ESMA Advice on Extension of Funds Passport: what next?

On 18 July 2016, the European Securities Markets Authority ("ESMA") issued its advice on the extension of the alternative investment fund managers' directive ("AIFMD") passport to investment fund managers and investment funds based in 12 non-EU countries, including Bermuda, the Cayman Islands, Guernsey and Jersey (the "Opinion").

In the Opinion, ESMA has confirmed that, in this second round of assessments, 2 additional jurisdictions (Canada and Japan) have been added to the original 3 jurisdictions (Guernsey, Jersey and Switzerland) deemed to satisfy the threshold of no significant obstacles impeding the application of the AIFMD passport. The assessment of the remaining 7 jurisdictions is still under consideration; 4 of these jurisdictions may need to address market access equivalency concerns raised by ESMA and ESMA has not yet had sufficient time to complete its review on the other 3 remaining jurisdictions (including Bermuda and the Cayman Islands).



The AIFMD aims to harmonise the regulation of alternative investment fund managers, managing and marketing alternative investment products in the EU. Under the current situation, non-EU fund managers have been largely precluded from marketing non-EU funds into the EU other than under the national private placement regimes ("NPPRs"). The benefit of the extension of the passport for any jurisdiction is that, once available, such jurisdiction's funds will be able to be managed and marketed in the EU on the same footing as European funds, albeit that this may not necessarily be as favourable as the current NPPRs.

Under the terms of the AIFMD, ESMA was required to give an opinion to the European Commission as to whether non-EU countries would be able to take part in the AIFMD EU passport regime. ESMA's first advice was published on 30 July 2015, following a decision by ESMA that it was in the best interests of the countries which were the subject of the advice that assessments were completed on a country-by-country basis. The first report covered six non-EU countries namely, Guernsey, Hong Kong, Jersey, Switzerland, Singapore and the United States. ESMA recommended that the AIFMD passport be extended to Guernsey, Jersey and conditionally, Switzerland.

The Cayman Islands and Bermuda were part of the second group that was assessed, which also included Australia, Canada, Japan and the Isle of Man.


The outcome

On 18 July 2016, ESMA released its second advice on the extension of the AIFMD passport to third countries and has recommended that the passport be extended to include Canada and Japan. Market access equivalency concerns remain in respect of Hong Kong, Singapore and the United States, and changes may be required to Australia's regulatory framework before it will be eligible for the passport extension.

Guernsey and Jersey, having already implemented AIFMD-equivalent regimes, remain categorised as jurisdictions which have no significant obstacles impeding the application of the AIFMD passport, and hence both should receive any passport extension when the European Commission finally permits third countries to participate in the AIFMD passport regime.

ESMA cannot give definitive advice with respect to the Cayman Islands or Bermuda until each has implemented its proposed new regulatory regime and ESMA have also confirmed that further assessment of the Isle of Man current regime needs to be undertaken.


Current status of Cayman AIFMD-equivalent regime

Whilst ESMA is of the view that there are no significant obstacles regarding competition and market disruption impeding the application of the passport to the Cayman Islands, ESMA wishes to further examine criteria on investor protection and effectiveness of enforcement before affirming that the passport should be extended to the Cayman Islands. Part of this process involves ESMA completing its review of draft rules and regulations supplied by the Cayman Islands government as part of the assessment process – following its initial review, ESMA has confirmed that the draft rules and regulations seem to show that the Cayman Islands' proposed new AIFMD-like regime would be broadly similar to the AIFMD framework, but ESMA still needs to undertake a more in-depth analysis. Much preparation has already been completed regarding the revision of the Cayman Islands laws and regulations in readiness for the extension of the AIFMD passport, specifically the Securities Investment Business Law ("SIB Law") and Mutual Funds Law ("MF Law").

The amendments to the MF Law and SIB Law provide a framework for Cayman Islands fund managers to opt to be licenced to an EU equivalent standard to allow them to obtain an EU passport. The MF Law amendments allow for Cayman Islands investment funds to opt-in to be regulated to an equivalent standard as against EU funds.

