The European Securities and Markets Authority (ESMA) has issued further advice to the European Commission, the European Parliament, and the European Council (EC) relating to extending the European Alternative Investment Fund Managers Directive (AIFMD) marketing passport to non-EU alternative investment fund managers and alternative investment funds established in non-EU third countries (Third Countries) that are assessed as equivalent. Extension of the "passport" system to Third Countries will allow funds established in such countries to be marketed, and managers established in such countries to provide services, across the European Economic Area (EEA), rather than applying for permission on a country by country basis.
ESMA's initial advice published on 30 June 2015 covered six non-EU countries. This new advice from ESMA covers 12 countries, including Cayman. In its commentary, ESMA noted there are no significant obstacles regarding competition and market disruption impeding the extension of the AIFMD passport to Cayman. However, with respect to investor protection, the assessment of the effectiveness of enforcement and the monitoring of systemic risk, ESMA stated that it could not give definitive advice in relation to extending the passport to Cayman as one of the Third Countries until (i) the final version of the proposed Cayman AIFMD-like opt-in regime is available; (ii) a legislative amendment has been implemented that will give Cayman's regulator, the Cayman Island Monetary Authority (CIMA), the power to impose administrative fines for breaches of regulatory laws, regulations, and rules; and (iii) CIMA's proposal for implementation of a macro-prudential policy framework (which is expected to enhance its current systemic risk monitoring) is put in place.
We at Ogier are encouraged by this advice. It subjects ESMA's definitive advice relating to extending the passport to Cayman to objective criteria that we believe Cayman will be in a position to satisfy in short order. The Cayman Government and CIMA have been working closely with ESMA for some time now on the required amendments to its regulatory framework relating to funds and the Cayman Government has confirmed that the jurisdiction is only a few short months away from finalising such framework. We therefore do not view this as negative advice from ESMA but simply a delay in the eventual extension of the AIFMD marketing passport to Cayman funds.
Furthermore, ESMA stated that it will continue to work on its assessment of other Third Countries, not covered in its advice to date, with a view to delivering further submissions in the future and reiterated its advice to the EC that they may wish to consider waiting until ESMA has delivered positive advice on a sufficient number of Third Countries before extending the passport to any Third Countries, taking into account the potential impact on the market that a decision to extend the passport might have (amongst other factors). It is therefore not certain when the extension of the passport to any Third Countries eventually will occur.
Delay on the extension of the AIFMD passporting to Third Countries is not all bad news: in the interim Cayman funds (and indeed funds established in the other non-EU jurisdictions that Ogier covers – BVI, Guernsey, and Jersey) will still be able to market into the EEA via national private placement regimes (NPPRs), which for most fund managers continues to be the preferred route for marketing into the EEA in our experience. Although in principle the phasing out of such NPPRs is due for consideration in 2018 under the AIFMD, it is unlikely that NPPRs will be phased out until such time as AIFMD passports become mandatory, so any delay will assist in extending the period during which clients will be able to market into the EEA using their preferred route, the NPPRs.
Two of Ogier's other non-EU jurisdictions, Guernsey and Jersey, were included in the five jurisdictions given an unqualified ESMA assessment. Our advisory on the position for Guernsey and Jersey can be found here.
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