On 19 July 2016, the European Securities and Markets Authority ("ESMA") delivered its latest advice (the "Advice") to the EC1 as to whether the AIFMD2 passport should be extended to non-EEA jurisdictions ("Third Countries").
ESMA gave unqualified positive advice in relation to only five of the 12 jurisdictions considered: Canada, Guernsey, Japan, Jersey and Switzerland. The other Third Countries received qualified assessments and these form only part of a larger group of Third Countries on which ESMA is still gathering information.
As regards its advice in relation to the Cayman Islands, ESMA stated it will complete its assessment of the Cayman Islands when the Cayman Islands' New AIFMD Regimes3 and related steps have been implemented.
We understand that the New AIFMD Regimes are in near final draft form and we now expect them to be enacted imminently, paving the way for the application of the AIFMD passport to the Cayman Islands if and when it is activated.
In its initial advice on 30 July 2015, ESMA suggested that the EC wait until ESMA has delivered positive advice on a sufficient number of Third Countries before considering extending the passport to any non-EEA jurisdictions.4
ESMA has reiterated that view in its latest Advice, suggesting that the EC "may wish to consider whether to wait until ESMA has delivered positive advice on a sufficient number of non-EU countries before triggering the legislative procedures foreseen by Articles 67(5) and (6)…".
ESMA also goes on to highlight certain other matters that the EC may wish to consider before deciding whether to extend the passport to Third Countries, including: (i) fiscal matters in the non-EU country; (ii) the latest intelligence on the Anti-Money Laundering and Counter-Terrorism Financing regime in the non-EU country; and (iii) how the existing National Private Placement Regimes ("NPPRs") will operate alongside the Third Country passport, together with other relevant transitional arrangements.
The EC will have ultimate discretion on whether to follow ESMA's advice and we will keep you informed of developments. However, we expect further delays in the activation of the Third Country passport as a result of these aspects of the Advice.
Advice on the Cayman Islands: Ongoing Process
When considering the Cayman Islands, ESMA's advice was that there were no significant obstacles regarding competition and market disruption impeding the application of the AIFMD passport to the Cayman Islands; but it advised that it could not provide its advice in relation to the other aspects of the Cayman Islands' eligibility until:
(a) the final version of the AIFMD-like regime to be implemented in the Cayman Islands was available;
(b) legislative amendments giving the Cayman Islands Monetary Authority ("CIMA") the power to impose administrative fines directly for certain breaches of regulatory laws have been enacted; and
(c) the proposed development and implementation of a macro-prudential policy framework by CIMA to enhance systemic risk monitoring is in place.
We understand the current status of these items to be as follows:
(a) The New AIFMD Regimes are close to final, having been subject to detailed comments by industry and CIMA and submitted to ESMA for their review and comment.
We note that ESMA advised that the drafts seem to show that the new AIFMD-like regimes are broadly similar to the AIFMD framework, although "this would need to be confirmed having regard to the final published versions".
Given the similarity between the New AIFMD Regimes in the Cayman Islands and those of other jurisdictions which have received a favourable assessment, we are confident that once in force ESMA will be in a position to confirm its initial favourable impression.
(b) The legislative amendments introducing administrative penalties are part of a broader legislative initiative in the Cayman Islands which is well advanced and expected to be completed no later than the end of 2016.
(c) ESMA noted that the Cayman Islands has frameworks in place for addressing systemic risk, which will be further enhanced by the New AIFMD Regimes. ESMA is also interested to see the final form of the overlay of the macro-prudential policy framework which is currently being developed by CIMA in addition to those measures, which we do not anticipate causing material delay.
It now falls to the EC to determine how to implement ESMA's advice. Given that only 12 of the original 22 relevant jurisdictions identified have been assessed by ESMA, and only five of the 12 jurisdictions assessed have received an unqualified positive assessment, it remains to be seen whether the EC will decide to extend the Third Country passport to non-EEA jurisdictions at this stage or rather defer implementation of the Third Country passport until more jurisdictions have been positively assessed, as recommended by ESMA.
In the meantime, funds based in the Cayman Islands and the British Virgin Islands will continue to be able to be marketed in the EU under the relevant NPPRs that apply in the EU until at least 2018, when there will be a further consideration of whether the NPPRs should continue indefinitely or not.
As a result, there is still no one-size-fits-all approach to AIFMD. In our view, it seems likely that the status quo will continue to apply for managers looking to access investors globally, with domicile of fund vehicle determined to match the expectations of the relevant groups of investors.
Therefore we expect that the majority of managers will continue to operate on a parallel fund structure basis. When AIFMD compliance is a critical factor in selecting fund structure, for example when looking to market across the EEA, they will establish fund structures in jurisdictions which are fully AIFMD-compliant and have a proven track record of EEA management and marketing (e.g. Ireland).
Indeed, we have observed that availability of the AIFMD passport is only one of a number of factors our clients and their international counsel are considering when selecting an EEA domicile. These issues include availability of UCITS, MiFID regimes, Solvency II and sophisticated legal, regulatory and tax regimes, which also points to using established EEA fund domiciles where these issues have been assessed. In parallel to that, managers will continue to establish Cayman Islands funds to target investors in countries where the Cayman Islands remains the dominant fund domicile (such as North America, Asia and the Middle East), relying on the existing NPPRs for marketing in the EEA or reverse solicitation where appropriate.
1 European Parliament, Council and Commission
2 Alternative Investment Fund Managers Directive (2011/61/EU)
3 ESMA to Assess Cayman Islands for AIFMD Passport Extension
4 ESMA Recommends Deferral of AIFMD Passport Extension Decision