The specifics of the compliance obligations under the AIFMD regime will be set out in Regulations for both the MF Law and the SIB Law, final drafts of which were provided to ESMA as part of the assessment process. These drafts were received favourably by ESMA given their similarity to the AIFMD framework and the Cayman Islands is in a position to finalise the Regulations and bring them into force very quickly.

Additional legislative changes are currently underway in the Cayman Islands to address the Cayman Islands Monetary Authority's ("CIMA's") power to impose administrative fines for breach of regulatory laws, regulations and rules, and CIMA is currently developing a macro-prudential policy framework which will enhance its already robust systemic risk framework.


Current status of Bermuda AIFMD-equivalent regime

ESMA has confirmed that Bermuda has met three of the five criteria it assessed in order to issue advice on the extension of AIFMD passports. It advised that there are no significant obstacles impeding the issue of a passport to Bermuda in relation to standards on competition, market disruption and monitoring of system risk, but that more time is needed to review the remaining criteria, being enforcement and investor protection measures.

Following its initial review, ESMA has confirmed that the interim rules and procedures supplied by the Bermuda Monetary Authority ("BMA") as part of the assessment process seem to show that Bermuda's proposed new AIFMD-like regime would be largely similar to the AIFMD framework, but ESMA will continue to undertake a more in-depth analysis.

Much has already been done in order to revise Bermuda laws in preparation for the extension of the AIFMD passport, specifically a draft bill that has been introduced and, once in force, will amend the Investment Business Act 2003 to provide an opt-in framework for the licensing and regulation of alternative investment fund managers who wish to market their alternative investment funds in the EU. Recent legislative approval of the Investment Funds Amendment Act in Bermuda will also enhance the enforcement powers of the BMA to impose civil penalties, make prohibition orders and take other disciplinary measures in order to meet appropriate international standards.


The next steps

With only 5 out of the 12 jurisdictions assessed by ESMA to date being approved for the extension of the passport, and assessments on a further 10 new jurisdictions still to be commenced, it is not certain when the extension of the passport to non-EU countries will occur. ESMA has advised in its Opinion that the Commission and co-legislators may also wish to consider fiscal matters and anti-money laundering regimes, in addition to ESMA's advice, before extending the passport to any jurisdiction, and highlights that the NPPRs can continue in the interim – it is expected that the NPPRs will co-exist with the passport regime until at least 2018.

Pursuant to Article 67 of the AIFMD, the European Commission should pass legislation within 3 months after having received the Opinion to enable non-EU managers to avail of any passport for marketing and managing EU and non-EU funds in the EU. Notwithstanding the Opinion, the European Commission may delay or refuse to approve the extension of the passport to some or all of the third countries recommended by ESMA.

Three years after the passing of legislation under Article 67, a further advice should be produced by ESMA under Article 68(1) of the AIFMD, advising whether the NPPRs should be terminated or continue in parallel with the AIFMD passport.

With so much uncertainty still surrounding the timing of the extension of passports to third countries, investment managers domiciled in any of Bermuda, the Cayman Islands, Guernsey or Jersey who intend to obtain a passport, when available, should note they will be required to obtain the relevant investment manager's licence under the applicable domestic law and also to obtain an authorisation from their intended EU member state of reference. For the time being, investment managers should continue to take advantage of the NPPRs to market their funds into the EU pending any further decision of the European Commission. If you would like to discuss this further or need more information, talk to your usual Walkers contact or contact one of the team members listed below.

Jonathan BettsPartnerT +1 441 242

Ingrid Pierce Global Managing PartnerT +1 345 814
David CollinsPartnerT +1 345 814 4503

Daniel WoodManaging PartnerT +971 4 363

Andy RandallManaging PartnerT +852 2596

Jonathan HeaneyManaging PartnerT +44 (0)1534 700

Jack BoldarinManaging PartnerT +44 (0)20 7220

John RogersManaging PartnerT +65 6595

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