between EU and third country AIFMs with regard to market access. This is because the market conditions of US funds dedicated to professional investors in the EU in the event that the AIFMD passport is extended to the US would be different from the market access conditions of EU AIFs dedicated to professional investors in the US, namely with respect to registration requirements under the US regulatory framework which generate additional costs.
Regarding investor protections, ESMA suggests that it would like more time to assess the US legal framework.
II. Next Steps
The AIFMD provides that the Commission has three months following the positive rendered by ESMA to adopt legislation to introduce the passport. However, given that the advice published on Thursday is still only for a small number of countries not including important jurisdictions like the Cayman Islands and USA ESMA recommend to wait until further countries have been added to the list of "admitted countries". ESMA has announced that it will continue to work on its assessment of other third countries not covered in the advice with a view to delivering further submissions to the European Parliament, the Council and the Commission in the coming months.
For those third-country jurisdictions with which no supervisory cooperation arrangements are currently in place for purposes of the AIFMD (each a memorandum of understanding or "MoU"), ESMA will continue its efforts to agree a MoU with the authorities concerned.
Moreover, ESMA has announced to work further on providing guidance as to the terms marketing and professional investor which are key terms for a harmonized passport regime.
III. What does this mean for marketing in Germany
When implementing the AIFMD into German law, the German legislature already considered the possibility of an application of the AIFMD passport to third country AIFMs and AIFs. The relevant rules in the German Capital Investment Act (Kapitalanlagegesetzbuch, "KAGB") shall become applicable once the Commission has passed the delegated acts on the extension of the AIFMD passport to third-country AIFMs and AIFs (cf. Sec.295 (3) no.2 KAGB). It is unclear, however, what this will mean for managers / funds of countries for which no recommendation as to the introduction of the passport will be rendered.
The announced harmonized guidance on the definition of marketing and professional investor will certainly also be of relevance and observed carefully.
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.