In our last Sidley Update on the Alternative Investment Fund Managers Directive (AIFMD) (AIFMD 2014 Update – private placements: where did we end up, and where are we going?1) we noted that, by July 22, 2015, the European Securities and Markets Authority (ESMA) was required to issue to the European Parliament (Parliament), the Council of the European Union (Council) and the European Commission (Commission):
- an opinion on the functioning of the marketing passport for EU AIFMs2 and on the functioning of the marketing of AIFs under the national private placement regimes (NPPR); and
- advice on the application of the passport to the marketing of non-EU AIFs managed by EU AIFMs and of AIFs managed by non-EU AIFMs in EU Member States.
On July 30, 2015, ESMA published its opinion (Opinion) and (the first batch of) its advice (Advice).3
This Sidley Update considers the implications for non-EU AIFMs arising from the Opinion and the Advice.
Some interesting data on marketing by non-EU AIFMs
Before considering the implications of the Opinion and the Advice, it might be interesting to highlight some data presented by ESMA in both documents.
ESMA notes that, as at March 31, 2015, 1,777 non-EU AIFMs had marketed their AIFs in the EU under the NPPR, with 1,013 marketing in the UK alone. Based on separate data provided by the UK Financial Conduct Authority, it appears that, of these 1,013 AIFMs marketing in the UK under the NPPR, over 500 were from the U.S., around 30 were from Hong Kong and around 20 were from Singapore.
When it comes to other EU Member States, U.S. AIFMs account for the vast majority of notifications or registrations under the NPPRs; countries like Hong Kong and Singapore account only for one or two AIFMs in each of those EU Member States. As at March 31, 2015, 78 U.S. AIFMs had marketed into Ireland using the NPPR, 85 into Sweden, 67 into Luxembourg, 32 into Finland, 26 into Belgium and 11 into Denmark. Figures for other EU Member States were not provided.
As noted above, ESMA was required to issue an opinion on how the AIFMD marketing passport and NPPR were functioning.
ESMA states in its Opinion that the delay in the implementation of the AIFMD, together with the delay in the transposition in some EU Member States, make a definitive assessment of the passport and NPPR difficult. ESMA would thus see merit in the preparation of another opinion on the functioning of the passport and NPPR after a longer period of implementation in all EU Member States. At this stage, ESMA says that there is insufficient evidence to indicate that the AIFMD passport and NPPRs have raised major issues in terms of the functioning and implementation of the AIFMD framework.
Specifically in relation to the EU passport, ESMA has identified several issues, including:
- divergent approaches with respect to marketing rules, including as regards fees charged by individual EU Member State regulators and the definition of what constitutes a “professional investor”; and
- varying interpretations of what activities constitute “marketing” and “material changes” under the AIFMD passport in the different EU Member States.
ESMA sees merit in greater convergence in the definition of these terms.
The countries assessed
Based on information provided by EU Member State regulators, ESMA has identified 22 non-EU countries to be assessed (country-by-country) for purposes of the extension of the AIFMD passport.5
However, the Advice covers only the following six countries:
- United States;
- Hong Kong;
- Switzerland; and
ESMA chose to assess the above six countries first, on the basis that ESMA had a “sufficient level of information” in relation to those countries. ESMA will be assessing the remaining 16 countries in batches. There are thus expected to be further Advice releases from ESMA as each batch is completed.
Of the six countries above assessed by ESMA, only Guernsey, Jersey and (pending an amendment to local legislation)6 Switzerland have been assessed positively. That is, in ESMA’s view there are no obstacles to the AIFMD passport being extended to Guernsey, Jersey and Switzerland.
However, ESMA has recommended that the extension of the AIFMD passport to the U.S., Hong Kong and Singapore be delayed due to concerns related to competition, regulatory issues and a lack of sufficient evidence to properly assess the relevant criteria. These criteria are examined in greater detail below.
Given the number of countries yet to be assessed, ESMA has suggested in its Advice that the Commission, Parliament and Council “may wish to consider whether to wait until ESMA has delivered positive advice on a sufficient number of non-EU countries” before triggering the legislative procedures to activate the passport, “taking into account such factors as the potential impact on the market that a decision to extend the passport might have.”
The criteria used by ESMA in the assessment
ESMA is required under the AIFMD to consider certain criteria in its assessment of non-EU countries in relation to the potential extension of the AIFMD passport to those non-EU countries. Specifically, the criteria are: investor protection, market disruption, competition and monitoring of systemic risk. For purposes of the Advice, ESMA also considered how the existing Memoranda of Understanding (MoU) between the relevant non-EU countries and EU Member States have been operating.
As noted above, ESMA’s advice as regards the U.S., Hong Kong and Singapore is that the decision as to extending the AIFMD passport to those countries should be delayed at this time. Set out below are the principal reasons for ESMA’s recommendation of the delay.
ESMA’s assessment of the U.S.
