Worldwide: ESMA Guidance Published On Application Of AIFMD Passport To Non-EU Jurisdictions

The European Securities and Markets Authority (ESMA) published its advice to the European Parliament, the European Council and the European Commission on 19 July 2016 in relation to the extension of the Alternative Investment Fund Managers Directive (AIFMD) passport to 12 "third countries" which are outside the European Union (EU): Australia, Bermuda, Canada, Cayman Islands, Guernsey, Hong Kong, Japan, Jersey, Isle of Man, Singapore, Switzerland and the United States.

Passporting is currently only available for EU Alternative Investment Funds (AIFs) managed by EU Alternative Investment Fund Managers (AIFMs). AIFMs in countries outside the EU or Non-EU AIFs managed by EU AIFMs must rely on the AIFMD National Private Placement Regimes in each EU member state. AIFMD makes provision for ESMA to provide advice to the European Parliament, the European Council and the Commission on the extension of the passport to third country AIFMs and AIFs and ESMA has been considering this on a country-by-country basis.

ESMA has identified 22 third countries which are the domicile of non-EU AIFMs that market AIFs in EU member states and which it intends to assess for passporting purposes. To date, ESMA has only considered 12 of these countries with others, such as the British Virgin Islands, due to be assessed in the next rounds.

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. 

In its advice, ESMA definitively assessed only five of the third countries under consideration, Canada, Guernsey, Japan, Jersey and Switzerland, as having no significant obstacles impeding the application of the AIFMD passport. The advice relating to the remaining third countries considered contained qualifications to varying degrees.

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 being prepared) 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 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 (adopted but 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 relating 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 to AIFMD passporting to those countries which have received a positive assessment by ESMA. 

ESMA has repeated its recommendation made in July 2015 that the European Parliament, European Council and European Commission may "wish to consider whether to wait until ESMA has delivered positive advice on a sufficient number of non-EU countries before triggering the non-EU country passporting, taking into account such factors as the potential impact on the market that a decision to extend the passport might have." If the European Parliament, European Council and European Commission follow this advice, 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, AIFs and AIFMs in non-EU countries, including Bermuda, the Cayman Islands and the British Virgin Islands can continue to rely on National Private Placement Regimes which will be available at least until July 2018. We expect that when AIFMD passporting is extended, Bermuda, the Cayman Islands and the British Virgin Islands (which is following the lead of the Cayman Islands in preparing for ESMA's assessment) are likely to be included in the list of approved third countries.

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