Article 67 of Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers (the “AIFM Directive”) obliged the European Securities and Markets Authority (”ESMA”) to issue (i) an opinion on the functioning of passport for EU alternative investment fund managers (“EU AIFMs”) managing and/or marketing EU alternative investment funds (“EU AIFs”) and non-EU alternative investment funds (“Non-EU AIFs”) by EU AIFMs and the applicability of the national private placement regime (“NPPR”) available to non-EU managers and (ii) an advice on the application of passporting rights for the marketing of Non-EU AIFs by EU AIFMs and the marketing and/or management of AIFs by non-EU managers, AIFM Directive passporting rights third party managers.
AIFM Directive passporting rights to third party managers
When coming into force in 2013, the AIFM Directive provided for the possible future granting of passporting rights to third party managers. The application of the relative articles were however subject to advice being issued by ESMA on the implications of the application of AIFM Directive passporting rights third party managers to non-EU managers and Non-EU AIFs. The deadline for receipt of such was 22 July 2015.
From the coming into force of the AIFM Directive to-date, non-EU managers and Non-EU AIFs have had to rely on NPPR as may be applicable in each Member State in order to market the shares or units of an AIF in a Member State. Upon the transposition of the AIFM Directive, some Member States decided to remove the possibility of managing and / or marketing through NPPR.
On the 22 July 2015, ESMA requested the granting of an extension to the deadline of the 22 July 2015 to issue its advice and opinion. EMSA issued the much awaited advice and opinion on the 30 July 2015.
ESMA Assessment Methodology
AIFM Directive passporting rights to third party managers, as stipulated in the AIFM Directive, ESMA had to consider the following elements when compiling its advice and opinion:
- Investor protection;
- Market disruption;
- Competition; and
- Monitoring of systemic risk.
ESMA is bound to issue a positive advice should it consider that there are no significant obstacles to the above-listed.
ESMA assessed, in its advice, the implications of extending passporting rights in six (6) non-EU countries, namely,
(iii) Hong Kong;
(ii) Singapore and
(iii) the United States (“US”).
General ESMA Advise on the Applicability of Passporting to third countries
ESMA found no significant obstacle to the applicability of passporting rights to Guernsey.
Even here, EMSA considers there to be no significant obstacles and therefore has no objection to the AIFM Directive passporting rights applying to Jersey.
On the date of issuing the advice, ESMA was still in the process of gathering and receiving from the Securities and Future Commission comprehensive information on the regulatory framework in Hong Kong. ESMA advised that it requires more time to assess the implications of the passporting rights being granted to Hong Kong.
Also, ESMA pointed out that the Hong Kong authority does not consider all Member States as “acceptable inspection regimes” and therefore assessment of whether or not there is a level playing field in respect of market access by EU AIFMs and EU AIFs in Hong Kong when compared to that given to Hong Kong managers in the EU – if passporting right is granted.
According to ESMA there would be no significant obstacles for the applicability of passporting rights to Switzerland subject however to the enactment of the amendments proposed to the Federal Act on Stock Exchanges and Securities trading (“SESTA”).
Following an assessment of the Singapore regulatory framework, ESMA advised the European Parliament, Council and Commission to delay passporting rights to Singapore.
ESMA opined that the possibility of extending passporting rights to the US would lead to significant obstacles regarding all the elements mentioned above. ESMA has advised that the European Parliament, Council and Commission delay the applicability of passporting rights to the US.
ESMA also mentioned its lack of time to assess the lengthy information provided by the US regulatory authority in respect of the US regulatory framework and the applicability of the AIFM Directive requirements.
Assessment of Other Third Country States
It is to be noted that ESMA also carried out an analysis of additional third country states, being Malaysia; Egypt; Chile; Peru; India; China and Taiwan. However, due to the lack of a Memorandum of Understanding between ESMA and the respective supervisory authority in the respective third country states and also considering the low level of activity by entities regulated in such jurisdictions within the EU, ESMA has not issued an advice on the same.
ESMA is working on establishing and finalising the necessary Memorandum of Understanding with these third country states.
Potential Issues raised by ESMA
In its advice, ESMA has raised the following issues which it opines should be looked into by the European Parliament, Council and Commission when publishing the delegated act:
- ESMA suggested that fiscal matters in the non-EU country and the latest anti-money laundering and counter terrorism framework in the non-EU country should be considered;
- Clarification is to be provided in respect of the application of article 37 of the AIFM Directive, in the light of article 42 of the AIFM Directive. Article 37, when in force, requires non-EU managers to be authorized in order to manage EU AIFs and / or market AIFs in the Union with a passport, however, article 42 permits Member States to allow non-EU managers to manage and / or market AIFs in their jurisdiction through NPPR. According to ESMA this implies that non-EU managers may be able to operate under article 42 despite the possibility of being authorize under article 37; and
- Article 37 only mentions authorization without referring to registration. ESMA advised that a common understanding of the treatment of non-EU managers which are de minimis, is provided.
What is Next?
ESMA is currently continuing the assessment process in respect of other non-EU countries which have not been covered in the advice issued on the 30 July 2015. It is expected that ESMA will issue further advice in the coming months.
ESMA suggested that the European Parliament, Council and Commission delay extending passporting rights to third countries until ESMA’s assessment covers more countries. No timeframe for issuing further advice by ESMA has been published to date.
In accordance with the provisions of the AIFM Directive, within three (3) months of receipt of positive advise by ESMA, the Commission is to adopt a delegated act which is to establish the date when article 35, article 37 to 41 (passporting provisions) of the AIFM Directive are to be applicable to all the Member States.
However, it is not clear under the AIFM Directive as to whether the delegated act extending the passporting rights to Non-EU AIFMs can be issued on a country by country basis.
Clarification is awaited.
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