ESMA recommends limited extension to AIFMD passport - National Private Placement here to stay?

August 3, 2015

The European Securities and Markets Authority ("ESMA") on July 30 published its Opinion on the current functioning of the existing AIFMD EU passport and its effective rival, the so-called National Private Placement Regimes ("NPPRs"). It also released much anticipated Advice on the possible extension of the passport to non-EU alternative investment fund managers ("AIFMs") and alternative investment funds ("AIFs"). This alert will focus on the limited extension currently proposed and summarize ESMA’s opinion on the existing passport and NPPRs.

ESMA's announcement is the culmination of a process initiated by Article 67(1) of the AIFMD (first published back in 2011, and in force since July 2013), which envisaged the opening up of the European market for alternative investment funds through the use of a “passport” – the principle that being authorized to market a fund in one member state gives you the right to market in them all. This was initially available only to EU AIFMs with EU AIFs, but the expectation was that this would be gradually opened up to non-EU AIFMs and AIFs alike.

The nature of ESMA's remit has to a considerable extent shaped its conclusions. It was charged with analyzing information provided to it by national competent authorities (local EU member state regulators) via quarterly reporting on the EU and non-EU AIFMs under their supervision. This analysis focused on the use of the existing EU passport; any problems encountered in its use; the operation of existing NPPRs and more general market intelligence, including market disruption; the monitoring of systemic risk; investor protection; and industry competition.

Opinion on the EU passport and the NPPRs – too early to say?
ESMA’s opening position is that a definitive assessment is difficult given the delayed transposition and implementation of AIFMD in many EU member states. However, ESMA has identified a number of issues on which it requests additional time to consider and ultimately address, such as divergent approaches to marketing rules, including fees and the definition of “professional investor,” and varying interpretations of what activities constitute “marketing” and “material changes” under AIFMD across different member states.

Despite these issues, ESMA’s interim verdict is not completely negative:“ESMA is of the view that there is insufficient evidence to indicate that the AIFMD EU Passport or the NPPRs have raised major issues in terms of the functioning and implementation of the AIFMD framework.”

ESMA advice on extending passport to non-EU AIFMs and AIFs
ESMA’s methodology here is to pull together detailed information on each relevant non-EU jurisdiction and assess each of these against certain prescribed criteria. It identified a “long-list” of some twenty-two countries to be assessed. It states that, at present, it has sufficient information only in relation to a shortlist of six non-EU countries: Guernsey, Hong Kong, Jersey, Switzerland, Singapore, and the United States.

These six jurisdictions have been assessed on how well each existing Memorandum of Understanding is operating and the overall experience of previous co-operation and engagement. Four specific tests were used to assess the situation in each jurisdiction:

  • The adequacy of investor protection arrangements,
  • The likelihood of existing EU AIFMs and AIFs being disadvantaged by new entrants,
  • Corresponding barriers to entry in the 3rd country, and
  • The effectiveness of monitoring of systemic risk.

Who’s in?
ESMA’s advice concludes that no obstacles exist to the extension of the passport to:

  • Jersey
  • Guernsey
  • Switzerland
    (Switzerland squeezed through because existing legislation in the pipeline will remove remaining obstacles.)

Who is not?
The remaining three – United States, Singapore, and Hong Kong – are deemed not ready to receive the passport at this time, although the situation in each will remain under review. Interestingly, the Cayman Islands are also conspicuous by their absence on the shortlist and only receive a cursory mention within the text.

What Next?
ESMA’s opinion on the EU passport/NPPRs and advice on the passport extension are now with the European Commission, Parliament, and Council for review and consideration. ESMA has also undertaken to deliver further rounds of assessment on the remaining sixteen countries “in the coming months.”

The ultimate determination (by the Commission, not ESMA) will be to either extend the non-EU passport to the countries highlighted above via a delegated act or to wait for ESMA to deliver a larger number of positive recommendations on other non-EU jurisdictions before taking any further action.

Where does this leave non-EU AIFMs and AIFs?
Although the very limited extension of the passport will disappoint, ESMA’s recommendations provide a degree of closure on the current options available to non-EU firms wishing to market AIFs into Europe. In our view, the use of existing National Private Placement Regimes in each member state will continue to be the method of choice. Indeed, the longer its use is perpetuated and refined, the greater the likelihood that the NPPRs will become a permanent feature of the EU market, possibly in tandem with the passport regime. We therefore anticipate that firms who have been “sitting on the fence” while this opinion was drafted will now want to make a definitive determination about how to proceed. In practice, this means registration under Article 36 (for EU AIFMs) and Article 42 (for non-EU AIFMs) in their top target jurisdictions. In so doing, they will continue to avoid the full obligations of authorization as a full-scope AIFM, while still being able to market their funds across Europe.

How can ACA Europe help?
ACA provides a full suite of AIFMD services, including a pre-registration AIFMD Gap Analyses, relevant Article 36 and 42 notifications to member states, comprehensive drafting of AIFMD policies and procedures, and software-enabled AIFMD Annex IV Reporting.

Please contact Andrew Welch ( or your regular ACA consultant with any questions on this email.