ESMA AIFMD advice and opinion on NPPR and passporting regimes

After keeping readers on tenterhooks(!) for over a week, on 30 July 2015 ESMA published its delayed advice and opinion to the European Commission, Council and Parliament on certain aspects of the Alternative Investment Fund Managers Directive (AIFMD).

The opinion relates to the passporting of EU AIF (by EU AIFMs) and the respective national private placement regimes (NPPRs); and the advice relates to the passporting of non-EU AIFMs and AIFs into the European Union. The Advice and Opinion, which were both required from ESMA under Article 67(1) AIFMD, will now be considered by the European Commission, Parliament and Council.

Opinion

Generally ESMA believes that the NPPRs and passport regime have not raised any major issues, although they do not go as far as to say that they are working well. Indeed, the evidence detailed suggests otherwise and we will be covering this in more detail at a later date.

Importantly, ESMA believes that it is difficult to give an opinion on the functioning of the passport and NPPRs in such a short time frame and believes that a more considered opinion should be given after a longer period of implementation. This appears slightly odd given its "advice" position (detailed below).

Several issues have however been identified for further work:

1. Divergent approaches with respect to marketing rules including the heterogeneity of fees charged by the NCAs where the AIFs are marketed and the definition of what constitutes a 'professional investor'; and
2. Varying interpretations of what constitutes 'marketing' and 'material changes' under the AIFMD passport in the different Member States. Indeed, what constitutes "marketing" has kept many busy for the last few years and any guidance on such might greatly alter the landscape (in either a positive or negative way).

Advice

The AIFMD makes provision for the passport – which is currently limited to EU AIFMs with EU AIFs – to be potentially extended. ESMA has considered an extension to six non-EU countries: Guernsey, Hong Kong, Jersey, Switzerland, Singapore and the United States. ESMA considers that the passport regime should be extended to Guernsey, Jersey and Switzerland, but not (currently) the others.

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. ESMA has decided to make a country-bycountry assessment of the potential extension of the AIFMD passport regime to allow it greater flexibility in the assessment and a distinction to be made between different situations of non-EU countries in terms for the demand for a passport, the access to the market of these non-EU countries for EU funds and managers, and their regulatory framework compared to AIFMD.

Issues were identified with the US which could lead to a distortion in competition if the passport were to be extended. These comments (in particular) appear slightly contrived…it was also noted that ESMA did not have sufficient time to consider the US requirements and regulatory structure in terms of its differences to the EU regime.

For Hong Kong, ESMA identifies that there does not appear to be a level playing field for all EU Member States as only some of them are considered as 'acceptable inspection regimes' by the Hong Kong Authorities. There is also concern from ESMA that not all EU AIFMs benefit from the same market access conditions in Hong Kong or indeed whether this would be the case if the passport was extended.

Finally, for Singapore, ESMA has identified significant obstacles regarding investor protection, competition, market disruption and the monitoring of systemic risk so Singapore has not been granted a passport.

Key Elements From Feedback Following Call for Evidence

Both the opinion and advice were based on reporting data received on a quarterly basis from national competent authorities as well as responses to a call for evidence issued by ESMA earlier this year. The papers give interesting statistics on the number of funds that have applied for authorisation or to market in different jurisdictions. They also summarise feedback received for the call for evidence on how the regimes are working from which ESMA has reached its conclusion.

A few key issues from the feedback on the passporting regime are set out below. Many of these were highlighted in our Ashurst briefing in January on the practical difficulties with the AIFMD (and in this sense, the ESMA papers were slightly cathartic!).

• Goldplating—ESMA highlighted responses which mentioned the additional requirements that a significant number of Member States have imposed such as:
  • Additional national requirements (such as France's centralising agent which one respondent even suggested was illegal). It should be noted that we understand that France has since removed this requirement;
  • Requirement by one Member State for a management company to be located in that jurisdiction for AIFs that are FCPs.
• Marketing definition—ESMA included responses which highlighted inconsistent interpretations of what constitutes marketing in different Member States. For example some Member States consider marketing to be when final fund documents are ready and units/shares are available for subscription to an investor (e.g. in the United Kingdom and Germany) compared to others who deem initial discussions with investors concerning potential fund strategies as marketing. This problem creates major issues for funds who cannot commit to a single pan-European marketing strategy but instead must look at the position in each Member State individually. This is clearly contrary to the basic premise of the AIFMD and an issue that looks likely to be tackled by ESMA quickly. In practice, the rule of reality is simply that AIFMs must make sensible risk calls.
• Fees—ESMA noted respondents' issues surrounding the fees charged in some Member States for marketing AIFs which differ vastly and are often opaque. They vary from €1,000 for processing documents for marketing passport in Austria, to €2,000 per AIF marketed in France, €2,650 for single compartment AIFs / €5,000 for multiple compartment AIFs in Luxembourg to Malta which charges notification fee of €2,500 per AIF and an annual supervisory fee of €3,000 per AIF. Often there can be additional fees levied which are not clear why they are being imposed and for which it is difficult to obtain proof of payment. The UK was generally seen favourably and does not impose additional requirements or fees to honour passport notifications from other Member States. Given this was highlighted by ESMA we would expect ESMA to rule on what level of fees can be charged by Member States and in what circumstances which will bring a level playing field across Europe. Of course, it could mean that where no fees are currently charged, fees may be charged in the future.
• Time taken—ESMA noted respondents' concerns on the disparity in time taken between different Member States to exercise passport rights. Again this has a particular impact on the marketing process for funds.
• Uncertainty in what constitutes a material change in different jurisdictions—which leads to difficulties in what to notify to different regulators. In some jurisdictions respondents complained that there was a lack of notification forms and discrepancies in the level of detail required in forms by those that do. This was highlighted in ESMA's opinion as something that needed to be looked at.

On the issue of NPPRs, the lack of consistency and requirement to consider each jurisdiction's rules separately were a bugbear of many respondents according to ESMA. In particular, the duplication of filing and reporting requirements – which includes periodic reporting and notifications of major holdings in some jurisdictions – was seen as a disincentive to market in certain countries. Some Member States were also seen to be harder to market into under their NPPRs than previously due to the additional requirements imposed on NPPRs by the AIFMD. This was often seen as a deterrent for many non-EU fund managers but could also lead to non-EU fund managers favouring those regimes that have favourable NPPRs such as the UK and the Netherlands.

Next Steps

ESMA considers that there should be another opinion on the functioning of the passport after a longer period of implementation in Member States. Clearly this exercise will be run again in the future.

Essentially, the Commission now has 3 months to adopt a delegated act specifying a date when the rules to extend the non-EU jurisdictions. This will set out the date from which the extended regime shall apply.