EU Unlikely to Extend Fund Passport in 2016

However last July the European Securities and Markets Authority  advised the European Parliament, the Council and the Commission that the AIFMD marketing passport should be extended to alternative investment fund managers in Switzerland, Jersey and Guernsey but not to the US, Hong Kong and Singapore at that time.

Esma said in its advice that if the AIFMD passport is allowed for the US, there is a risk of an ‘uneven playing field’ as regards market access between EU and non-EU alternative investment funds. As a result Esma said the AIFMD passport should not be extended to US until better market access conditions are granted by the US authorities to EU funds. For Hong Kong, Esma said that detailed information on the country’s regulatory framework was incomplete while Singapore had significant obstacles regarding investor protection, competition, market disruption and the monitoring of systemic risk.

Tuffy said in a report that it is important to note that Esma has not ruled out extending the AIFMD passport to the US, Hong Kong and Singapore and that Steven Maijoor,  chief executive of Esma, said in his testimony to the EU Parliament in November that the regulator will continue its country-by-country assessment. In addition Esma has identified the second set of countries that it will assess for the passport extension which includes Australia, Canada, Japan, the Cayman Islands, the Isle of Man, and Bermuda.

Sean Tuffy, Brown Brothers Harriman.

“The biggest sticking point in all of its assessments is almost certainly going to be the remuneration rules, which are a uniquely EU-centric idea,” added Tuffy. “It will be interesting to see how Esma works to square this circle – in particular with key non-EU jurisdictions such as the US and Hong Kong, because it seems very unlikely that these counties will introduce similar remuneration rules.”

He continued that the EU parliament has shown little interest in approving the AIFMD passport even to the limited number of jurisdictions that Esma has approved.

“More likely than not, the AIFMD passport will remain available to only EU funds and managers in 2016, if not longer,” added Tuffy. “If the decision drags out long enough, they may be better off launching EU-domiciled AIFMD funds.  Of course, the more cynical among us might suggest this was the point of the delay all along.”

This week Esma published a letter it received from the European Commission last month about the extension of the AIFMD passport. The commission requested that the regulator complete its assessment of the USA, Hong Kong, Singapore, Japan, Canada, Isle of Man, Cayman Islands, Bermuda and Australia by 30 June 2016. The letter said Esma should provide a more detailed assessment of the capacity of supervisory authorities and their track record in ensuring effective enforcement and the expected inflow of funds by type and size into the EU from relevant third countries.

“Finally, we agree with Esma’s suggestion that it produces another opinion on the functioning of the EU passport and National Private Placement Regimes once the AIFMD has been fully transposed in all the member states and there is more experience on the functioning of this framework,” added the commission. “An updated opinion will be particularly helpful for the planned review of the Directive that should start in 2017.”

Gregg Beechey and Zachary Mellor-Clark at law firm Fried Frank Harris Shriver & Jacobson said in a note that the good news for non-EU managers is that Esma has now been put back on the clock. They added: “However, given Esma’s resource constraints and its country-by-country approach, the timing is challenging, and it will be interesting to see what Esma delivers by 30 June 2016 (assuming it delivers anything at all). Managers would, for the time being, be advised not to build their future fundraising plans around this timetable, since even if Esma produces advice in June 2016 that is positive with respect to their jurisdictions, there is still no indication of when the passport will go live.”

Matthew Baker and Chris Ormond at law firm Berwin Leighton Paisner said in a note that the commission’s letter does not reveal whether or not it intends to leave the national private placement regimes operating until the third country passport is functioning correctly. They said: “There is a fear among some in EU jurisdictions that they should be careful what they wish for – in gaining access to the passporting process (and month-long delays that go with it), fund managers will lose the ability to access some EU markets on a private placement basis much more quickly. Allowing private placement regimes to continue would be preferred by many, as it allows more flexibility in future marketing strategies.”

Featured image by yobab/Dollar Photo Club