On July 19, 2016, the European Securities and Markets Authority (“ESMA”) published its revised advice to the European Parliament, the European Council, and the European Commission on the extension of the AIFMD marketing and management passport (“AIFMD Passport”) to certain non-EU alternative investment fund managers (“AIFM”) and alternative investment funds (“AIF”). With respect to Switzerland, ESMA confirmed its earlier positive advice and concluded that that there are no significant obstacles impeding the potential application of the AIFMD Passport to Switzerland. While this positive advice is an important step towards passporting for non-EU AIFM and AIF, it is now up to the European institutions (Parliament, Council, and Commission) to decide, based on ESMA’s advice, whether or not the AIFMD Passport will be extended to third-countries such as Switzerland.
By Patrick Schärli (Reference: CapLaw-2016-32)
1) AIFMD Passport and Third-Country Rules
Directive 2011/61/EU of the European Parliament and of the Council of June 8, 2011 on Alternative Investment Fund Managers (“AIFMD”) enables EU AIFM and AIF to market and manage funds within the European Union by way of a so-called passporting system. Under this passporting system, a EU AIF managed by a EU AIFM may be marketed freely across the European Union without the need of obtaining separate authorization from each individual EU member state’s regulators. AIFMD also governs how AIF and AIFM from third countries, such as Switzerland, may access the European fund markets. As a general rule, non-EU AIFM and non-EU AIF may not (yet) rely on the AIFMD Passport when engaging in marketing and/or managing activities within the European Union. Rather, these third country AIFM and AIF have to rely on national private placement regimes (“NPPR”) provided for in the laws of the individual member states. The requirements to be met under the various NPPR (where such NPPR are available) are quite different across the European Union’s member states. Accordingly, non-EU AIFM and AIF see the AIFMD Passport as an important tool to facilitate easier access to the entire European fund market. In fact, bringing Swiss law in line with the AIFMD standards, which is one of the key requirements in ESMA’s equivalence assessment, was one of the main reasons for the recent revision and amendment of the Swiss Collective Investment Schemes Act (“CISA”) which entered into force on January 1, 2013.
AIFMD provides for the possibility to extend the AIFMD Passport to (selected) third country AIFM and AIF. More specifically, art. 37 through 41 AIFMD lay out rules that would apply for non-EU AIFM that intend to manage EU AIF or market EU or non-EU AIF using the AIFMD Passport. The AIFMD Passport will, however, only become available to third country AIFM and AIF once the European institutions decide, by way of a delegated act, to extend the AIFMD Passport to third countries. The decision to extend the marketing passport to selected countries will be based on advice by the European securities regulator ESMA and in accordance with the procedures laid out in art. 67 AIFMD. The initial deadline by which ESMA was supposed to render this advice was July 22, 2015.
2) Assessment of Third-Country Legislative Framework
a) Initial ESMA Advice of July 2015
ESMA published a first set of advice in July 2015. This first set of advice was limited to an assessment of six non-EU jurisdictions: Guernsey, Hong Kong, Jersey, Singapore, the United States, and Switzerland. In this initial set of advice, ESMA concluded that there are no significant obstacles impeding the potential application of the AIFMD Passport to Switzerland, provided, however, Switzerland enacted certain amendments to its Stock Exchange and Securities Trading Act (“SESTA”). These amendments relate to information sharing and cooperation between the Swiss regulator FINMA and foreign financial market supervisory authorities. The potentially problematic provision has since then been amended and transferred from the SESTA to the Financial Market Supervisory Act.
After having received this first set of advice, the European Commission asked ESMA to also conduct assessments of additional countries. In addition, the European Commission asked ESMA to include in its advice details on the capacity of non-EU regulators and their track record with respect to effective enforcement.
b) Revised ESMA Advice of July 2016
In addition to the originally assessed jurisdictions, ESMA’s revised advice of July 2016 now covers six additional jurisdictions. ESMA now assessed the regulatory framework of the following jurisdictions: Australia, Bermuda, Canada, Cayman Islands, Guernsey, Hong Kong, Isle of Man, Japan, Jersey, Singapore, the United States, and Switzerland.
ESMA concluded that there are no significant obstacles impeding the application of the AIFMD Passport to five out of the twelve jurisdictions. These five jurisdictions include Canada, Guernsey, Japan, Jersey and Switzerland. With respect to the remaining jurisdictions, ESMA’s advice either had certain limitations, reservations or conditions that need to be met (United States, Hong Kong, Singapore, Australia) or was not able to make a definitive assessment (Bermuda, Cayman Islands, Isle of Man).
