ESMA Advice Extending the AIFMD Passport: Including the United States, Hong Kong, Singapore and Switzerland

On 18 July 2016 the European Securities and Markets Authority (ESMA) published its advice to the European Parliament, the Council and the Commission on the application of the Alternative Investment Fund Managers Directive (AIFMD) passport to non-EU Alternative Investment Fund Managers (AIFMs) and Alternative Investment Funds (AIFs) in twelve non-EU countries: Australia, Bermuda, Canada, Cayman Islands, Guernsey, Hong Kong, Isle of Man, Japan, Jersey, Switzerland, Singapore and the United States.

ESMA assessed each country to determine if the memorandum of understanding with the local non-EU regulator is working efficiently (assuming there is one) and whether there are significant obstacles regarding investor protection (including depositary safekeeping requirements), market disruption, competition, and the monitoring of systemic risk.

No Significant Obstacles: Following its assessment, ESMA has taken the view that there are no significant obstacles impeding the application of the AIFMD passport to Switzerland, Guernsey, Jersey, Japan and Canada.

Qualified Opinions: ESMA  gave a qualified opinion in relation to Hong Kong, Singapore, Australia and the United States.

It is curious that ESMA focussed on accessing the retail market when assessing EU AIFMs marketing funds into these countries on a reciprocal basis because AIFMD explicitly deals with professional investors only.  ESMA emphasized the differential regimes under United States law relating to “public offerings” (which private funds marketing in the US typically seek to avoid) as opposed to private offerings and the requirement and expense of local filing requirements. ESMA expressed the view that the EU legislature may wish to consider granting the passport to US domiciled funds but only to (i) those targeting professional investors which exclude a US “public offering”; (ii) funds that are not registered as mutual funds under the Investment Company Act of 1940; and/or (iii) funds that restrict their marketing activities locally and in the EU to “professional investors” as defined under AIFMD.

No Definitive Advice:  For Bermuda and the Cayman Islands, ESMA was unable to provide definitive advice until a final version of an AIFMD-like regime is implemented in those countries. ESMA noted that both countries intend to implement legislation later this year which will provide additional enforcement powers but ESMA cannot complete its assessment of the effectiveness of enforcement in those jurisdictions until legislation is adopted. Assuming both countries implement AIFMD compliant legislation, it seems that a positive opinion will be forthcoming.

ESMA was of the view that the Isle of Man lacked the same degree of investor protection mechanisms as other countries and declined to give a view on the effectiveness of enforcement due to the “nature and timeline of the assessment”. The Isle of Man is therefore left somewhat in limbo.

ESMA is proceeding to assess other jurisdictions and, where required, agree a memorandum of understanding which is a pre-requisite for AIFMD compliance.

Next Steps for Countries on the “Positive List: This will depend on the approach that the EU legislature adopts. If the EU Commission decides that passporting will only be activated when definitive opinions have been delivered on all relevant countries or a sufficient number of countries then there may be further delay before activation of the passport. On the other hand, if the passport is activated for the countries that have received positive opinions then this would be a step forward albeit that it would place AIFMs and AIFs in the approved countries at a competitive advantage when compared with counterparts in countries for which assessments are ongoing.

If a passport is granted in respect of a particular country this means that (i) EU AIFMS may manage and market funds domiciled in that non-EU country on a passported basis in the EU; and (b) AIFMs regulated in the non-EU approved country may manage AIFs domiciled there or in the EU and apply to the relevant EU regulator for full authorisation under AIFMD. Following authorisation, the non-EU AIFM would be able to market those funds on a passported basis into the EU.

The crux of the matter for non-EU AIFMs is that in both cases they must apply for full authorisation under AIFMD to the appropriate EU regulator which may prove an unattractive proposition.


The SBEEA: Register of Significant Beneficial Ownership

The SBEEA (Part I: People with Significant Control)

Against the backdrop of an increasing push for greater transparency of company ownership, the Small Business Enterprise and Employment Act 2015 (“SBEEA“) took effect on 6 April 2016 which implements the beneficial disclosure requirements of the EU Fourth Money Laundering Directive. The SBEEA imposes a requirement on UK companies and LLPs to maintain a register of significant beneficial ownership information and creates a central registry for such information to be publicly accessible via Companies House.

