On 19 July 2016, the European Securities and Markets Authority (ESMA) published its latest advice to the European Parliament, the European Council and the European Commission on the application of the Alternative Investment Fund Managers Directive (AIFMD) passport regime to asset managers and investment funds domiciled in non-EU countries.
The scope of the AIFMD is extremely wide and, with some limited exceptions, applies to EU and non-EU domiciled alternative investment fund managers (AIFMs) managing or marketing EU-domiciled and/or non-EU domiciled alternative investment funds (AIFs) to investors in the EU. AIFMs in countries outside the EU or Non-EU AIFs managed by EU AIFMs must currently comply with the National Private Placement Regimes (NPPR) in each EU Member State they market into.
Under the AIFMD, ESMA was tasked with advising the European Parliament, the Council and the Commission on (a) how the existing passport mechanism has functioned for EU AIFMs marketing EU AIFs; (b) how EU AIFMs have marketed non-EU AIFs; (c) how non-EU AIFMs have marketed AIFs under the NPPR; and (d) the application of the AIFMD passport to AIFMs and AIFs domiciled outside the EU.
ESMA’s assessment commenced in November 2014, with ESMA seeking views from market participants at that time. These views were published in January 2015 and in July 2015, ESMA published its first advice (the Initial Advice) having assessed six jurisdictions (Guernsey, Hong Kong, Jersey, Switzerland, Singapore and the United States)(the Initial Jurisdictions) out of 22 which had been identified as being the domicile of non-EU AIFMs that market AIFs in EU Member States.
In its Initial Advice, ESMA called for a slow-down in approach. ESMA advised that it was too soon to give a definitive opinion on how the passport regime and various NPPRs had been working. ESMA also advised that a country-by-country assessment was necessary in order to appropriately advise on the possible extension of the AIFMD passport to “third countries”, recommending that the Commission delay the extension of the AIFMD passport regime to any “third country” until ESMA had given positive advice to a sufficient number of the 22 identified “third countries”.
At the prompt of the European Commission, ESMA published its second advice relating to the extension of the passport regime to “third countries” on 19 July 2016 (the 2016 Advice). The 2016 Advice provided a follow up assessment on the Initial Jurisdictions assessed under the Initial Advice, and fresh assessments on a further six jurisdictions (Australia, Bermuda, Canada, Cayman Islands, Isle of Man and Japan) in the list of 22 jurisdictions.
In the latest round of assessments, ESMA definitively assessed Canada, Guernsey, Japan, Jersey and Switzerland as having no significant obstacles impeding the application of the AIFMD passport, however, the advice relating to the remaining seven “third countries” (the United States, Hong Kong, Singapore, Australia, Bermuda, Cayman Islands and Isle of Man) that were considered contained qualifications to varying degrees.
The persistent message coming out of the 2016 Advice suggests a continuation of the “go-slow” theme in the Initial Advice, with ESMA suggesting to the European Commission once again that they may wish to consider delaying the application of the AIFMD passport regime to “third countries” until ESMA has had the opportunity to deliver positive advice on a sufficient number of non-EU countries.
For those non-EU countries who have not yet received a positive assessment this recommendation may come as a relief from the perspective of creating a level playing field amongst the AIFs and AIFMs domiciled in non-EU countries that participate in asset management in the EU, particularly those jurisdictions, such as the BVI, that patiently await any form of assessment. Yet, for the industry, a further call for deferral may come as a disappointment especially to those who have been awaiting positive guidance whilst either complying with the applicable NPPR regime in each relevant EU Member State where they market; or, in some cases, ignoring EU-sourced capital altogether until clearer guidance is forthcoming.
The 2016 Assessment – The Cayman Islands and Bermuda
For each of the countries being assessed by ESMA, consideration is given to whether there were significant obstacles to applying the AIFMD passport regarding investor protection, competition, market disruption and the monitoring of systemic risk.
For the Cayman Islands and Bermuda ESMA confirmed its view that there are no significant obstacles regarding competition and market disruption impeding the application of the AIFMD passport to those jurisdictions. ESMA has however delayed giving definitive advice in relation to the extension of the AIFMD passport to Bermuda and the Cayman Islands on the grounds that both countries are in the process of implementing new AIFMD-like regulatory regimes which will need to be assessed to determine whether they satisfy the criteria on investor protection and effectiveness of enforcement.
In relation to Bermuda, ESMA was also of the view that no definitive advice could be provided until the Bermuda Monetary Authority (BMA) has completed its review of the Investment Funds and Management framework under the Investment Funds Act 2006, in particular in relation to enforcement (on which new legislation is due to be adopted imminently).
In relation to the Cayman Islands, ESMA was of the view that no definitive advice could be provided with respect to the assessment of the effectiveness of enforcement and the monitoring of systemic risk until legislative changes (currently in the pipeline) are adopted in relation to imposing administrative fines and breaches of regulatory laws and until the Cayman Islands Monetary Authority (CIMA) has implemented a macro-prudential policy framework which is expected to enhance systemic risk monitoring (such implementation is also expected to occur shortly).
ESMA did acknowledge in its advice that the interim versions of the draft AIFMD-like regulations proposed to be adopted in Bermuda and Cayman (which are not yet in force) would be very similar (in the case of Bermuda) and broadly similar (in the case of Cayman) to the AIFMD framework, but that this would need to be confirmed having regard to the final published versions (in the case of Bermuda) and related implementing regulations.
The European Parliament, the European Council and the European Commission now have to decide how to proceed and whether to activate the extension of AIFMD passporting to those countries which have received a positive assessment by ESMA. If they follow ESMAs advice to defer, it seems unlikely that passporting will be extended to third country AIFMs and AIFs until a positive assessment has been made in respect of a larger number of countries.
For now, it is business as usual for AIFs and AIFMs in non-EU countries, including Bermuda, the British Virgin Islands and the Cayman Islands, who must continue to comply with NPPRs in each EU Member State they wish to market into, which will be available until at least July 2018. We expect that when AIFMD passporting is extended, Bermuda, the British Virgin Islands (which is following the lead of the Cayman Islands in preparing for ESMA’s assessment) and the Cayman Islands are likely to be included in the list of approved third countries.