Written by Charles Gubert

Charles Gubert

National Private Placement Regimes (NPPR) could remain in place until 2020 following the announcement by the European Securities and Markets Authority (ESMA) that only Switzerland, Jersey and Guernsey would presently be able to access the pan-EU marketing and distribution passport afforded under the Alternative Investment Fund Managers Directive (AIFMD).

ESMA published its advice on AIFMD on July 30, 2020 and identified the jurisdictions which it felt met regulatory equivalence to reap the benefits of the passport. The agency confirmed it had reviewed the regulatory regimes in the US, Switzerland, Hong Kong, Singapore, Jersey and Guernsey. ESMA highlighted more work needed to be done in the US, Hong Kong and Singapore before a firm judgement on extending the passport could be made.

“Only three countries have been recommended for the passport so far. Approving third countries will be a time-consuming process for ESMA and as such the passport might not be afforded to a number of jurisdictions for a few years. Furthermore, it is now entirely up to the European Commission and European Parliament to pass a delegated act extending the passport. This is unlikely to occur before the beginning of 2016. As such, the existing set-up of NPPR will last beyond 2018 and even into 2020,” said Bill Prew, CEO of INDOS Financial, an independent AIFMD depositary in London.

Some believe the decision by ESMA to recommend Guernsey, Jersey and Switzerland for the passport are cultural. Others point out these countries have made significant efforts early on to introduce regulation that is equivalent to that of AIFMD. Guernsey and Jersey, for example, passed legislation permitting dual fund regulation whereby managers could elect to be regulated under rules equivalent to AIFMD or maintain the status quo provided they only solicited capital from non-EU institutional investors.

Offshore fund domiciles including the Cayman Islands, British Virgin Islands (BVI) and Bermuda have not been included in the primary approvals by ESMA. This is despite the Cayman Islands proposing regulation similar to that of the Channel Islands earlier this month.

“The decision by the Cayman Islands to propose legislation that allowed fund managers to either comply with AIFMD or retain their pre-existing status was necessary but it did come quite late in the day and I doubt ESMA had time to review Cayman’s equivalence status to that of AIFMD. Despite some inflammatory headlines about the Cayman Islands being shut off from the passport, ESMA has made it clear that it will review Cayman Islands, alongside a range of other countries in the future,” said Prew.

ESMA’s decision not to include the Cayman Islands in the jurisdictions it reviewed is strange given that it is the domicile of choice for the majority of the world’s hedge fund managers. “Given the limited interest from Singapore or Hong Kong-based fund managers in seeking AIFMD authorisation and the market dominance of the Cayman Islands, I do find it strange that Cayman Islands was not included in the first review,” commented Prew.

 A number of challenges do remain. Attaining EU equivalence can be a protracted process as a number of US central counterparty clearing houses (CCPs) are finding out under the European Market Infrastructure Regulation (EMIR). “There remain significant differences with the US and EU over equivalence. Perhaps most interestingly is that ESMA says it is concerned that EU AIFMs will not get the same level of access to US investors as US managers would to EU investors under AIFMD. However, the ESMA opinion talks of AIFMs accessing US retail investors when AIFMD is applied only to fund managers targeting institutional investors,” said Prew.

 A number of non-EU managers had delayed a decision on whether to market into the EU until ESMA published its opinion. The lack of definitive guidance in the opinion means many non-EU managers might simply utilise NPPR as a means to target EU institutional investors. Managers which have a number of EU investors across member states may even establish onshore fund structures in Luxembourg or Dublin.

 “Non-EU managers will probably use NPPR. While this means they have added costs of Annex IV regulatory reporting, additional investor and annual report disclosures, and in some limited cases the appointment of a ‘depositary-lite’ service provider, it does give managers enhanced investor diversification. In addition, many managers’ compliance teams are concerned about reliance on reverse solicitation and the risk of violating the rules. As such, we understand more non-EU managers are registering to market under the AIFMD rules instead of running the risk of marketing in breach of AIFMD,” commented Prew.

 Martin Cornish, partner at law firm MJ Hudson, agreed. “Over the last few years, a number of US managers shunned the EU because of the associated compliance costs of AIFMD and were hoping for an early passport. In the last six months, we have received a number of inquiries from US managers who have realised that reverse solicitation is not a marketing strategy.  Serious managers are increasingly looking to comply with the NPPRs or launch onshore,” said Cornish.