The European Securities and Markets Authority (Esma) has published its long-awaited advice to the European Commission on extending passports to funds outside of the EU. Fund managers and their advisors have welcomed the decision, which had been expected on June 30.
Since the Alternative Investment Fund Managers’ Directive’s (AIFMD) implementation in 2014 managers in non-EU countries have at times blamed the framework for facilitating overly protectionist behaviour from member states. It’s left them grappling with national private placement regimes (NPPRs) in individual member states, which are notoriously divergent and can be difficult to navigate.
Esma concluded that there are no obstacles to granting passports to funds in Canada, Guernsey, Japan, Jersey and Switzerland. For alternative investment funds (AIFs) alone, Hong Kong and Singapore also got the nod, though for Ucits [Undertakings for Collective Investment in Transferable Securities] in those jurisdictions, the picture is a little less clear. With seemingly minimal adjustments, Australian funds will also be granted passports.
“Esma’s advice ensures continued marketing access to the wider EU market, providing fantastic stability for investors and managers alike,” said Andrew Whittaker, chairman of the Guernsey Investment Funds Association and managing director of fund administrator Ipes Guernsey.
Perhaps most significantly, as will funds in the US, though Esma alludes to the risk of an uneven playing field being created. “In my view it’s unlikely that US managers would be queuing up to use the passport for those funds anyway. Most are happy to market their funds in four or five member states on the basis of NPPRs,” said Leonard Ng, partner at Sidley Austin in London. “They’re unlikely to want to subject themselves to full AIFMD authorisation; the price to pay for using the passport.”
- On Tuesday Esma issued its long-awaited advice on granting AIFMD passports to non-EU countries, allowing funds from those jurisdictions to market in the EU;
- The funds industry has welcomed the news, which looks favourably upon Canada, Guernsey, Japan, Jersey, Switzerland, Hong Kong, Singapore, Australia and the US;
- Bermuda and the Cayman Islands must finish implementing new legislation before they can be properly assessed;
- While the news is overwhelmingly positive, it’s only the first step. Next is a delegated act from the Commission, though it’s unclear whether it will wait for advice from Esma on more third countries;
- It’s also positive for the UK, which post-Brexit may well be a third country like the rest.
The news was slightly less positive for Bermuda and the Cayman Islands. The watchdog said it could not give definitive advice on their approaches to investor protection and enforcement, because both countries are still implementing new legislation. Ng thinks for these it will be a question of if, not when, though.
“This is really positive, for many jurisdictions – there’s been encouraging noises about the US especially,” said Lisa Cawley, partner at Kirkland & Ellis. “The key now will be what happens at Commission level. But post-Brexit it’s also very encouraging for the UK.”
For Britain, which if it leaves the European Economic Area as well as the EU will become a third country too, this increases the likelihood of it being granted a passport, given it’s also the most equivalent third country in the world. “This should be reassuring for the PE market in the UK,” added Whittaker.
"This should be reassuring for the PE market in the UK"
“Esma’s latest recommendations are a welcome step forward,” said Michael Collins, public affairs director at trade association Invest Europe. “European investors must be free to choose the best managers wherever they’re located, so a workable passport regime, sitting alongside national private placement regimes, is therefore essential.”
The Commission must now decide if it will take Esma's advice. The next step would then be a delegated act from the EC which will set a timeline for the formalisation of third country equivalence, explained David Ryland, partner at Paul Hastings. “This process will of course take time, and it’s likely there will be some transitional issues,” he said. In the meantime non-EU firms will be required to appoint an EU-based AIFM.
While the anticipated timeline is within three months of Esma’s advice, Ulf Klebeck, general counsel at Woodman Asset Management in Zurich thinks there is a possibility the Commission could wait until the regulator has positively assessed more countries. “The key issue is that AIFMD stipulates that any national private placement rules shall be abolished once the concept of the non-EU passport has been implemented,” he added.
The Alternative Investment Management Association (AIMA) also welcomed the news. “We’re hopeful that the Commission will proceed to the introduction of the passport to all these countries, given the remaining cited obstacles appear to be minor,” said deputy CEO Jiri Krol. “We remain optimistic that Esma will be in a position in the not-too-distant future to provide a full and positive assessment for the Cayman Islands and Bermuda in the same manner.”
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