ESMA Publishes Advice on Extending the Marketing Passport Beyond Europe

ESMA has recommended that the AIFMD passport be extended beyond the countries within the European Union to Jersey, Guernsey, and Switzerland.

On 30 July, the European Securities and Markets Authority (ESMA) sent its advice to the European Parliament, European Council, and European Commission on the extension of the Alternative Investment Fund Managers Directive (AIFMD) passport to non­–European Union (EU) managers of alternative investment funds (AIFMs) and non-EU alternative investment funds (AIFs).[1] ESMA recommends that Guernsey, Jersey, and (subject to a condition) Switzerland should be considered eligible for the passport. It bears repeating that the AIFMD is the first of the single market directives to extend the possibility of the passport to third countries, and in that respect alone, it is a landmark directive.

Under the AIFMD[2], the passport is currently available to EU AIFMs only, which allows them to market and/or manage EU AIFs freely across the EU without the requirement to register the AIFs under the local private placement regimes in each EU country. Under AIFMD, non-EU AIFMs and EU AIFMs that market non-EU AIFs are required to access potential EU investors via the national private placement regimes (NPPRs) of each of the EU member countries where AIFs are marketed up to 28 different sets of rules. However, AIFMD contains a preset process for extending the passport to third countries, as appropriate.

Article 35(2) of the AIFMD sets forth the following conditions for marketing in the EU with a passport of a non-EU AIF by an EU AIFM:

• Appropriate cooperation agreements must be in place between the regulators of the EU AIFM’s home country and those of the third country of the AIF.
• The third country of the AIF is not listed as a Non-Cooperative Country and Territory by the Financial Action Task Force.
• The third country of the AIF has entered into a tax agreement in compliance with Article 26 of the Organisation for Economic Co-operation and Development’s Model Tax Convention on Income and on Capital and ensures an effective exchange of tax information with the home country of the AIFM and each other EU country where the AIF is to be marketed.

Equivalent requirements are set out in Article 37(7) to cover a situation where the passport is granted to a non-EU AIFM.

Article 67(4) states that where ESMA considers that there are no significant obstacles regarding investor protection, market disruption, competition, and the monitoring of systemic risk, impeding the application of the passport to the marketing of non-EU AIFs by EU AIFMs in the member countries and the management and/or marketing of AIFs by non-EU AIFMs in the member states, ESMA is mandated to issue positive advice on extending the passport. ESMA has decided to also take into account the effectiveness of any existing intra-regulator cooperation arrangements.

AIFMD equips ESMA with useful market and regulatory information and intelligence to inform its advice. Article 67(3) requires national regulators to provide information to ESMA quarterly since July 2013. To supplement those quarterly surveys, ESMA launched a call for evidence in November 2014[3] to which it received 67 responses, from inside and outside the EU, which were published in January 2015. In that call for evidence, ESMA made clear that it had decided to pursue a country-by-country assessment of the passport extension rather than treat third countries as a bloc. That seems eminently sensible but makes it necessary to assess the different non-EU countries on an individual basis, which requires an extensive information-gathering and assessment exercise per country.

ESMA has identified the following non-EU countries and territories for assessment: Australia, Bahamas, Bermuda, Brazil, British Virgin Islands, Canada, Cayman Islands, Curaçao, Guernsey, Hong Kong, Isle of Man, Japan, Jersey, Mexico, Mauritius, Singapore, South Africa, South Korea, Switzerland, Thailand, the United States, and the US Virgin Islands. However, currently, ESMA considers that it only has enough information to make a substantive assessment in relation to Hong Kong, Jersey, Guernsey, Singapore, Switzerland, and the United States. Accordingly, ESMA has only assessed those six jurisdictions.

In short, ESMA has determined that no significant obstacles exist to extending the passport to Guernsey, Jersey, and—once certain amendments have been made to the Swiss Federal Act on Stock Exchanges and Securities Trading—Switzerland. In principle, this enables the European Commission to proceed with the necessary legislation within three months of receipt of the advice, by 30 October 2015. However, in that regard, ESMA cautions that the commission should wait until ESMA has delivered positive advice on a sufficient number of third countries to help avoid any adverse market impact that extending the passport to a handful of third countries might have. This opens up the possibility that the commission will delay extending the passport to those three countries beyond the deadline prescribed by AIFMD.

Despite some review of the regimes in Hong Kong, Singapore, and the United States, ESMA has not yet made a definitive decision on extending the passport to those jurisdictions.

ESMA continues to work on its assessment of other batches of non-EU countries, hinting at further submissions to the commission “in the coming months”. Alongside that process, ESMA will also progress its continuing assessment of Hong Kong, Singapore, and the United States.

For an understanding of how AIFMD affects non-EU AIFMs that market private funds to EU investors, please see our previous LawFlash.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

London
William Yonge