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THIRD-COUNTRY AIFMD PASSPORT STALLS IN BRUSSELS

Alternative fund managers based out-side the European Union are coming to terms with the prospect that they cannot expect to access EU investors through an Alternative Investment Fund Managers Directive (AIFMD) marketing passport

for the foreseeable future, even if their funds are domi-ciled in an EU jurisdiction.

Last year the EU was supposed to begin the process of creating a third-country passport for managers of hedge funds, private equity, real estate vehicles and other alternative investments based in countries where regulation was deemed to be equivalent in standard and qual-ity of enforcement to that intro-duced for member states by the AIFMD.

The passport would mean that once a manager was authorised as being in compliance with the AIFMD by a national regulator, it could market its funds freely throughout the EU without requiring further approval in the markets where the fund was to be sold, as is already the case for EU-based managers.

ASSESSING AND ACCESSING The European Securities and Markets Authority (Esma) has already carried out assessments of the regulatory framework of 12 jurisdictions that are home to managers or funds likely to be interested in access-ing EU markets through compliance with the AIFMD framework, and submitted its findings to the European Commission.

Esma sees no impediment to allowing access to funds and managers from Canada, Guernsey, Japan, Jersey and Switzerland, nor any significant obstacles in the case of Singapore or Hong Kong. It generally favours application of the passport to Australia and the US, subject to some regulatory changes in those countries.

The authority is awaiting more details of new regula-tory regimes in Bermuda and the Cayman Islands to determine whether they meet EU standards on investor protection and effectiveness of enforcement criteria,

and remains unsure about whether the Isle of Man meets investor protection requirements.

However, it is now becoming clear that EU officials, with backing from some member states, are not willing to move further with the process of opening up access to managers and funds from outside the union, even if they are subject to regulatory regimes that satisfy all the AIFMD criteria.

CONSIDERATIONS CONTINUE The European Commission was widely expected to take a decision in October on whether to endorse Esma’s recommendations, but it did not do so. Officially the Commission is still considering the advice it has received from Esma.

Reports attribute the lack of enthusiasm in part to a desire to protect alternative managers that are based in Europe or access the market through an EU domicile. However, the process has also been overtaken by events seen as a higher priority in Brussels, such as the UK’s vote in June to leave the EU.

Where does this leave alternative investment firms from outside the EU and their funds, many of which are domiciled in the Cayman Islands? Setting up funds within the EU does not give them access to the AIFMD passport unless it has an authorised EU-based AIFM, a designated alternative investment fund manager.

Currently non-EU managers can continue to market their funds within individual EU member states on a country-by-country basis if they meet the individual

rules of their respective private placement regimes.

However, in some countries, including Nordic members of the EU, highly restrictive rules make it extremely difficult for foreign managers from selling their alter-native funds in those markets, even to sophisticated investors. Germany severely limited its pri-vate placement regime when the AIFMD came into force in 2013 and France’s does not apply to alternative funds.

Under the original AIFMD blue-print, national private placement regimes were due to be abolished once the marketing passport had been extended to non-EU coun-tries and this had been assessed as working well over a period of up to three years. In the absence of a

decision on passporting, these plans are now up in the air.Some non-EU managers have considered continuing

to access European investors through so-called passive marketing, where the initiative comes from an inves-tor that has not been solicited by the fund’s manager. However, European regulators have indicated that they are interpreting this provision very narrowly and are ready to clamp down on any abuses.

This leaves managers that wish to access EU markets with a need to have not only a fund or funds domiciled within the EU but also an AIFM. Managers that do not wish to incur the expense of setting up their own dedi-cated AIFM can as an alternative use a third-party AIFM, several of which are in operation in Luxembourg.

Rémi Chevalier is a founding partner of the Luxembourg law firm Chevalier & Sciales, which was established in 2005. He is a Luxembourg qualified lawyer and specialises in investment funds, banking and finance and capital markets.

Olivier Sciales and Rémi Chevalier of Chevalier & Sciales explore the latest developments in respect of the third-country AIFMD passport and how they might affect the industry

“ THE EUROPEAN

COMMISSION WAS WIDELY EXPECTED TO TAKE A

DECISION IN OCTOBER ON WHETHER TO ENDORSE

ESMA’S RECOMMENDATIONS, BUT IT DID NOT DO SO

” Olivier Sciales is a founding partner of the Luxembourg law firm Chevalier & Sciales, which was established in 2005. He is a Luxembourg qualified lawyer and specialises in investments funds. He holds a Master of Laws degree (LLM) from Cornell Law School.