Uncertainty over extension of Pan-EU passport to non-EU managers remains
The extension of the pan-EU passport to non-EU managers as envisioned under the Alternative Investment Fund Managers Directive (AIFMD) is contingent on third countries meeting equivalence standards laid out by the EU and the effectiveness of the national private placement regimes.
The European Securities and Markets Authority (ESMA) is conducting a wholesale review of the Directive in 2015 and must advise the European Commission by July 22, 2015 whether the pan-EU passport should be afforded to non-EU managers. The Commission must then pass a delegated act within three months outlining how and when the passport will be introduced.
“ESMA is currently collecting data and will provide a conclusion in summer 2015 as to its views on whether the passport be extended. While it is hard to predict what direction this will take and when, it seems reasonable to me to think that the passport will eventually be extended to non-EU funds in countries which meet the equivalent regulatory standards of the EU,” said Simon Whiteside, partner at Simmons & Simmons in London.
Countries deemed non-equivalent could be those without a cooperation agreement with the EU or on a Financial Action Taskforce (FATF) blacklist, or one which does not adhere to the Organisation of Economic Cooperation and Development’s (OECD) tax agreements. However, one senior European policymaker involved in the passage of the Level I text of AIFMD, speaking under Chatham House Rules, said he suspected EU officials might introduce additional hurdles for third countries seeking equivalence so as to avoid granting them passports for pan-EU distribution of funds.
Another factor that would hinder the extension of the passport to non-EU managers would be if private placement is judged to be a success, and maintained. Private placement regimes vary markedly across the EU with the UK and The Netherlands adopting a relatively liberal approach, whereas France and Germany are far tougher. Germany, for example, requires the appointment of a depositary-lite service provider(s) if a non-EU AIFM wants to market to German institutional investors.
“The varied degree of implementation of private placement across the EU may lead ESMA to see this approach as excessively muddled, and react by being in favour of extending the passport to non-EU firms” said Whiteside.
Whether or not non-EU managers embrace the passport is open to interpretation. US managers are not particularly enthused about complying with AIFMD even if the marketing passport was extended to non-EU hedge funds with 90% telling a Deutsche Bank Markets Prime Finance survey that they were either not interested or undecided. “Many US managers are reluctant to meet the requirements of the Directive in relation to disclosure of their remuneration as they see it as intrusive. In addition, because AIFMD obligations ‘bite’ irrespective of a successful marketing campaign, some US managers are reluctant to pay the additional compliance costs that AIFMD entails without any guaranteed upside,” commented Whiteside.