The fund management industry has urged the European Securities and Markets Authority to rethink their decision not to allow alternative investment funds from the US, Hong Kong and Singapore to market their funds in the region under a single passport.
Last week Esma advised the European Parliament, the Council and the Commission that the pan-European marketing passport under the Alternative Investment Fund Managers Directive should be allowed for alternative investment fund managers in Switzerland (when pending legislation is adopted), Jersey and Guernsey. However it rejected extending the passport to equivalent funds from the US, Hong Kong and Singapore at this time.
Glynn Barwick, counsel at law firm Goodwin Procter in London, said in an email to Markets Media that Esma’s advice and opinion were a mixed bag for the fund management industry.
Barwick said it was good news that the regulator has recognised that some EU countries, mainly France and Germany, have imposed (possibly unlawful) fees and other obligations on EU managers that passport into those countries and that Esma suggested that further European-wide guidance is issued on the definition of “pre-marketing” and when offers may be made to “semi-professional investors”.
However he said the advice regarding non-EU passports is less good news.
“Real obstacles have been identified in Hong Kong and Singapore, and the review in the United States has not yet been finalised. Little progress has been made on other countries,” added Barwick. “It does seems as though obtaining the non-EU passport is going to be a tougher process than many had thought to the detriment of both managers located there and to EU investors.”
Esma said in its advice that if the AIFMD passport is allowed for the US, there is a risk of an unlevel playing field as regards market access between EU and non-EU alternative investment funds.
The regulator said: “Esma is of the view that the market conditions of US funds dedicated to professional investors in the EU in the event that the AIFMD passport is extended to the US would be different from the market access conditions of EU funds dedicated to professional investors in the US, notably due to registration requirements under the US regulatory framework (which generate additional costs).”
As a result Esma said the AIFMD passport should not be extended to US until better market access conditions are granted by the US authorities to EU funds.
For Hong Kong, Esma said that that detailed information on the country’s regulatory framework is incomplete while Singapore has significant obstacles regarding investor protection, competition, market disruption and the monitoring of systemic risk.
Esma said it will continue to work on its assessment of other non-EU countries and make further submissions in the coming months after a country-by-country assessment.
The Alternative Investment Management Association, which represents hedge funds, welcomed the extension of the AIFMD passport to Switzerland, Jersey and Guernsey but said the passport should be granted to all the main asset management and fund jurisdictions.
The association said in a statement: “AIMA welcomed Esma’s intention to assess other non-EU countries including the Cayman Islands, Canada and Australia, and also welcomed Esma’s willingness to refine its assessment of the US, Hong Kong and Singapore, which have not yet received a positive recommendation that the passport will be extended to them. But AIMA urged Esma to complete this process as soon as possible and in particular questioned the open-ended nature of the process relating to the US.”
Jack Inglis, chief executive of AIMA, said in a statement that the passport was just one marketing option for hedge funds as private placements can be used by European pension funds and investors to access non-EU funds managed by non-EU firms.
“We look forward to engaging further with Esma on the continuation of the national private placement regimes which we feel should be allowed to run alongside passports indefinitely,” Inglis added. “In any case, we believe that the country-by-country approach ESMA has chosen should ensure the continuation of such regimes absent a positive decision on the passport in relation to an individual jurisdiction.”
The extension of the AIFMD passport was seen as critical to AIFMD becoming a global brand - like Ucits - in a survey from Multifonds, the investment fund software provider at the end of June, a year after the regulation was implemented. Regulatory reporting was cited as the biggest concern by 81% of respondents compared to 66% in 2014.
Keith Hale, Multifonds' executive vice president for client and business development said in a report: "With regulatory reporting clearly an increasing concern across the board, it is crucial that regulators vocalise the importance of AIFMD and clearly outline how the data will be used, otherwise it will be at risk of being perceived merely as an administrative or bureaucratic burden with little tangible value."
