At present, non-EU managers of Alternative Investment Funds ("AIFs") wishing to market actively their AIFs to European investors must use the National Private Placement Regime ("NPPR") of each individual EU member state in which they intend to market. The AIFMD1 passport (the "Passport"), which allows for the management and/or marketing of AIFs in multiple member states based upon a single authorisation in one EU member state (the so-called Member State of Reference), is currently reserved only for managers of AIFs ("AIFMs") established in the EU. However, the AIFMD states that the European Securities and Markets Authority ("ESMA") must issue advice to the European Parliament, the Council and the European Commission on the application of the Passport to non-EU AIFMs.
Following its publication of a first set of advice on the application of the Passport to six non-EU countries – Guernsey, Hong Kong, Jersey, Switzerland, Singapore and the United States – ESMA has since published on 18th July 2016 a second set of advice on the application of the Passport to 12 non-EU countries – Australia, Bermuda, Canada, Cayman Islands, Guernsey, Hong Kong, Isle of Man, Japan, Jersey, Switzerland, Singapore and the United States.
Article 67(4) of the AIFMD states that ESMA must issue positive advice in relation to the extension of the Passport, where ESMA considers that there are no significant obstacles regarding investor protection, market disruption, competition and the monitoring of systemic risk that would impede the application of the Passport to the management and/or the marketing of AIFs by non-EU AIFMs.
We have summarised below ESMA's advice in relation to the extension of the Passport to AIFMs in Japan (which was awarded one of the instances of ESMA's unqualified positive advice), as well as the United States, Singapore and Hong Kong (all of which received some qualification to their positive advice from ESMA).
ESMA has concluded that there are no significant obstacles regarding market disruption, obstacles to competition or the monitoring of systemic risk that would impede the application of the Passport to Japan.
Although ESMA is of the view that there are differences with respect to investor protection between the Japanese regulatory framework and the AIFMD, it considers that these differences are not a significant obstacle impeding the extension of the Passport to Japan.
The reason for this is that the AIFMD provides that the Passport will only be extended to those non-EU AIFMs who have obtained prior authorisation by the national competent authority of their EU member state of reference. In order to obtain this authorisation, the non-EU AIFM will have to comply with the requirements of the AIFMD, including its rules on remuneration and the rules in respect of appointing independent depositaries, regardless of the existing regulatory framework in their own country.
However, despite the positive ESMA advice, it seems that J-REITs will not be able to obtain such authorisation and utilise the Passport due to them not having separate independent depositaries.
ESMA is of the view that there are no significant obstacles regarding the monitoring of systemic risk.
In respect of investor protection, though, it concludes that there are differences between the U.S. regulatory framework and the AIFMD, notably in relation to the ability of an AIF to act as its own custodian in some circumstances and the lack of remuneration rules equivalent to those in AIFMD. However, it concludes that these differences are not a significant obstacle impeding the application of the Passport to the United States (except to "self-custodian funds") since a U.S. AIFM would need to comply with the AIFMD remuneration requirements in order to obtain authorisation in the EU and utilise the Passport.
In relation to market disruption and obstacles to competition, ESMA has concluded that EU AIFs dedicated to professional investors and marketed in the United States would not have the same market access that would apply to U.S. AIFs dedicated to professional investors and marketed in the EU in the event of the Passport being extended to U.S. AIFs. This is due to registration requirements under the U.S. regulatory framework, which generate additional costs, particularly in the case of funds marketed by managers that involve public offerings. ESMA acknowledges that in the case of marketing not involving a public offering in the United States, the conditions that would apply to passported U.S. funds dedicated to professional investors in the EU would be broadly comparable to the market access conditions of EU funds focused on U.S. professional investors. As a result, ESMA has suggested three possible options to the European Commission if the latter were minded to extend the Passport to the U.S.:
- granting the Passport only to those U.S. funds dedicated to professional investors to be marketed in the EU without any public offering (although one difficulty with this is that the marketing of AIFs under AIFMD is not defined in terms of public and/or non-public offerings);
- granting the Passport only to those U.S. funds which are not mutual funds under the 1940 Investment Company Act; and
- granting the AIFMD Passport only to those U.S. funds which restrict investment to professional investors, as defined in the AIFMD.
ESMA considers that, in relation to AIFs, there are no significant obstacles regarding investor protection, competition, market disruption or the monitoring of systemic risk that would prevent the extension of the Passport to Hong Kong AIFs. However, it notes that in relation to the access of retail funds (including UCITs) in Hong Kong, only certain jurisdictions in the EU are deemed to be "acceptable inspection regimes" with the consequence that UCITs funds established in some EU member states have better access to Hong Kong investors than UCITs funds established in other EU member states.
ESMA considers that, in relation to AIFs, there are no significant obstacles regarding investor protection, competition, market disruption or the monitoring of systemic risk that would impede the extension of the Passport to Singapore AIFs. However, it notes that, similar to Hong Kong in relation to retail funds, only certain EU member states are "recognised" by the MAS in Singapore, meaning that the market access of UCITs funds established in those "recognised" member states in Singapore is better than the market access of UCITs established in other EU member states.
By 18 October 2016, the European Commission is mandated by AIFMD to adopt a delegated act that specifies the date when the Passport will be extended to those non-EU jurisdictions in respect of which ESMA has issued positive advice.
The intention of the AIFMD is that a non-EU AIFM in a jurisdiction to which the Passport is extended will, for a period of three years, have the option of either becoming authorised in its EU member state of reference and using the Passport to market or manage funds throughout the rest of the EU or, alternatively, continuing to use the individual NPPRs of those EU member states in which it wishes to market its AIFs. However, after that three-year period, the expectation is that for AIFMs in those non-EU jurisdictions that have the benefit of the Passport, NPPR regimes shall cease to be available. It is also possible that certain individual member states will withdraw their NPPR, and Germany, for instance, has already indicated that it will do so once the Passport has been extended.
The abolition of the NPPRs after three years will be dependent upon a further opinion from ESMA on the functioning of the Passport for non-EU AIFMs and its advice on the termination of the NPPRs in parallel with the existence of the Passport. That opinion and advice will be based upon such factors as:
- the use made of the Passport;
- problems encountered regarding effective cooperation among competent authorities, investor protection and investor access in the EU and the effective exercise of supervisory functions being prevented by the laws of the jurisdiction of the non-EU AIFM;
- the negotiation, conclusion, existence and effectiveness of the required cooperation arrangements between the home jurisdiction of the AIFM and the EU member state of reference; and
- the effectiveness of the collecting and sharing of information in relation to the monitoring of systemic risk by, amongst others, national competent authorities and ESMA.
ESMA will also consider the potential market disruptions and distortions in competition, i.e. whether there is a level playing field, and any potential negative effect on investor access or investment in or for the benefit of developing countries. It will also conduct a quantitative assessment to identify the number of third-country jurisdictions in which AIFMs are established that are marketing AIFs in a EU member state under either the Passport or the NPPRs.
If ESMA considers that there are no significant obstacles regarding investor protection, market disruption, competition or the monitoring of systemic risk that would impede the termination of the NPPRs, it is obliged to issue positive advice in this respect.
The European Commission must adopt delegated acts to specify the contents of the information on which ESMA is to base its opinion and advice, as mentioned above, but has not done so yet.
It will be important for the managers of AIFs, such as J-REITs, that do not fulfil the conditions for authorisation for the Passport to make representations to ESMA, in due course, concerning their need for individual member states to be allowed to maintain their NPPRs for such AIFs after the Passport becomes available to their country.
1 Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No. 1060/2009 and (EU) No. 1095/2010.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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