EuropeanSep 21 2015

The retail market is sighing with relief

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The AIFMD regulates the cross-border management and marketing of alternative investment funds (AIFs) – effectively any fund that isn’t a Ucits – within the European Economic Area (EEA). While funds established and managed in the EEA can be marketed to professional investors under an AIFMD ‘passport’, funds established or managed outside the EEA can be marketed only in EEA member states under the more restrictive ‘national private placement regimes’.

Since its implementation, the AIFMD has been criticised for the inconsistent way different member states are operating the passport, and because of the reduction in investor choice resulting from the marketing restrictions applicable to non-EEA AIFs and managers.

Indeed, had the UK implemented the AIFMD as restrictively as some member states, there would have been a noticeable impact on the listed investment company sector, since many of these companies are established in the Channel Islands, which are outside the EEA.

Embedded in the AIFMD was a requirement for the European Securities and Markets Authority (Esma) to give advice by July 22 2015 on the extension of the AIFMD passport to non-EEA member states (known as ‘third countries’). Esma has issued this advice and more general guidance on the functioning of both the passport and the national private placement regimes. So, what are the headline messages?

Esma has advised that, subject to some minor bedding-down issues, both the AIFMD passport and the national private placement regimes are functioning well alongside each other.

This is good news, since it had been feared that national private placement regimes would gradually be withdrawn as routes for marketing AIFs into the EEA. Unless there was a corresponding extension of the passport, this would have had a significant impact on the investment companies sector, since Channel Islands funds are commonly used as alternatives where a UK investment trust would not be tax-efficient.

Esma’s advice gave no sign that it was considering recommending the withdrawal of national private placement regimes in the near future.

Secondly, Esma has recommended the extension of the AIFMD passport to ‘third countries’. So far, it has considered six, and recommended extending the passport to only three: Guernsey, Jersey and, subject to some proposed legislative changes taking effect, Switzerland.

Jersey and Guernsey have both worked hard to update their regulatory regimes to cater for those wishing to ‘opt in’ to a regime that has been more or less copied from AIFMD. This, together with the local regulators’ history of co-operation with Esma and EEA regulators, made it relatively straightforward for Esma to conclude that their regimes were equivalent to AIFMD.

Esma did not recommend extending the passport to Hong Kong, Singapore or the US. The reasons were slightly different in each case, but the main themes were: lack of time to perform a full analysis of the relevant regulatory regimes; and a concern that extending the passport to those jurisdictions would lead to an uneven playing field in that local managers would have better access to EEA investors than EEA managers would have to local investors.

Before anyone gets too excited about the extension of the passport, they should note that it is likely to be delayed until there are more eligible ‘third countries’. For the time being, the status quo will prevail and Guernsey, Jersey and Switzerland will have to wait in the wings.

What is the impact on the retail market? Principally, investment company fans can breathe a sigh of relief. Even if the national private placement regimes are eventually withdrawn, investors should still have access to Channel Islands-domiciled funds under the passport. This is good news in view of the raft of other forthcoming EU legislation that is expected to have a less positive impact on the investment trust sector, for example Mifid II.

A final word on AIFMD. It may be remembered that in certain areas, the directive had the bizarre outcome of imposing stricter rules in relation to AIFs and their managers than those that apply to Ucits and their managers. Ucits V, which is on the horizon, will bring Ucits regulation in line with AIF regulation in these areas. The impact of Ucits V remains to be seen, but is likely to be felt by managers more than investors.

Cathy Pitt is funds partner at CMS

THE REGULATOR’S VIEW

The European Securities and Markets Authority (Esma) was asked to provide advice on the extension of the AIFMD ‘passport’ to non-EU countries. In a report published on July 30, Esma noted its research had highlighted 22 non-EU countries where Alternative Investment Funds (AIFs) were domiciled and marketed into EU member states. It narrowed the list to six jurisdictions, of which only three were given positive advice. Its conclusions were:

US

In the context of a potential extension of the AIFMD passport towards the US, there is the risk of an unlevel playing field between EU and non-EU AIFMs as regards market access. Esma is of the view that the market conditions of US funds dedicated to professional investors in the EU (in the event that the AIFMD passport is extended to the US) would be different from the market access conditions of EU funds dedicated to professional investors in the US, notably due to registration requirements under the US regulatory framework (which generate additional costs).

Esma advises the European Parliament, the Council and the Commission to delay their decision on the application of the passport to the US until such time as conditions which might lead to a distortion of competition are addressed.

Guernsey

There are no significant obstacles regarding investor protection, competition, market disruption and the monitoring of systemic risk impeding the application of the AIFMD passport to Guernsey.

Jersey

The same as Guernsey, above.

Hong Kong

Esma notes that detailed information on the Hong Kong regulatory framework remains incomplete. Therefore, more time is needed to analyse the extent to which the potential differences between the Hong Kong regulatory framework and the AIFMD may be material to the assessment on the potential application of the AIFMD passport to Hong Kong.

Esma also notes that some EU member states are considered as “acceptable inspection regimes” by the Hong Kong authorities, but most of them are not. It is therefore not clear whether there is a level playing field between EU and non-EU AIFMs as regards market access and whether EU AIFMs and EU AIFs are treated in the same way as managers and collective investment schemes of Hong Kong in terms of regulatory engagement.

Switzerland

Esma highlighted potential issues with the transfer of information under the existing Federal Act on Stock Exchanges and Securities Trading (Sesta). But it notes “a process is underway in Switzerland to amend Sesta, including the provisions on co-operation. The process is at a relatively advanced stage and the new version of Sesta adopted by the Swiss Parliament in June is due to enter into force on January 1 2016”.

Esma advises the European Parliament, the Council and the Commission that there will be no significant obstacles impeding the potential application of the AIFMD passport to Switzerland, upon the enactment of the amendments to Sesta.

Singapore

There is not enough evidence to assess the extent to which there would be significant obstacles regarding the monitoring of systemic risk or to assess the extent to which there would be significant obstacles regarding investor protection impeding the application of the AIFMD passport to Singapore.

Detailed information on the Singapore regulatory framework remains incomplete. Therefore, more time is needed to analyse the extent to which the potential differences between the Singapore regulatory framework and the AIFMD may affect the assessment on the potential application of the AIFMD passport to Singapore.

Esma advises the European Parliament, the Council and the Commission to delay their decision on the potential application of the AIFMD passport to Singapore.