Following a week delay, the European Securities and Markets Authority (ESMA) issued an opinion recommending that Guernsey and Jersey be awarded pan-EU marketing passports awarded to managers authorized under the Alternative Investment Fund Managers Directive (AIFMD). The regulator also recommended that Switzerland be awarded the same status should it pass proposed legislative changes that will bring it into line with the directive.
ESMA reviewed the regulatory regimes of six countries (Guernsey, Jersey, Singapore, Hong Kong, Switzerland and the US) to determine what non-EU managers should be extended the passport. While Switzerland and the Channel Islands – who have built regulatory regimes and fund vehicles modelled after the directive – where given the blessing by ESMA, the US, Singapore and Hong Kong, three major private fund domiciles, still await ESMA’s opinion. GPs based in those countries will need to continue using individual sovereigns’ private placement regimes until EU policymakers make a decision – which the directive requires by 2018.
In relation to its assessment of the US, ESMA made a significant statement about how granting the passport to US managers would cement an uneven playing field for EU managers seeking to market their vehicles in the United States, Owen Lysak, a senior associate at law firm Clifford Chance, told PDI.
The advice goes through the access hurdles currently in place for EU managers wishing to market their products in the US before concluding; “… the decision to extend the AIFMD passport to the US should be delayed until better conditions of market access are granted by the US Authorities to EU AIFMs/AIFs…”.
A similar tit-for-tat argument about uneven market access has dragged on between EU and US regulators in the over the counter derivatives market for several years, noted Lysak, who believes that the US could face a long haul to get AIFMD passport approval.
That divides the applicants for AIFMD passports into two tiers, said Lysak. Jurisdictions like the Cayman Islands already moving to implement their own AIFMD-like regimes in order to qualify for the passport, could be on a fast-track to approval, while larger hubs such as the US will fall behind as the regulators wrangle over equality of access. Jersey and Guernsey were ahead of the pack with suitable AIFMD-like structures in place in time, he added.
Also significant, said Lysak, were the figures on non-EU AIFs active in Europe. The breakdown has not been published before and the figures demonstrated that the number of Cayman Islands- and US-based funds marketed in Europe far outstripped other jurisdictions. In the final quarter of 2014, 587 Cayman Islands alternative investment funds were marketing in Europe (under article 42 – others were also marketed under article 36). The equivalent number for the US was 236, almost double the next largest jurisdiction which was Guernsey at 121.
The European Commission (EC) now has three months to consider the ESMA advice and opinion before deciding whether to activate the passport provision in the AIFMD. The ESMA announcement noted that; “… the institutions may wish to consider waiting until ESMA has delivered positive advice on a sufficient number of non-EU countries, before introducing the passport in order to avoid any adverse market impact that a decision to extend the passport to only a few non-EU countries might have… ”.
The regulator said it would continue its assessments of Hong Kong, Singapore and the US as quickly as practicably possible but did not give an indicative date as to when this examination may be completed.
In terms of how the passport will work, ESMA said the delay of AIFMD meant it was still too early for a full assessment but noted that it has already identified several issues including different interpretation of the marketing rules among European member states. The body recommended greater convergence in the definition of terms.