With respect to Switzerland, ESMA confirmed its initial positive advice. Among other things, ESMA noted the positive experiences that have been reported by European national financial markets regulators on the cooperation with Swiss authorities. ESMA further noted that although the Swiss remuneration rules are simpler than their European counterparts, they are nonetheless comparable. In this respect, ESMA not only analyzed the rules as set out in the CISA and its implementing ordinances, but also reviewed FINMA circulars, in particular Circular 2010/1 on remuneration schemes. Further, ESMA also took note of the Code of Conduct issued by the Swiss Funds and Asset Management Association SFAMA, the Swiss fund industry organization. This Code of Conduct, which applies to all CISA-regulated institutions, also requires appropriate salary and remuneration policies. As noted above, ESMA concluded its assessment of Switzerland by advising the European Institutions that there are no significant obstacles impeding the application of the AIFMD Passport to Switzerland.
3) Next Steps
a) Passporting under AIFMD
While ESMA’s advice is a first step towards AIFMD Passport for third country AIFM and AIF, it may still take a while before the AIFMD Passport finally becomes available to such third country AIFM and AIF. According to art. 67(6) AIFMD, the European Commission will now have to enact a delegated act specifying the date by which the AIFMD Passport will become available to (selected) third country AIFM and AIF. While AIFMD provides for a deadline of three months for the European Commission to enact such delegated act, there is still a certain degree of political uncertainty as to the decision on the extension of the AIFMD Passport. In particular, the European Commission may want to wait to extend the AIFMD Passport until such time as it has a definitive assessment as to certain important third countries such as the United States.
Even once the AIFMD Passport becomes available, a non-EU AIFM or AIF is not able to automatically access the entire European fund market. Instead, a non-EU AIFM that intends to market its non-EU AIF or that intends to manage a EU AIF requires a registration with or authorization from a so-called member state of reference. While art. 39 and 40 AIFMD generally lay out the procedure for such a registration or authorization, it remains to be seen what specific requirements and conditions the individual member states will impose on non-EU AIFM and AIF.
b) Continuing Availability of National Private Placement Rules
Irrespective of the availability of the AIFMD Passport in the future, non-EU AIFM and AIF may decide to continue carrying out their marketing activities under the relevant NPPR. In its advice, ESMA specifically addressed the continuing availability of NPPR. According to ESMA, non-EU AIFMs will be able to continue to operate under the applicable NPPR irrespective of the fact that they could also be authorized under the AIFMD Passport. ESMA also notes that with respect to the availability of NPPR there is a transitional period provided for in art. 68 AIFMD. According to this provision, within three years of the entry into force of a delegated act extending the AIFMD Passport to non-EU AIFM and AIF, ESMA shall issue another set of advice on the termination of the various NPPR. Based on such advice, the European institutions will then have to decide whether or not they want to continue permitting marketing activities under the relevant NPPR in parallel to marketing activities using the AIFMD Passport.
ESMA’s confirmation of the continuing availability of NPPR is important. In particular, as noted above, using the AIFMD Passport does still require registration or authorization with the competent regulator of a reference member state. Depending on the requirements for such a registration or authorization, using a NPPR, even one with a limited scope of permissible marketing opportunities, may still seem the preferable option for many non-EU AIFM.
c) Does the AIFMD Passport Change the Way Foreign Funds Can Be Marketed in Switzerland?
While Switzerland has brought its regulatory framework mostly in line with AIFMD when it last amended the CISA, there is no passporting for European AIFM and AIF. Instead, EU funds, like any other non-Swiss funds, have to rely on the Swiss private placement regime when marketing their funds in or into Switzerland. Under this private placement regime, no registration or authorization from the Swiss regulator FINMA is required as long as the funds are only being marketed to so-called qualified investors (such as regulated financial institutions, pension funds, large corporates, and certain high-net worth individuals). Depending on the type of qualified investor approached, additional requirements (such as appointing a Swiss representative and a Swiss paying agent) apply. Conversely, marketing of non-Swiss funds to retail investors in Switzerland requires an authorization from FINMA. Such authorization requires, among other things, that FINMA has entered into a memorandum of understanding with the non-Swiss fund’s home regulator. As ESMA noted in its advice, Switzerland has already concluded such memoranda of understanding with all interested EU member states.
Patrick Schärli (patrick.schaerli@lenzstaehelin.com)