Olivier Sciales and Rémi Chevalier of Chevalier & Sciales explore the latest developments in respect of the third-country AIFMD passport and how they might affect the industry.

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THIRD-COUNTRY
AIFMD PASSPORT
STALLS IN
BRUSSELS
A
lternative fund managers based out-
side the European Union are coming to
terms with the prospect that they cannot
expect to access EU investors through an
Alternative Investment Fund Managers
Directive (AIFMD) marketing passport
for the foreseeable future, even if their funds are domi-
ciled in an EU jurisdiction.
Last year the EU was supposed to begin the process
of creating a third-country passport for managers of
hedge funds, private equity, real estate vehicles and
other alternative investments based in countries where
regulation was deemed to be
equivalent in standard and qual-
ity of enforcement to that intro-
duced for member states by the
AIFMD.
The passport would mean that
once a manager was authorised
as being in compliance with the
AIFMD by a national regulator,
it could market its funds freely
throughout the EU without
requiring further approval in the
markets where the fund was to
be sold, as is already the case for
EU-based managers.
ASSESSING AND ACCESSING
The European Securities and
Markets Authority (Esma) has
already carried out assessments
of the regulatory framework of
12 jurisdictions that are home to
managers or funds likely to be interested in access-
ing EU markets through compliance with the AIFMD
framework, and submitted its findings to the European
Commission.
Esma sees no impediment to allowing access to funds
and managers from Canada, Guernsey, Japan, Jersey
and Switzerland, nor any significant obstacles in the
case of Singapore or Hong Kong. It generally favours
application of the passport to Australia and the US,
subject to some regulatory changes in those countries.
The authority is awaiting more details of new regula-
tory regimes in Bermuda and the Cayman Islands to
determine whether they meet EU standards on investor
protection and effectiveness of enforcement criteria,
and remains unsure about whether the Isle of Man
meets investor protection requirements.
However, it is now becoming clear that EU officials,
with backing from some member states, are not willing
to move further with the process of opening up access
to managers and funds from outside the union, even if
they are subject to regulatory regimes that satisfy all the
AIFMD criteria.
CONSIDERATIONS CONTINUE
The European Commission was widely expected to
take a decision in October on whether to endorse
Esma’s recommendations, but it did not do so. Officially
the Commission is still considering the advice it has
received from Esma.
Reports attribute the lack of enthusiasm in part to a
desire to protect alternative managers that are based in
Europe or access the market through an EU domicile.
However, the process has also been overtaken by events
seen as a higher priority in Brussels, such as the UK’s
vote in June to leave the EU.
Where does this leave alternative investment firms
from outside the EU and their funds, many of which
are domiciled in the Cayman Islands? Setting up funds
within the EU does not give them access to the AIFMD
passport unless it has an authorised EU-based AIFM, a
designated alternative investment fund manager.
Currently non-EU managers can continue to market
their funds within individual EU member states on a
country-by-country basis if they meet the individual
rules of their respective private
placement regimes.
However, in some countries,
including Nordic members of the
EU, highly restrictive rules make
it extremely difficult for foreign
managers from selling their alter-
native funds in those markets,
even to sophisticated investors.
Germany severely limited its pri-
vate placement regime when the
AIFMD came into force in 2013
and France’s does not apply to
alternative funds.
UndertheoriginalAIFMDblue-
print, national private placement
regimes were due to be abolished
once the marketing passport had
been extended to non-EU coun-
tries and this had been assessed as
working well over a period of up
to three years. In the absence of a
decision on passporting, these plans are now up in the air.
Some non-EU managers have considered continuing
to access European investors through so-called passive
marketing, where the initiative comes from an inves-
tor that has not been solicited by the fund’s manager.
However, European regulators have indicated that they
are interpreting this provision very narrowly and are
ready to clamp down on any abuses.
This leaves managers that wish to access EU markets
with a need to have not only a fund or funds domiciled
within the EU but also an AIFM. Managers that do not
wish to incur the expense of setting up their own dedi-
cated AIFM can as an alternative use a third-party AIFM,
several of which are in operation in Luxembourg.
Rémi Chevalier
is a founding partner
of the Luxembourg law
firm Chevalier & Sciales,
which was established in
2005. He is a Luxembourg
qualified lawyer and
specialises in investment
funds, banking and finance
and capital markets.
Olivier Sciales and Rémi Chevalier of Chevalier & Sciales explore the
latest developments in respect of the third-country AIFMD passport
and how they might affect the industry
“THE EUROPEAN
COMMISSION WAS WIDELY
EXPECTED TO TAKE A
DECISION IN OCTOBER ON
WHETHER TO ENDORSE
ESMA’S RECOMMENDATIONS,
BUT IT DID NOT DO SO
”Olivier Sciales is
a founding partner of
the Luxembourg law
firm Chevalier & Sciales,
which was established in
2005. He is a Luxembourg
qualified lawyer and
specialises in investments
funds. He holds a Master
of Laws degree (LLM) from
Cornell Law School.