Who do the rules affect? The new rules will apply to most UK companies and LLPs, with some minor exceptions (e.g. LSE main market and AIM companies).

What is the upshot of these rules? Companies and LLPs must maintain a Person with Significant Control (‘PSC’) register and from June 2016, entities are now required to include the PSC information in their Confirmation Statement (to replace the Annual Return) at Companies House.

Who is a ‘person with significant control’? A PSC will meet at least one of the following conditions:

  1. Directly/indirectly hold more than 25% share capital;
  2. Director/indirectly control more than 25% votes at general meetings;
  3. Directly/indirectly control the appointment/removal of a majority of directors;
  4. Actually exercise/have the right to exercise significant influence or control; or
  5. Actually exercise/have the right to exercise significant influence or control over any trust or company that satisfies one of conditions 1 – 4 above.

The Government’s statutory guidance advises that “control” might be indicated where a person can direct the activities/policies of a company; and “significant influence” where that person can ensure that any desired activities/policies are generally adopted.

What do companies need to do? An officer of the company will be required to (1) identify PSCs over the company (or any legal entities that might be classed as a PSC) and confirm their details (inter alia: name, DOB, nationality, residential address and country of usual residence, service address (residential address and DOB will be suppressed on the public register)); (2) record such details on the company’s PSC register; (3) provide such information to Companies House; and (4) maintain the company’s PSC register up to date.

Penalties for non-compliance. Companies must take reasonable steps to ascertain any PSCs over their company, non-compliance of which can attract criminal penalties. Where an individual ought reasonably to know that they are a PSC, they are under a duty to inform the company of their interest, non-compliance of which can also attract criminal penalties.

Further Guidance. The statutory guidance referred to above is in force and companies are obliged to adhere to this guidance when analysing conditions 4 and 5 above. The Government has also produced useful non-statutory guidance for companies, LLPs and PSCs to aid in the identification of PSCs.

Future Developments in Real Estate and Public Contracting. Separately, the UK Department for Innovation and Skills issued a consultation paper in March 2016 on “Beneficial ownership transparency: Enhancing transparency of beneficial information foreign companies undertaking certain economic activities in the UK”.  The consultation moots the concept of enhancing disclosure of ultimate beneficial ownership information on foreign companies owning UK real estate and entering into public procurement contracts because the Fourth Money Laundering Directive applies to EU incorporated entities only. The consultation proposes that companies that are incorporated in countries that publicly provide equivalent beneficial ownership information will be exempt provided that company register information is provided (see more here).


Proposed changes to the UK Limited Partnership Act 1907

On 23 July 2015, the UK Treasury published a consultation paper and draft Legislation Reform (Limited Partnership) Order 2015 setting out its proposed amendments to the Limited Partnership Act 1907 (LPA 1907).

The proposals were intended to modernise the law on limited partnerships by removing unnecessary legal complexity and administrative burdens to ensure that UK limited partnerships remain the preferred structure for European private equity and venture capital funds, as well as various other types of private fund. The government has now considered, and responded to, the submissions received. It has outlined a number of changes to the initial proposals, which we discuss further in here.

EU Referendum – what can private equity funds do to hedge against sterling risk?

We have seen a dramatic increase in interest in hedging FX risk related to investments by private equity funds.

The precipitous decline in the value of sterling has caused complications for funds which are in the process of acquiring UK assets. For deals which are still going ahead, many sponsors are using or considering deal contingent FX hedges to protect them against further fluctuations. These products are offered by a small number of banks to funds which are buying or selling assets denominated in a different currency to their base currency.

They allow the fund to enter into an FX forward which will only settle if the sale goes ahead (for example, when the conditions precedent to completion such as competition clearance are satisfied). The forward agreement includes a schedule of settlement dates with FX rates which gradually move against the fund depending on when settlement actually occurs. They are, in a sense, options without a premium which are contingent on completion.

Brexit for asset managers and fund managers – don’t panic, it may not be as bad as it at first appears!

