Third-Country Passport for Funds
The European Securities and Markets Authority (ESMA) intends to strengthen the European investment market by the implementation of a passport for cross-border management and marketing of funds for non-EU countries (ESMA Advice dated July 19th 2016). In rendering the advice, ESMA examined 12 non-EU countries regarding their compliance with the Alternative Investment Fund Managers Directive (AIFMD). As a result of such review, ESMA recommended 9 countries (partially with restrictions) and also considers the U.S. as generally eligible for the passport.
Impact on professional practice
The advice by ESMA is the first step towards a corresponding legislative act by the European Commission. The extension of the passport to non-EU countries would abolish national notification regimes currently applicable to fund managers from non-EU countries. Under current laws, only funds and managers from the EU benefit from the passport, as they do not need to obtain separate authorizations for each individual EU Member State.
Funds and managers from non-EU countries, however, are subject to multiple authorizations pursuant to national requirements of each EU Member State. With the third-country passport, one single authorization would be sufficient for third-country fund managers to manage and market funds in every EU Member State, therefore making the different authorizations obsolete. On the basis of reciprocity, the market of the respective non-EU country would also be accessible for EU fund managers on equal terms.
The extension of the passport qualifies as a milestone in cross-border investment regulations as it enlarges the investment diversity for institutional investors such as pension funds and insurance companies.
The reciprocal market accessibility, i.e. the opportunity to manage and market EU funds to investors in non-EU countries, is beneficial to EU fund managers. If the passport were to be implemented, cross-border investments for fund managers as well as investors would be simplified and the EU investment market would be accessible to global competition.
First positive evaluation for the U.S.
In its former evaluation, ESMA had classified the supervisory requirements for EU funds to do business in the U.S. as too cost-intensive. Such unequal provisions for market access would contradict the concept of reciprocal market accessibility, therefore ESMA could not recommend the U.S. as eligible for the third-country passport in its previous advice. Notwithstanding its current positive evaluation, ESMA considers certain restrictions for the U.S., especially the limitation of the investor base to professional investors. For example, German investors, who only qualify as semi-professional investors pursuant to the German Capital Investment Act (Kapitalanlagegesetzbuch, KAGB), in particular smaller trusts, churches, family-offices and pension funds, would not benefit from a third-country passport for the U.S.
ESMA also considers Canada, Japan, Jersey, Guernsey and, subject to pending legislation, Switzerland eligible for the third-country passport.
Australia, Singapore and Hong Kong would only be considered eligible if their respective market is also accessible on a reciprocal basis for EU funds and managers from each EU Member State. ESMA was not able to make a conclusive recommendation in respect of Bermuda, the Cayman Islands and the Isle of Man.
The European Commission now has to decide whether or not the extension of the EU passport for funds to non-EU countries shall be enacted at the present time. According to the provisions of the AIFMD, this decision must be made within 3 months of receipt of ESMA`s advice. However, similar to its prior advice dated July 30th 2015, ESMA has once again suggested not to adopt the passport until it has made recommendations for a sufficient number of countries, though it has not specified how many. ESMA will therefore continue to examine and evaluate non-EU countries. As a result, it is uncertain whether the implementation of the third-country passport for funds will be adopted in the near term.
An accelerated implementation would be preferable for countries that ESMA unconditionally recommended as eligible for the passport. Consequently, the U.S. would not (yet) be included. The United Kingdom (UK), which would become a non-EU country upon Brexit, will have to be evaluated by ESMA. From the present perspective, there is nothing to suggest the passport may not be extended to the UK. However, any deregulation discussions in connection with the Brexit remain to be seen.
The advice by ESMA is an important step towards the opening of the EU market for investment funds and fund managers from non-EU countries. In particular, the evaluation by ESMA of the U.S. as generally eligible for the third-country passport could provide EU investors and fund managers with a simplified access to one of the largest investment markets; however, it remains unclear, when and to what extent the implementation of the third-country passport will be adopted. We will keep you informed on further developments.
Any questions? Please contact: Dr. Georg Christoph Schneider, Dr. Matthias Geurts or Dr. So-Ang Park
Practice Group: Private Equity & Venture Capital