Execution of the AIFMD marketing passport to third countries: the latest from ESMA

Written on 6 Oct 2016

Glossary of terms
AIF = an alternative investment fund (which includes most types of non-UCITS funds).
AIFM = an alternative investment fund manager (the legal person appointed to manage one or more AIFs)
AIFMD or the Directive = The Alternative Investment Fund Managers Directive 2011/61/EU
EEA = the 28 Member State countries of the European Union plus Norway, Liechtenstein and Iceland
ESMA = The European Securities and Markets Authority, the EU securities regulator which is mandated by the AIFMD to carry out analysis, issue advice and guidance on a number of areas, including the extension of the marketing passport to third countries
NPPR = national private placement regime, i.e. the national regime that regulates the marketing of AIFs in the relevant jurisdiction, where the AIF/AIFM/both are established outside the EEA
Passport = the right granted under the AIFMD to manage or market an AIF in the EEA on a cross-border basis without obtaining a licence from the regulatory authority of the country in which that right is exercised.
Third country = a country that is not a member of the EEA

On 19 July 2016, ESMA published its latest advice on the extension of the AIFMD marketing passport to third countries – i.e. extending the right of managers/funds based in third countries to market AIFs to professional investors throughout the EEA on the basis of a single registration. AIFMD includes provision for such an extension of the passport, but requires ESMA’s positive advice before the European Commission can legislate for it.

Twelve countries assessed

ESMA has so far assessed twelve jurisdictions on a country-by-country basis against criteria specified in the AIFMD.

AIFMD requires ESMA to issue “positive advice” on extending the passport where it considers that there are no significant obstacles regarding (i) investor protection, (ii) market disruption, (iii) competition, and (iv) monitoring of systemic risk which may impede such extension.  Its assessments to date can be split broadly into 4 categories:

  • Positive opinion: this is effectively the highest rating ESMA has given, applied to Jersey, Guernsey, Canada, Switzerland and Japan, where it found no significant obstacles to the extension of the passport
  • Extension of passport to AIFs only: in respect of Hong Kong and Singapore, ESMA found that there were no significant obstacles to the extension of the passport as it related to AIFs only (i.e. for Hong Kong/Singapore based AIFs managed by EEA AIFMs, but not for Hong Kong/Singapore AIFs managed by local AIFMs)
  • Qualified positive opinion: in respect of Australia and the US, ESMA gave a “qualified positive opinion”. For example it determined with regard to the US that the passport could be extended to US funds dedicated to professional investors marketed in the EEA by managers not involving any public offering, where the funds are not mutual funds as a matter of US law, and which restrict investment to professional investors.  This opinion was based on its assessment of the reciprocal arrangements available in the US for EEA-based funds
  • Incomplete assessment: in respect of the Cayman Islands, Bermuda and the Isle of Man, ESMA merely noted that because they are currently in the process of implementing AIFMD-like regulatory regimes, it would not be able to finalise its assessment until this had been completed.

Next Steps: an uncertain process

The status quo has not changed (for now); if the AIFM or AIF is established outside the EEA, it will need to continue relying on the NPRRs (or reverse solicitation) in order to market that AIF in Europe.

ESMA’s advice will now be considered by the Commission, Parliament and Council, and ESMA will also continue to assess additional countries in the same manner.  It is not clear when legislation would be enacted to extend the passport. The Directive itself does not legislate for implementation of third country passport rights on a country-by-country basis, so it is unclear if there is any deadline for doing this.  The uncertainty has been compounded by ESMA noting in its July 2016 advice that legislation could wait until it has issued positive advice in respect of a sufficient number of countries.

Some countries have already indicated that once a third country passport regime is in place they will effectively take away the alternative NPPR route, so any countries which don’t make the grade for the passport could be cut out of the private placement market as well. ESMA has pointed out that a decision to extend the passport should take into account a number of factors including the potential impact on the market. So the Commission will need to determine whether any adverse impact of extending the passport for a select number of countries outweighs enacting legislation swiftly to compensate for the delay in the process.

Brexit impact?

ESMA’s advice should be of particular interest to UK AIFMs in the wake of the decision by the British people to leave the EU.

If the UK remains in the EEA (so-called “soft Brexit”) following its expected withdrawal from the EU then the AIFMD will continue to apply in full. However, if the UK leaves the EEA it will acquire third country status (so-called “hard Brexit”) and authorised UK AIFMs will no longer be entitled to benefit from the existing passport. If ESMA were to issue advice on the UK’s regime we would expect it to be positive, given that the UK pursued a “copy-out” approach when implementing the AIFMD, although there will obviously be various political pressures in play here. Given political winds are indicating a hard Brexit is perhaps the more likely scenario, UK AIFMs may be hoping for the Commission to adopt legislation swiftly to extend the marketing passport.