AIFMD Passporting Debate Continues as National Private Placement Regimes get a Reprieve

Date: August 26, 2015

On 30th July, after much anticipation and a one-week delay, ESMA has released its advice and opinion to the European Parliament, the Council and the Commission in relation to the functioning of the EU’s Alternative Investment Fund Managers Directive (AIFMD) fund distribution passport.

Interested parties eagerly digested the material and the media output that followed which included some dramatic headlines such as “ESMA excludes Cayman from AIFMD Passport” and other similar stories in relation to those jurisdictions that did not receive positive advice. This painted a rather scandalous picture of protectionism and the perception of an unfair bias towards neighbouring non-EU jurisdictions.

Taking a more objective viewpoint, ESMA’s advice and opinion is a 52-page assessment beginning with a list of 22 jurisdictions that are key domiciles for Alternative Investment Fund Managers (AIFMs) as defined by the Directive. ESMA screened those 22 jurisdictions on the basis that they had sufficient information readily available on the regulatory regime of each jurisdiction in order to make a proper assessment and an informed decision. A total of six jurisdictions (the United States, the Channel Islands of Guernsey & Jersey, Switzerland, Singapore and Hong Kong) were assessed, but only the Channel Islands and Switzerland received positive advice to extend the passport. This outcome is not surprising given the close relationship and cultural synergies of these business jurisdictions with Europe.

In defence of ESMA’s decision not to include the Cayman Islands in the initial 22 jurisdictions, there are two factors at play. First, the Cayman Islands are a significant domicile for funds, but not for fund management activities as a whole. And second, when ESMA began the information gathering exercise in November 2014, the Cayman Islands did not have a dual regime in place for governing alternative investment fund managers operating from the Cayman Islands. That being said, it should be noted the Cayman Islands government[1] is close to finalising an AIFMD equivalent dual regime at the time of this writing.

With regards to the U.S., Singapore and Hong Kong, the rationale for not providing a definitive decision relates to unresolved discussion surrounding competition, regulatory gateways for information, and smoothing the differences in the regulatory regimes governing alternative funds and managers / advisors. ESMA is, however, hoping to complete the assessment of these three jurisdictions in the coming months.

In essence, the long awaited advice and opinion proved to be rather lacklustre due to its incompleteness. The delivering of advice and opinion to the Parliament, Council and Commission is one component of the already quite lengthy European legislative process and, in a communication to the Ministry of Finance, ESMA has suggested those European institutions may wish to wait until further positive assessment has been made on a sufficient number of non-EU jurisdictions before triggering the legislative process.

The fact that three jurisdictions have been given the ‘green light’ is arguably a bit of a misnomer, and we are only now entering into the real assessment where ESMA and three of the largest power houses of fund management domicile will need to find common ground. They will need to work together on what could be a defining moment for global fund distribution and regulatory convergence to create the foundations for a truly level international playing field.

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