18 September 2019 - Article
Non-European managers looking to sell into Europe must look to the Alternative Investment Managers Directive ('AIFMD') and what it says about non-EU managers and non-EU alternative investment funds (hedge, PE, VC, etc.). The current position is that, while AIFMD allows EU managers and EU funds a 'passport' to market across the EU without barriers, non-European managers are subject to the so-called 'national private placement regime' ('NPPR') of each individual EU member state. Of course, passive, or reverse solicitation sales are, when the circumstances merit it, entirely carved out of AIFMD.
For US managers promoting their funds into the UK, the NPPR is a benign set of requirements that involve registering the fund with the UK regulator (the FCA) and ensuring that its offering documents comply with certain AIFMD transparency requirements (which are typically found in most offering memoranda as standard disclosures). Other EU member states, such as France, take a more restrictive, protectionist stance via the NPPRs they elect to apply to incoming, non-EU managers and funds.
Developments under AIFMD
AIFMD provides for the potential extension of the cross-Europe passport to non-EU managers and non-EU funds. This extension is dependent on recommendations, on a country-by-country basis, by the European Securities and Markets Authority ('ESMA') to the effect that there are no significant obstacles regarding investor protection, market disruption, competition and the monitoring of systemic risk that could impede the application of the passport to these non-EU products and managers (a test, then, of equivalence). ESMA does not grant the passports itself; that remains the preserve of the EU legislature, based on ESMA's advice and recommendations.
On 18 July, ESMA gave its advice and recommendations on Australia, Bermuda, Canada, Cayman Islands, Guernsey, Honk Kong, Isle of Man, Japan, Jersey, Switzerland, Singapore and the United States.
Will US managers get an EU passport?
ESMA is of the view that existing memoranda of understanding between European and US regulators work well, and suitable investor protection rules and regulatory standards and processes are in place in the US to justify the US regulatory regime as being sufficiently equivalent to that of the EU. ESMA does consider that market access for EU funds in the US has more inbuilt obstacles (when marketing to retail investors) which could indicate a competitive disadvantage. ESMA has therefore suggested that if the legislators are minded to enact a passport for US fund managers, they legislate to grant the passport to funds that are sold to professional investors only. This would clearly not create a problem for the vast majority of US funds currently marketing into Europe, who are already focusing on professional and UHNW investors.
As we say above, ESMA just makes recommendations on non-EU countries' eligibility for the passport, and for these to be put in place, legislation is needed. Given that the AIFMD timetable is already arguably behind schedule on the extension of the passport, and in light of resourcing and political issues throughout the European infrastructure, we should manage our expectations on timing, but the direction of travel is clearly positive, and travel is happening.
What about Brexit?
As the IMF recently pointed out, Brexit has thrown a 'spanner in the works', and this spanner will have an effect on ESMA and EU decision making processes as well as on EU growth and GDP figures. This is not least because ESMA, already under-resourced, makes extensive use of secondees and appointments from the UK regulator. Equivalence decisions, and rule making are inevitably going to be further delayed, and there are suggestions that these processes will become politicised, or more politicised.
However, from a UK perspective, and looking at the methodology AIFMD requires when making a decision to extend the passport to a non-European state, there is no reason that a post-EU UK would not qualify for that passport. It has fully implemented AIFMD, and has always allowed the inward sale of products by non-UK managers (subject to certain obvious restrictions). So given that equivalence and a level playing field for competition purposes are evident, an assumption that a passport would be extended to the UK once it is outside the EU seems a safe bet. However, where the UK will come in the queue for ESMA decisions and EU legislation, and how long those processes will take is a more open-ended question.
What is next for US managers?
Pending Brexit, business is very much as usual for US managers selling into Europe. Indeed, post-Brexit, and regardless of the form that eventually takes, it is likely that the landscape will remain the same – the UK will continue to accommodate sales by US managers, and, within time, itself be accredited as AIFMD equivalent for the purposes of sales and marketing from the UK into the EU.