At the moment, a non-EU PEVC fund manager (Fund Manager), managing a non-EU PEVC fund (Fund), can only market* that Fund in the EU if it complies with the National Private Placement Regime (NPPR) in every relevant EU country. That usually means:
- giving notice to, registering with, or securing the permission of, the authorities in every relevant EU country, before marketing to investors domiciled or with a registered office in their jurisdictions; and
- complying with at least some of the Alternative Investment Fund Managers Directive (AIFMD) and the relevant NPPRs after that.
But that may be about to change: the AIFMD includes a passport mechanism, which allows EU domiciled Fund Managers to market EU Funds across the whole of the EU in reliance on a single EU authorization. The AIFMD also includes a mechanism that will extend that passport to non-EU Fund Managers of non-EU Funds, if certain conditions are met – and the first of those preconditions has just been satisfied.
The extension mechanism:
Article 67 of the AIFMD provides that the European Securities and Markets Authority (ESMA) “shall issue to the European Parliament, the Council and the Commission … advice on the application of the passport to … the management and/or marketing of [Funds] by non-EU [Fund Managers] in the [EU] … Where ESMA considers that there are no significant obstacles regarding investor protection, market disruption, competition and the monitoring of systemic risk, impeding the application of the passport to … the management and/or marketing of [Funds] by non-EU [Fund Managers] in the [EU] … it shall issue positive advice in this regard. The Commission shall adopt a delegated act within 3 months after having received positive advice … from ESMA specifying the date when [the EU passport will be extended to non-EU Funds and non-EU Fund Managers]”.
ESMA has just published an advice for the US; Guernsey; Jersey; Hong Kong; Switzerland; Singapore; Australia; Bermuda; Canada; the Cayman Islands; the Isle of Man and Japan:
For the US: ESMA’s advice is positive. The passport could therefore be extended to US domiciled Fund Managers and US domiciled Funds although, for the reasons given in ESMA’s advice, if it is, it might be restricted to (a) US Funds dedicated to professional investors that are marketed in the EU without a public offering; (b) US Funds that are not mutual funds under the 1940 Investment Company Act; and/or (c) US Funds that are restricted to professional investors, as defined in the AIFMD;
For Guernsey, Jersey, Hong Kong, Switzerland, Canada and Japan: ESMA’s advice is positive. The passport should therefore be extended to Fund Managers and Funds domiciled in these jurisdictions.
For Australia: ESMA’s advice is positive, but conditional – the passport should be extended to Australia, if the Australian Securities and Investment Committee (ASIC) extends the “class order relief” that’s available to some EU Member States, to all EU Member States.
For Bermuda, the Cayman Islands and the Isle of Man: ESMA’s advice is positive on some tests, but it cannot reach a view on others. The passport is therefore unlikely to be extended to Fund Managers and Funds in these jurisdictions in the near term.
ESMA is also looking carefully at, and/or working with the authorities in, Malaysia, Egypt, Chile, Peru, India, China and Taiwan – although its work is much less advanced in respect of these jurisdictions. An extension of the passport to Fund Managers and Funds in these jurisdictions is therefore unlikely in the near or medium term.
Next steps – what does this all mean?
ESMA’s advice has been given to the European Commission, and a copy has been sent to the European Parliament and Council. The Commission now has 3 months to decide (a) when the extended passport for Fund Managers and Funds in Guernsey; Jersey; Hong Kong; Switzerland; Canada; and Japan will be switched on; and (b) whether and, if so, when and how, the extended passport will be switched on for Australia and the US.
If the Commission chooses to switch on an extended passport, it will do so by making and adopting “delegated acts”, and telling the European Parliament and Council what it’s done. The Parliament and Council will then have 3 months to consider the delegated acts and object, if they wish – although they can extend the 3 month period by another 3 months, if that’s what they want or need to do. Either way, if the Parliament and Council do not object to the delegated acts within the 3 or 6 month period, the acts will be published in the Official Journal of the European Union, and come into force shortly after that. It is therefore at least possible that the extended passports will be in place at about the turn of the year; and that US Fund Managers (and others) will be able to rely on them after that.
If and when the extended passports do come into effect, it will still be necessary for a non-EU Fund Manager of a non-EU Fund to give notice to the regulators in at least 1 EU Member State, before marketing the relevant Fund to investors in the EU; and the Fund Manager will still be required to comply with at least some of the requirements of the AIFMD – so US Fund Managers will still need to consider whether the benefit of being able to market a US Fund across the whole of the EU with a passport outweighs the cost of doing so. (Some may therefore prefer to continue to rely on the reverse solicitation and pre-marketing exemptions, when they can.) That aside, marketing should become a whole lot easier than it’s been since the AIFMD came into force.
* “marketing” means “a direct or indirect offering or placement at the initiative of the [Fund Manager] or on behalf of the [Fund Manager] of [interests in a Fund] it manages to or with investors domiciled or with a registered office in the Union“.