The politics (but not the merits) of any third country marketing passport remain as complex as ever and, in the meantime, industry must find other solutions.
By way of background, the AIFMD sought (erroneously, in the view of many industry observers) to introduce a regulatory framework for all alternative investment funds (including private equity investment partnerships) that replicated many of the features of the UCITS Directive (i.e. traded retail investment products). One such feature was the introduction of a ‘marketing passport’ for the units, shares or other transferable interests in AIFs. The idea (simply put) was that securities in an AIF duly registered in one Member State should be contractually marketable (in the narrow sense) to investors throughout the Union, thereby avoiding the regulatory hurdles (and costs) associated with marketing securities to investors in multiple Member States on a jurisdiction-by-jurisdiction basis. Although a simplification of the cross-border marketing process was welcomed, the AIFMD (rather controversially) reserved the benefits of the marketing passport for EU AIFMs managing EU AIFs. Non-EU AIFMs and non-EU AIFs managed by EU AIFMs were unable to take advantage of the passport, leaving the affected managers to navigate often skewed national private placement regimes (NPPRs) in each Member State. The AIFMD did, however, leave scope for the passport regime to be extended to non-EU AIFMs and AIFs in accordance with the rather complex rules set out in Article 35 and 37 to 41 of the AIFMD that juggle the political sensitivities of certain Member States (i.e. the so called ‘third country passport’).
ESMA was charged with conducting a thorough review of the legal and regulatory regimes of a number of non-EU jurisdictions and preparing a letter of advice to the Commission, the Parliament and the Council on the merits of extending the passport to them. The first ‘wave’ of jurisdictions assessed by ESMA comprised Jersey, Guernsey, Hong Kong, Switzerland, Singapore and the US. The jurisdictions were selected on the basis of a number of factors, including the amount of NPPR marketing activity carried out by entities from those countries, EU Member States’ knowledge and experience of dealing with them and the efforts of stakeholders from those countries to engage with ESMA’s assessment process. After months of analysis ESMA’s findings in relation to Jersey and Guernsey were seemingly unequivocal; ESMA concluded that ‘no obstacles exist to the extension of the passport’ to the Channel Islands. This was, in the eyes of many observers, due recognition of the efforts made by the Channel Islands to engage with ESMA, their well-established fund regimes and their well-respected legal and regulatory environments.
However, despite this unequivocal endorsement, the message from ESMA was not as positive and clear-cut as many first thought. ESMA concluded that it was unable to reach a definitive view on most other jurisdictions due to concerns ranging from competition and regulatory issues to a lack of sufficient evidence against which to properly assess the relevant criteria. As a result, ESMA went on to query whether extending the passport to only a few non-EU countries would have an adverse market impact, and suggested that the Commission, the Parliament and the Council might wish to defer the extension of the passport until a sufficient number of other ‘third countries’ were approved in principle. On the basis that the current passport regime creates a disparity by favouring on-shore managers and on-shore funds, ESMA’s desire to avoid a market imbalance seems somewhat ironic.
Should the Commission, the Parliament and the Council elect to postpone the extension of the passport in line with ESMA’s suggestion, there is a risk that the roll out of the passport to the Channel Islands could be delayed for an indeterminate period. Although the Commission, the Parliament and the Council are free to deviate from ESMA’s recommendations, the absence of a robust, positive message from ESMA feels like a missed opportunity. Opening the door to further delays to the extension of the passport regime, coupled with recent and impending developments in investor regulation at both EU and national level, point to the growth of a “fortress Europe” mentality within the Commission. In the long term such a mindset could increasingly stifle the free movement of international capital; the losers will ultimately be the very investors (and their stakeholders) which the regulations were designed to protect.
Realistically the Commission, the Parliament and the Council are unlikely to move quickly and, therefore, it falls to industry to make the marketing passport a reality for any third country AIFM that needs it.
previous comment / James McCarthy
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