ESMA’s primary objections to granting a positive assessment to the U.S. at this time are that:
- it is more difficult for EU AIFMs to market funds to U.S. investors than it is for U.S. AIFMs to market funds to EU investors; and
- the Volcker Rule9 “might have implications for European actors in the asset management industry notably in relation to the scope of the entities that might qualify as ‘banking entities’ or ‘covered funds’.”
That is, in ESMA’s view, EU AIFMs would not be competing on a level playing field with U.S. AIFMs were the passport to be extended to the U.S.
ESMA’s assessment of Hong Kong
ESMA’s primary objections to granting a positive assessment to Hong Kong at this time are that:
- detailed information on the Hong Kong regulatory framework as regards funds and their managers remains incomplete; there is not enough evidence to assess how it compares to the AIFMD framework. More time is needed to analyse the potential differences; and
- some EU Member States are considered as “acceptable inspection regimes” by the Hong Kong authorities but most of them are not; it is therefore not clear whether there is a level playing field between EU and non-EU AIFMs as regards market access.
ESMA’s assessment of Singapore
ESMA’s primary objections to granting a positive assessment to Singapore at this time are that:
- there is not enough evidence to assess the extent to which there would be significant obstacles regarding investor protection that might impede the application of the AIFMD passport to Singapore;
- detailed information on the Singapore regulatory framework remains incomplete; more time is needed to analyse the potential differences between the Singapore regulatory framework and the AIFMD; and
- there appear to be some barriers to entry for EU AIFMs into Singapore based on a requirement that managers should have a “sufficient nexus with Singapore”; also, only UCITS from certain EU Member States appear to be recognised in Singapore.
What happens next?
The AIFMD provides that, within three months of receiving “positive” advice and an opinion from ESMA, the Commission should adopt a “delegated act” (Delegated Act) specifying the date on which the legislative provisions in the AIFMD will become applicable, whereupon the AIFMD passport would be extended to non-EU AIFs and non-EU AIFMs.
Given that ESMA has only provided “positive” advice in relation to Guernsey, Jersey and Switzerland in the Advice, the question is whether the Commission will adopt its Delegated Act and “activate” the passport for AIFMs and AIFs from those three countries within three months of the Advice and Opinion, or wait until more countries have been assessed positively by ESMA.
In the meantime, ESMA will continue to work on its assessment of the remaining 16 non-EU countries and, presumably, will release further advice as each batch is completed.
| Sidley comment
As noted in our last Update, much of the AIFMD is going to be the subject of a review in 2017, which may lead to “AIFMD II.” Given all that has happened in the EU regulatory landscape since the AIFMD was adopted – including the focus of the Commission on the development of a Capital Markets Union, as well as tricky “equivalence” assessments under EMIR and MiFID II – it is not certain what the outcome of that review will be. Amongst other things, it is possible that the entire regime relating to the marketing of AIFs may be overhauled. Clearly, it is too early to speculate as to what might happen.
If you have any questions regarding this Sidley Update, please contact the Sidley lawyer with whom you usually work, or
1 Sidley Update, AIFMD 2014 Update – private placements: where did we end up, and where are we going? (September 8, 2014), available at: http://www.sidley.com/en/news/2014-09-08-investment-funds-update. See also AIFMD 2014 Update – Action Points for Non-EU Managers in 2014, available at: http://www.sidley.com/en/news/aifmd-2014-update--action-points-for-non-eu-managers-in-2014-01-24-2014.
2 Capitalised terms are as defined in previous Sidley Updates on the AIFMD.
3 ESMA, ESMA advises on extension of AIFMD passport to non-EU jurisdictions (July 30, 2015).
4 A detailed description of these obligations is set out in Sidley Update AIFMD 2014 Update – Action Points for Non-EU Managers in 2014, available at: http://www.sidley.com/en/news/aifmd-2014-update--action-points-for-non-eu-managers-in-2014-01-24-2014.
5 Australia, Bahamas, Bermuda, Brazil, British Virgin islands, Canada, Cayman Islands, Curacao, Guernsey, Hong Kong, Isle of Man, Japan, Jersey, Mexico, Mauritius, Singapore, South Africa, South Korea, Switzerland, Thailand, United States of America, and the U.S. Virgin Islands.
6 ESMA raised an issue regarding the exchange of information between the Swiss regulator (FINMA) and EU Member State regulators. However, the Swiss Federal Act on Stock Exchanges and Securities Trading (SESTA) is due to be amended January 1, 2016 in a manner that appears should resolve the issue raised by ESMA.
7 The regulator would be that of the AIFM’s EU “Member State of reference”; the AIFMD provides a test as to how to determine which EU Member State should be that AIFM’s EU Member State of reference.
8 To date, EU AIFMs with AIFs in non-EU countries could only market those AIFs under the NPPR regime set out in Article 36 of the AIFMD.
9 The Volcker Rule was introduced as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act; ESMA notes that the Volcker Rule “provides different obligations/restrictions regarding proprietary trading and investment in ‘covered funds’ by ‘banking entities.’”
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