UK regulated fund managers and asset managers should bear in mind that, while the Brexit vote has occurred, this does not bind the UK Parliament. As of the date of writing (12 July 2016), the process of withdrawal under Article 50 of the Lisbon Treaty has not yet started. Although the timetable for withdrawal under Article 50 limits negotiations to two years, this may be extended by agreement. During this hiatus period, it will be business as usual because the UK will remain a member state of the EU.

There are three potential options for the future relationship between the UK and the EU. Please read our Client Alert on

SEC Office of Compliance Inspections and Examinations Releases 2016 Exam Priorities

The SEC Office of Compliance Inspections and Examinations (“OCIE” or the “Staff”) released its 2016 Exam Priorities recently, as applicable to examined registrants other than national securities exchanges.  

Exam Priorities are always a reflection of current trends and news and, in recent years, also reflected the SEC’s expanded capabilities for monitoring market activity through data analytics.  

The three key themes and many of the individual focus items for 2016 are much the same as last year.  For highlights of the differences in the 2016 Exam Priorities, please read our Client Alert on



New “Senior Managers Regime” to be introduced for all financial services firms, including the fund management sector

The Government has confirmed that it will be pushing forward with extending the Senior Managers and Certification Regime to all financial services firms (including investment firms and fund managers), following the Fair and Effective Markets Review (FEMR) report’s recommendation (and Mark Carney’s Mansion House speech indication) of the extension of the SMR to fixed income, commodity and currency markets.  The new regime (for insurers, the Senior Insurance Managers and Certification Regime, or SIMR) will come into force for banking and insurance sector firms from March 2016, leaving the discredited Approved Persons Regime (APR) in place for other financial sector firms.

The Government intends that implementation of the newly extended regime should come into operation during 2018, so there is much still to be finalised as the legislative and consultation process unfolds in the coming months. A key area will be the detail in the Government’s plans for how the ‘principle of proportionality’ will operate to take into account the diversity of firms in the sector – this will be a key area of interest for smaller financial services firms.  As the shape of any universal senior managers regime is likely to follow the SMR and SIMR very closely, we would expect to also see similar grandfathering provisions to ease the transition.  Continue Reading

AIFMD Passporting Update

EU regulated AIFMs promoting EU domiciled AIFs We have lived with AIFMD since the full implementation date of 22 July 2014 with the marketing passport being available from that date for EU regulated AIFMs promoting EU domiciled AIFs.

The ESMA Opinion – Use of the AIFMD Passport – ESMA published its Opinion on 30 July 2015 on the functioning of the AIFMD passport and national private placement regimes.

While the expectation was that there would  be substantial divergence in the approach taken by Member States to their private placement regimes (which is expressly permitted under AIFMD), passporting for EU AIFMs of EU AIFs should have been a simple affair involving notification by the home state regulator to the regulators of the Member States where the passport is intended to be used.

The Opinion highlighted a number of issues that EU AIFMs have encountered which reflect the fact that AIFMD has not “harmonised” the EU landscape:

  1. Fees – Some countries charge fees (Austria, Denmark, France, Germany, Italy, Latvia, Luxembourg, Malta and Spain) while others do not (the UK, Ireland and the Netherlands, for example). One of the respondents to the call for evidence reported to ESMA that if an AIF is marketed in all 28 Member States, the total fees would be circa €168,000 with the appointment of centralising agents (see immediately below) bringing the overall cost to €200,000.
  2. Centralising Agent – France requires the appointment of a local bank through which payments must be channelled (which is not envisaged by AIFMD and therefore could be considered unlawful).
  3. Pre-Marketing – A lack of homogeneous interpretation of when “marketing” occurs. In the UK and Germany final form documents are required before “marketing” occurs however France, for example, considers that “marketing” of an AIF may occur before it is formed. For PE funds, this is a real issue given that documents are negotiated substantially in advance of a fund being incorporated or registered.
  4. Time to Market – The UK, for example, will permit marketing on receipt of passport notification from other Member States without any additional requirements but that is not necessarily the case in other Member States which delays access to the local market (fees may need to be paid in advance while BaFIN and the AMF, for example, may make additional checks that are not permitted under Article 23 of AIFMD).
  5. Material Changes – There is no consensus amongst regulators on what a “material change” is and the timing for notifying the regulator of that change (in advance, promptly, etc).

