ESMA’s Opinion on the functioning of the passport and NPPRs and its Advice on the application of the AIFMD passport
The Alternative Investment Fund Managers Directive (AIFMD), which entered into force on 22 July 2013, introduced an EU marketing passport for EU domiciled Alternative Investment Fund Managers (AIFM) managing and marketing EU domiciled Alternative Investment Funds (AIF), whereas non-EU domiciled AIFMs remained subject to the national placement regimes (NPPRs) of each Member State where the AIF is marketed.
In accordance with AIFMD requirements, the European Securities and Markets Authority (ESMA) published two documents on 30 July 2015:
- its Opinion on the functioning of the EU passport for EU domiciled AIFMs and of the NPPRs; and
- its Advice on the application of the AIFMD passport to non-EU domiciled AIFMs and AIFs.
With its Opinion, ESMA has taken into consideration the responses received to its call for evidence launched in November 2014. ESMA’s opinion on the functioning of the EU passport and the NPPRs is brief – their preliminary view is that not enough time has elapsed for them to be able conduct a definitive assessment. They recommend preparing a further opinion after a longer period. ESMA has also already identified several issues relating to the current situation with the passport such as different definitions of “professional investor”, “marketing” and “material changes” in various Member States. ESMA believes that a second opinion after a longer period of implementation in all Member States would be useful and permit to reach a final assessment, a comment that comes back several times in the documents.
ESMA considered the viability of extending the passport to six non-EU jurisdictions only: USA, Guernsey, Jersey, Singapore, Hong Kong and Switzerland. ESMA’s Advice concludes that no obstacles exist to the extension of the passport to Guernsey and Jersey, while Switzerland is enacting legislation to remove any remaining obstacles. ESMA has not yet reached a definitive view on the other three jurisdictions, while other jurisdictions were not assessed. The Advice notes that it may be worth considering delaying the passport extension until ESMA can issue favourable recommendations on additional jurisdictions.
Both documents have been sent to the European Commission, European Parliament and European Council. The European Commission now has three months to consider whether or not to extend the AIFMD passport to non-EU domiciled AIFMs. Should the European Commission decide to extend the AIFMD passport to third countries, it shall adopt a Delegated Act specifying the date when this would become applicable in all Member States. Until then, the current situation will not change and non-EU domiciled AIFMs will remain subject to the NPPRs of each Member State.
Key Features considered by ESMA
ESMA reviewed each of the 6 countries according to the same criteria. We have summarised the findings of each of these below.
- Reciprocity of market access:
The key feature of the non-EU regimes which ESMA considered was the degree of reciprocity extended to EU funds and fund managers. They found that in each of the three countries which received positive outcomes that EU managers and funds were subject to the same treatment as local funds and managers. ESMA found that this was not the case with the US, which was unpopular with US funds industry stakeholders. On 30 July 2015, the Investment Company Institute (ICI) President and CEO Paul Schott Stevens issued the following:
“ESMA’s advice inappropriately confuses the regulation of mutual funds with the regulation of funds sold to professional investors in the United States. The issue before ESMA is the sale of funds to professional investors across the European Union. Currently in the United States, EU managers can readily sell funds to professional investors on the same terms as U.S. managers, and across the entire U.S. marketplace. Unfortunately, the impact of ESMA’s advice would be to discriminate against U.S. managers by denying them comparable access to the entire EU marketplace.
“EU policymakers must correct this error and apply the appropriate legal analysis before they take additional action on the potential extension of the AIFMD passport to the United States.”
Following its review of the Hong Kong regime, ESMA concluded that it was unclear whether there was a level playing field between EU and non-EU AIFMs as regards market access and whether EU AIFMs and EU AIFs are treated in the same way as managers and collective investment schemes of Hong Kong in terms of regulatory engagement. ESMA also noted that some EU Member States are considered as “acceptable inspection regimes” by the Hong Kong Authorities, but most of them are not.
ESMA found that managers are required to have a “sufficient nexus with Singapore” and therefore should have at least SGD 500 Mio AuM in Singapore (EUR 335 Mio) to be authorised – this requirement should be investigated further as it could create a barrier to market access in the context of making the AIFM passport available to Singapore managers.
Another key feature was the existence of remuneration rules akin to the AIFMD rules. As Guernsey has an optional AIFMD compliant regime where managers can choose to apply the AIFMD requirements, these rules accordingly have AIFMD equivalent rules. Jersey and Switzerland were also found to have broadly similar rules. ESMA’s report noted that equivalent remuneration rules do not seem to be applicable in the US.
- Systemic oversight:
Systemic oversight was another of the critical features. ESMA is confident that the three successful jurisdictions have equivalent regimes and that cooperation between the authorities of those jurisdictions and with EU authorities is working well.
ESMA noted that it could have benefited from having more time to assess the detailed information it received on the U.S. regulatory framework, particularly to allow ESMA to analyse whether the differences between the U.S. regulatory framework and AIFMD would affect their present assessment.
Reporting on the Singapore regime, ESMA found that overall, the requirements in terms of investor protection seem to be fulfilled. The FSAP Report concluded that the Singapore authorities are very strict when it comes to market entry and that the authorisation process is very detailed – however, the follow up and ongoing supervision does not keep those high standards. This might lead to difficulties with reporting and monitoring of systemic risk.
