The European regulator’s approach to extending the alternative investment fund passport to managers and funds outside of the European Economic Area raises significant legal issues.
It was in July when the European Securities and Markets Authority (Esma) published its preliminary advice on extending the Alternative Investment Fund Managers Directive (AIFMD) passport for managers and funds that sit outside of the European Economic Area.
At the same time, Esma gave its opinion on the functioning of the passport for alternative managers under the AIFMD within the European Economic Area, and on national private placement regimes.
AIFMD passport
In its advice on extending the AIFMD passport to alternative investment fund managers – or AIFMs – outside of the European Economic Area, and/or non- alternative investment funds – or AIFs – also outside of the region, Esma conducted a country-by-country assessment for six jurisdictions – Guernsey, Hong Kong, Jersey, Singapore, Switzerland and the US.
Esma concluded positively that no obstacles exist to the extension of the passport to Guernsey and Jersey, with Switzerland expected to remove any remaining obstacles soon. Esma offered no definitive advice on Singapore, Hong Kong or the US, but expressed concerns over competition and regulatory issues. Australia, Canada, Japan, the Cayman Islands, Isle of Man and Bermuda have since been included within the scope of Esma’s assessment.
To avoid any adverse market impact that a decision to extend the passport to only a few non-European Economic Area countries might have, Esma noted the Commission may wish to consider waiting until Esma has delivered positive advice on a sufficient number of outside juridsdictions before introducing the passport.
An uncertain picture
Esma’s proposed approach raises significant legal issues. The AIFMD does not contemplate Esma issuing separate advice on a country-by-country basis and no clear authority or timetable is given for
such advice.
Similarly, the AIFMD contemplates the Commission must adopt a delegated act extending the passport if Esma’s opinion is positive. The AIFMD does not contemplate that Esma’s advice could be incomplete and it does not authorise the Commission to delay extending the AIFMD passport where Esma’s opinion is positive or to adopt multiple delegated acts in a phased approach.
If the Commission adopts a delegated act extending the European passport for some but not all structures outside of the European Economic Area, some AIFMs may face the worst of all worlds, without access to the European passport but also more limited access under national private placement regimes. For these AIFMs, taking advantage of the AIFMD passport, imperfect though it is, will not be an option. Instead, their only alternatives will be to further limit their marketing activities in Europe or to establish affiliates in the European Economic Area that will be required to be authorised and regulated as AIFMs – that is, effectively onshoring their fund marketing business.
The next phase
How Esma and the Commission handle this initial phase will set the stage for the next phase in late 2018. At that point, depending on Esma’s opinion on the success of the passport, the Commission may adopt a delegated act to completely terminate national private placement regimes, resulting in the AIFMD passport becoming the sole and mandatory regime for AIFMs outside of the economic area that wish to access the region’s €15.5 trillion asset management market.
Imogen Garner, partner at Norton Rose Fulbright
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