Marketing to “professional investors” Both EU AIFMs using the AIFMD marketing passport and EU and non-EU AIFMs marketing funds under the national private placement regimes of Member States may only market to MiFID “professional investors” unless they have top up marketing permissions from each regulator (where permitted).

Unless a qualitative and quantitative analysis is carried out to opt up a natural person to “professional investor” status, the passport and AIFMD related national private placement regimes will not be able to be used when marketing to natural persons and therefore most family offices.

Marketing to non-professional investors is at the discretion of each Member State so separate registrations may be required or non-professional investor marketing may not be permitted altogether.

Managers should also note that MiFID II will be throwing another spanner in the works by reclassifying local government (and therefore local government pension schemes) as retail investors with each Member State having the ability to decide whether or not to permit an opt up to professional investor status.

 The Future – ESMA has taken on board the experiences highlighted by the respondents to the call for evidence and will now need to decide if it should issue guidance on unclear areas (such as when “marketing” is deemed to occur) and/or take action against those Member States who have adopted policies and procedures contrary to AIFMD that hamper the operation of the passport.

  Continue Reading

The European Securities and Markets Authority (ESMA) published advice on the extension of the Alternative Investment Fund Managers Directive (AIFMD) passport on 30 July 2015 (the Advice).

For Jersey and Guernsey, the ESMA Advice was positive: no obstacles exist to the extension of the AIFMD passport to these jurisdictions.  AIFMD Article 67 envisages that a delegated act will follow within three months to implement this advice.  However, the time-frame for this now appears to be uncertain.

The Advice notes that the Commission are obliged to adopt a delegated act extending the EU passport to non-EU AIFs and non-EU AIFMs within three months of receipt of positive advice from ESMA (although the date on which the rules will become applicable in all Member States will be specified within in the delegated legislation.  This date will be determined according to a number of listed criteria e.g. internal market, investor protection, risk monitoring). There are further provisions in AIFMD Article 58 that allow the European Parliament and Counsel to object to the delegated act within 3 months (increasing to 6 months if the European Parliament or Counsel request).

However, the press release issued by ESMA on publication of the Advice states that “the institutions may wish to consider waiting until ESMA has delivered positive advice on a sufficient number of non-EU countries before introducing the passport in order to avoid any adverse market impact that a decision to extend the passport to only a few non-EU countries may have”.

A total of 22 non-EU jurisdictions were identified for detailed assessment by ESMA on a country-by-country basis.  The Advice issued on 30 July 2015 relates to only 6 of these 22.  Only Jersey and Guernsey were the subject of ‘positive’ advice from ESMA, although pending national legislation will remove remaining obstacles in Switzerland shortly.  ESMA did not reach a definitive view on Hong Kong (more time required for assessment), Singapore and USA (ESMA recommended the EU delay a decision on these 2 jurisdictions).

In its view, ESMA does not have sufficient information in relation to the remaining 16 identified non-EU jurisdictions in order to perform the substantive assessment necessary to underpin any advice it issues pursuant to AIFMD Article 67(1)(b).

ESMA aims to finalise the assessments of Hong Kong, Singapore and the USA as soon as practicable and to assess further groups of non-EU countries – until it has provided advice on all the non-EU countries that it considers should be included in the extension of the passport.

Freeman & Co. Reports Mixed Year for Financial Services M&A Activity as Stock Markets Continue to Rise

Very interesting report from deal advisor Freeman & Co this morning, reporting 50 asset manager acquisitions globally in 1H15. The advisory firm notes an increase in mid-size deals relative to last year.  “Deals involving firms with $1-10 billion in AUM, experienced a notable increase during 1H 2015 with 30 deals announced year-to-date, a 20% increase from 25 in 1H 2014.”  See attached news release from Freeman & Co. LLC for further trend analysis and let us know if we can help your firm prepare to participate in a future transaction.