On July 30, after a one-week delay, the European Securities and Markets Authority (ESMA) published its long-awaited Opinion to the European Parliament, Council and Commission and responses to the call for evidence on the functioning of the Alternative Investment Fund Managers Directive (AIFMD) EU passport and of the National Private Placement Regimes (the “Opinion”) and its Advice to the European Parliament, the Council and the Commission on the application of the AIFMD passport to non-EU alternative investment fund managers (AIFMs) and alternative investment funds (AIFs) (the “Advice”).

The requirement for ESMA to publish the Opinion and the Advice was originally set forth in the AIFMD itself, and it mandated that ESMA should come to a view as to whether the cross-border marketing of EU AIFs by EU AIFMs was functioning well during the first year since the AIFMD took effect across the EU on July 22, 2014. If the EU passport was deemed to be effective, then ESMA was further mandated with the task of advising the European legislative authorities when, how and if to extend the passport to non-EU AIFMs and non-EU AIFs.

In the Opinion, ESMA has assessed the functioning of the EU passport and has found that, overall, it seems to be working—though ESMA does identify that only one year of passport use is insufficient to allow for a full analysis and suggests that a better view might be formed over a longer period of time, after which a new Opinion should be prepared.

In the Advice, ESMA explains that it has conducted a country-by-country assessment, taking into account the different circumstances of each non-EU jurisdiction regarding the regulatory issues to be considered (i.e., investor protection, competition, potential market disruption and the monitoring of systemic risk). Significantly, in this first round of jurisdiction reviews (ESMA will conduct several such reviews), ESMA only assessed six jurisdictions: Guernsey, Hong Kong, Jersey, Singapore, Switzerland and the United States.

Those initial countries were chosen due to a number of factors, including (1) the level of activity already being carried out by entities from those countries under EU national private placement rules (NPPRs, which are the only means by which a non-EU AIF managed by a non-EU AIFM can currently be marketed in EU countries), (2) EU national authorities’ and regulators’ knowledge and experience of dealing with their counterparts in the non-EU countries and (3) the level of engagement by market participants, including AIFMs, from those countries with ESMA’s review process. The authorities in Jersey, Guernsey and Switzerland have been very engaged with ESMA regarding their desire to receive the benefit of the EU passport, whereas other countries, including the United States, seem not to have engaged with ESMA, lobbied or actively participated in the review process.

In brief, the Advice that ESMA gives to the European Parliament, the Council and the Commission is that:

• there are no apparent obstacles to the passport being extended to AIFMs or AIFs established in Guernsey, where many private equity funds are established, and Jersey, where many real estate funds are established and which has a developing hedge fund community; and
• other than an amendment to the Swiss Federal Act on Stock Exchanges and Securities Trading, which becomes effective on January 1, 2016, there are no obstacles to the passport being extended to AIFMs or AIFs established in Switzerland.

However, ESMA was unable to reach a conclusion regarding Hong Kong, Singapore and the United States because of concerns regarding competition, regulatory issues and a lack of sufficient evidence to properly assess the relevant criteria. ESMA stated that it will finalize its analysis of Hong Kong, Singapore and the United States as soon as is practicable. It will also consider other non-EU countries in due course, including the Cayman Islands, where the majority of the world’s hedge funds are established.

The Advice and Opinion are currently being considered by the European Commission, Parliament and Council, which will offer their views in due course as to whether they believe that EU law needs to be amended to extend the passport to Guernsey, Jersey and Switzerland, and to other non-EU countries that subsequently satisfy ESMA’s requirements and for which ESMA provides further advice.

ESMA’s Opinion is available here.

ESMA’s Advice is available here.