The European Commission (‘EC’) has responded to the advice from the European Securities and Markets Authority (‘ESMA’) on extension of the Alternative Investment Fund Managers Directive (‘AIFMD’) passport regime. It has asked that ESMA complete the third country assessments of the Cayman Islands (‘Cayman’) and the United States (‘US’) by June 2016.
AIFMD Passports and NPPRs
The AIFMD provides for the authorization, ongoing operation and transparency of Alternative Investment Funds (‘AIF’s) and aims to establish harmonised regulatory standards for AIF Managers (‘AIFM’s). An AIFM which is authorised and regulated in a European Union (‘EU’) Member State (‘MS’), may apply for a ‘passport’ which will allow it to market AIFs to institutional investors in all MSs or provide management services to AIFs domiciled in other MSs. At present, and until at least 2018, Cayman investment funds can be marketed in the EU under national private placement regimes (‘NPPR’s).
Passports for Non-EU countries
The decision on whether the EC would approve the extension of the passport regime to non-EU countries was due to be taken on 22 October 2015, based on advice from ESMA which was due in July 2015. ESMA’s advice was that it saw ‘no obstacles exist to the extension of the passport…’ to countries for which ESMA has had sufficient evidence to properly assess the relevant criteria and to satisfy any concerns related to competition and regulation. By July 2015 ESMA had assessed just six countries, and only formed an opinion on three. On 13 October 2015 ESMA’s Chair confirmed that ESMA would continue the existing three incomplete assessments and start assessing a second group of six, including Cayman.
EC Response to ESMA
The EC’s reply to ESMA’s July advice, signed on 16 December 2015, confirms that the EC will take its decision on whether to extend the passport regime to third countries 'when a sufficient number of countries have been appropriately assessed'. In the meantime it accepts that ESMA’s country by country assessment is correct and that the test set out in the AIFMD may result in different outcomes depending on the regulatory and supervisory framework of the countries in which the non-EU AIFMs and funds are established. The letter says that the EC understands that there are budget constraints which mean that ESMA can only deliver its advice on non-EU countries in waves.
ESMA’s second opinion
ESMA’s advice and opinion suggested that it was not able to provide a definitive assessment of the extension of the passport and NPPR regimes by the original July 2015 deadline because there had been delays in MS’s implementing AIFMD. It suggested it should produce another opinion once the AIFMD had been fully transposed in all EU countries and ESMA has a chance to see how it is working in practice. The EC agrees that ESMA provides a second opinion once it has more information, and that such an updated opinion will be particularly helpful for the planned review of the AIFMD due to start in 2017.
Deadline June 2016
The EC has asked ESMA:
- - to complete its assessment of the regimes of the USA, Hong Kong, Singapore, Japan, Canada, Isle of Man, Cayman Islands, Bermuda and Australia by 30 June 2016.
- - to provide a more detailed assessment of the capacity of each of the supervisory authorities in the non-EU jurisdictions it assess and their track record in ensuring effective enforcement.
- - to provide a preliminary assessment of the expected inflow of funds by type and size into the EU from relevant non-EU countries.
Cayman investment funds may continue to be marketed in the EU under national private placement regimes (‘NPPR’s) until at least 2018. ESMA will then consider whether the passport regime should displace NPPRs entirely, but until it takes that decision the two approaches will continue in parallel. As part of preparations for the EC’s possible extension of the passport to non-EU countries, in 2015 Cayman introduced two new laws (the Mutual Funds (Amendment) Law 2015 and the Securities Investment Business (Amendment) Law 2015) and related regulations have been developed in conjunction with ESMA.
We are actively monitoring the developments of this new regime and will produce a further update on the nuts and bolts of how the new regime will work in practice, once the implementing regulations are put in place. If you require any further information or legal advice on the marketing Cayman funds in the EU, please contact us at