ESMA delivered a positive opinion on the Hong Kong authority’s regulatory oversight with respect to the range of intermediaries and vehicles operating in Hong Kong.
- Depositary regime
In Guernsey, the AIFMD opt-in includes identical depositary requirements; while the original trustee oversight system for open ended funds resembles AIFMD. Jersey’s depositary requirements follow the IOSCO principles which are similar to the AIFMD requirements. A Jersey depositary will therefore need to comply with AIFMD as well as local requirements. Overall, Swizterland’s depositary requirements are similar to those under AIFMD.
In the US, ESMA found that mutual funds must place and maintain asses with a qualified custodian. However, certain funds qualify for ‘self-custody’ under US rules; ESMA noted that these funds would not be appropriate for the EU passport.
- Co-operation among national competent authorities
Guernsey, Switzerland, the USA and Jersey all received commendable reports on their interaction with national competent authorities (NCAs). ESMA reported that the feedback from NCA’s on interaction with the Hong Kong authorities was ‘in general terms, positive’, while that the information available on the interaction with the Singapore authorities was scarce and difficult to address.
Notable omissions from ESMA’s initial review of AIFMD passport eligible countries
There was surprise among certain sectors of the investment management industry at both the findings on the countries which were reviewed, as well as the countries which were not included in ESMA’s initial review, and particularly the Cayman Islands and Bermuda.
- Cayman Islands
On 10 July 2015, the Cayman Islands Government (CIG) published two bills (Bills) to establish two new "opt in" regulatory regimes which are AIFMD compliant. It is anticipated the Cayman Islands' Legislative Assembly will approve the Bills during August 2015.
The Mutual Funds (Amendment) Bill provides for the regulation of Cayman investment funds - both closed ended and open ended - that elect to be regulated by the Cayman Islands Monetary Authority (CIMA) for AIFMD passport purposes.
The Securities Investment Business (Amendment) Bill provides for the regulation of Cayman fund management entities that engage in certain EU connected activities and elect to be regulated by CIMA for AIFMD passport purposes.
The new AIFMD regimes were designed to allow Cayman managers to access European investors, both under the existing national private placement regimes or under the AIFMD passport at some future point. As the AIFMD regimes are optional, managers are not required to use them and can continue business as usual under the existing Cayman rules.
The Alternative Investment Managers Association (AIMA) issued a press release on 19 August 2015 (link below) stating that “The Cayman Islands is confident that the pan-European marketing ‘passport’ will be extended to alternative investment funds (AIFs) set up in the jurisdiction”.
AIMA said that Cayman was well-placed to have a successful review in the near future. The press release added that Cayman had “already entered into the requisite co-operation arrangements with the major EU investment securities regulators and the necessary tax information exchange agreements with EU governments as required by the AIFMD, AIMA said. In addition, the Cayman Islands Government has been developing an AIFMD compliant opt-in regime to ensure that the jurisdiction can continue to meet the needs of Cayman-based alternative investment fund managers who want to market funds into the EU under the passport.” AIMA added that “it was in the interests of institutional investors in Europe and hedge fund managers globally that Cayman be granted the passport.”
Jack Inglis, CEO of AIMA, said: “The global industry as a whole needs Cayman AIFs to be approved under the AIFMD passport to ensure that pension funds and other European institutional investors can continue to benefit from investing in some of the world’s leading alternative investment funds. We are confident that Cayman will be granted the passport since the new Cayman regime looks similar to those in the jurisdictions that have already obtained favourable assessments.”
Bermuda was not among the original 6 jurisdictions considered during the initial phase of ESMA’s non-EU AIFMD passport review. This omission surprised many, however, members of Bermuda's asset management industry said ESMA's announcement contained no surprises. "We are pleased ESMA has begun the process of extending the EU passporting regime to non-EU alternative investment fund managers," said Alison Dyer-Fagundo, Partner, Appleby, and leader of the BDA's AIFMD sub-committee. "As stakeholders will be aware, draft legislation has been tabled in Bermuda's Parliament, which is anticipated to assist ESMA in making a determination on extending passporting to Bermuda managers. This shows our strong commitment to ensuring Bermuda managers continue to be able to do business in Europe."
This new legislation is being developed to create an opt-in AIFMD compliant regime. The proposed AIFMD amendments to Bermuda's Investment Business Act (IBA) were tabled in Bermuda's Parliament for July 17.
Sean Moran of the Bermuda Development Association stated that “As a premier jurisdiction with a highly respected reputation, we expect Bermuda will be favourably considered for passport rights in a subsequent stage of this assessment process". He added that the introduction of an AIFMD compliant opt-in regime was "an ongoing process and we are fully committed to seeing it through."
He applauded the joint commitment by the Bermuda Monetary Authority (BMA), the Bermuda government and the Island's asset management industry in working together on this project, saying "We have made significant progress towards putting in place the necessary legislative framework to meet AIFMD criteria, and passage of that legislation is now well underway in our Parliament".
"Bermuda is on its journey towards equivalence under the AIFMD, having achieved some significant milestones over the past several months" said a BMA spokesperson. "The Authority welcomes the fact ESMA has included Bermuda as one of the countries to be considered in its assessment as we refine the regulatory regime for alternative investment fund managers."
The European Commission, Parliament and Council will now consider both the Advice and the Opinion, and are due to issue their recommendations within 90 days.