Back in December 2014, Paul Soltis provided us with a timely update on the transposition and implementation of the Alternative Investment Fund Managers Directive (AIFMD) and finished off by alluding to the round of talks scheduled for 2015 in relation to the distribution of non-EU AIFs within Europe under the existing cross-border marketing passport regime originally established under MiFID.
This program is now well and truly underway and with the initial consultation period now closed by the European Securities and Markets Authority (ESMA), the responses to the “Call for Evidence – AIFMD passport and third country AIFMs” by various EU and non-EU (Third Country) stakeholders indicate this could be a lively debate.
From a Third Country perspective, much work has been done in preparation for these talks so it’s difficult to imagine that nothing will come from this process. All key fund services jurisdictions with mature fund services markets have proactively engaged with the 27 member states and signed co-operative agreements, thus creating various regulatory and fiscal gateways for exchange of information. Similarly those non-EU jurisdictions who also promote themselves as domicile of choice for asset management companies have legislated for AIFMD in order to position themselves as having an equivalent standard of regulatory framework to facilitate any passporting decision. A positive decision by ESMA to allow passporting for non-EU managers may not be in the form of blanket permission across all Third Country jurisdictions but it’s reasonable to expect there will be some positive outcome.
In evaluating the responses from the Call for Evidence consultation, needless to say, any stakeholder body with a business interest in a Third Country is bullish on the establishment of a mechanism for EU cross-border distribution. International firm Eversheds, one of the world’s largest corporate law firms, highlighted the costly inconsistency of process, requirements and timelines throughout Europe when having to utilise the National Private Placement Regimes (NPPRs) for their clients. They strongly urge ESMA to allow passporting for non-EU AIFs and cite improved competition and better investor choice as a result. Conversely, The Association of Luxembourg Fund Industry (ALFI) has suggested in their response that the extension of the passport facility to non-EU managers at this time would be premature and ESMA should allocate more time for its Member States to fully implement AIFMD and “establish a smooth functioning of the passport” before doing so.
It’s clear that the consultation to allow non-EU AIFMs access to European distribution is politically sensitive and that a form of protectionism is understandably likely to emerge, but what does the consultation and final decision mean for the future of global distribution? Well for a start, a positive result would mean a fundamental shift in the way non-EU managers view Europe in terms of the potential for raising capital. In particular, while US managers have a healthy and thriving domestic investor base to utilise, the opening of cross-border marketing opportunities using a single passport to unlock Europe’s EUR15.5 trillion* asset management business, is arguably very appealing.
So if ESMA looks favourably on the lobbying and recognises the regulatory reform and commitment to AIFMD demonstrated by the Third Countries, it’s reasonable to expect an uptake in the desire to be an AIFM by asset managers established and operating within Third Country jurisdictions such as the US, Cayman Islands, Switzerland and the Channel Islands. ESMA is expected to deliver its advice and opinion to the Commission on or around 22nd July 2015.
* Pwc “Fund Distribution in Europe” August 2014