Under the current structure of the Alternative Investment Fund Manager’s Directive (AIFMD), European firms are permitted to market EU funds to professional investors throughout the European Union through the passport system, whereas non-EU firms are able to market in the EU only in circumstances where they register with the appropriate national competent authority and provided that local law permits such marketing. The Directive had always contemplated that ESMA would provide a review of the operation of this EU marketing passport and would provide further advice on whether it should be extended to non-EU managers. This it has now done (at least in preliminary form), and it has raised a number of interesting issues.
ESMA’s task here was to give advice to the European Commission on the functioning of the EU passport. Given that a number of member states were late in implementing the Directive, it has not had a long period to assess the operation, although it has identified a number of diverging issues throughout the EU:
- Host rules. A number of significant member states, including France and Germany, have imposed a number of additional host state rules applicable to passporting EU managers marketing into their jurisdiction, including the payment of fees and the requirement to appoint a local agent. This complexity is multiplied by the fact that some home member states (such as Luxembourg) will not accept an application for a passport unless the manager is able to confirm that it has already complied with these host state obligations whereas other member states do not have the ability to do this (such as the UK). It is arguable that it is contrary to the directive to appoint additional host state obligations and therefore unlawful; it is certainly contrary to the spirit of the financial services single market to do so.
- Member states often have an inconsistent view as to what constitutes “marketing” and, in particular, as to what constitutes acceptable “soft marketing”. Certain states, such as the UK, consider “marketing” to be involved only at the very final stage when an offering document is presented to a potential investor, whereas other member states conclude that a fund is being marketed at the very outset of initial discussions with potential investors. Not only is this patchwork a complexity for managers to negotiate when talking to potential investors, it may also create a difficulty in getting a passport from countries that take a minimalist line on what constitutes “marketing” in order to “market” a non-existent fund into countries that take a maximalist line.
- The Directive permits a passported manager to market to professional investors, but there is inconsistency amongst member states as to whether funds may be marketed to additional “semi-professional” investors and in what circumstances.
ESMA’s overall conclusion, therefore, is that there is insufficient evidence to indicate that the passporting regime has raised major problems, but that there would be merit in greater convergence on the above issues. ESMA does not state how this ought to occur, but perhaps further guidance from ESMA itself is the most likely route. It is difficult to see, though, how the third issue can be harmonised since marketing to non-professionals is a concession granted by member states at their discretion outside the directive.
ESMA also considered the issue of extending the EU passport to certain non-EU countries: Guernsey, Hong Kong, Jersey, Switzerland, Singapore and the United States. In these circumstances, if granted, a manager that is incorporated in one of the approved locations that is then authorised in the European Union and complies with the terms of the Directive, may passport its funds to professional investors in the same way as an EU Manager.
The AIFMD says that where ESMA considers that there are no significant obstacles regarding investor protection, market disruption, competition and the monitoring of systemic risk, it shall issue positive advice. In other words, ESMA should provide the green light in circumstances where access to that market for EU managers is broadly comparable with access to the EU market.
ESMA’s conclusion was that there were obstacles in relation to both Hong Kong and Singapore. In particular, the Hong Kong legal framework considers only some EU member states as “acceptable inspection regimes”, and ESMA found potential anti-competitive barriers in Singapore. ESMA approved of Jersey and Guernsey and (subject to an agreed legal change) Switzerland.
In relation to the United States, ESMA noted that there are significant differences between the U.S. and the EU regimes in relation to investor protection and market access for EU managers. ESMA stopped short of saying that this would mean that the passport could not be granted to U.S. managers, but said that it had had insufficient time to make a final determination. Presumably ESMA will eventually come to the conclusion that the U.S. regime is acceptable, but it is unclear how much longer it will take.
In principle, the European Commission should introduce the passport for the approved countries within three months of ESMA’s advice, although ESMA has suggested that the Commission should wait until a large enough number of countries have been approved to avoid distorting competition. The open question is whether EU member states will switch off the existing national private placement regimes for the approved countries with the passport. In other words, a Jersey or Guernsey manager would be able, therefore, to market within the EU ONLY if it is fully compliant with the directive.