Hedge Funds Push for EU Passport for Cayman and Bermuda
European Union regulators have advised against including the two jurisdictions where most hedge funds are set up in the distribution passport for the region but favoured including 12 other countries, including the US.
Yesterday the European Securities and Markets Authority advised that the Alternative Investment Fund Managers Directive passport should be extended to non-EU alternative investment fund managers and alternative investment funds to 12 countries, dependent on some conditions. Without the passport alternative investment fund managers and funds have to meet the national regulations in each EU member state where they market funds.
The Alternative Investment Management Association, the global representative of the alternative investment industry, said in a statement that it welcomed Esma’s positive assessment of Canada, Guernsey, Japan, Jersey and Switzerland and notes that Hong Kong, Singapore, United States and Australia have also received a positive assessment albeit with some reservations and conditionality.
“We are hopeful that the European Commission will proceed to the introduction of the passport to all of these countries given that the remaining cited obstacles appear to be minor are capable of being successfully addressed or mitigated,” added the AIMA. “We remain optimistic that Esma will be in a position in the not too distant future to provide a full and positive assessment for the Cayman Islands and Bermuda in the same manner it took a second look the initial set of six non-EU jurisdictions.”
Esma said it could not give definitive advice with respect to investor protection and enforcement for Bermuda and the Cayman Islands since they are both implementing new regulatory regimes and the regulator needs to see the final rules.
Sean Tuffy, head of head of regulatory intelligence at Brown Brothers Harriman in Dublin, tweeted that the biggest part of the Esma opinion is that it found a way to defer the decision granting the AIFMD passport to Bermuda and Cayman.
“This matters b/c most hedge funds are set up in Bermuda/Cayman. So, it means these fund’s cannot access the AIFMD passport,” Tuffy added.
He continued that Esma’s decision on the US is pretty hedged. “Though, if approved, it does mean 40 Act funds may now have a passport route into the EU,” Tuffy tweeted.
The Bermuda Monetary Authority said in a statement that Esma had agreed that the country met three of the five criteria it assessed for the extension of AIFMD passports and further review is needed on the remaining two.
Jeremy Cox, chief executive of the Bermuda Monetary Authority said: “The Authority commends Esma on releasing their detailed report in such a timely fashion and looks forward to demonstrating the strengths of Bermuda’s AIFM regime – notably the recent legislative approval of the Investment Funds Amendment Act which gives the Authority additional enforcement powers. We remain fully committed to Esma’s assessment process because it will benefit Bermuda-based investment managers with products and services for the European fund industry.”
Cayman Finance, which promotes the country’s financial services, said in a statement: “Having reviewed the advice, we believe the Cayman Islands Monetary Authority and government can work constructively with Esma and address the points that Esma has raised in a much shorter time frame than Esma suggested in its advice. We are confident that Cayman can satisfy those points and be deserving on any objective basis of an extension of the AIFMD passport to the Cayman Islands in the near future.”
The Cayman Islands, where more than 11,000 regulated investment funds are registered, said it expects the status quo to remain and that funds can continue to be marketed into the EU using existing national private placement regimes.
Esma’s advice needs to be approved by the European Parliament, Council and Parliament for the AIFMD passport to be extended and this could prove a lengthy process.
The regulator published its first advice on the extension of the passport to six non-EU countries (Guernsey, Hong Kong, Jersey, Switzerland, Singapore and the US) in July 2015. The Commission then asked Esma to assess six more countries and to provide data on the expected inflows of funds by type and size into the EU from the different non-EU countries.
Guernsey and Jersey were amongst the jurisdictions that Esma recommended for full AIFMD passport access yesterday. They are outside the European Union and regarded as “third countries” for AIFMD purposes and their status under AIFMD is not expected to be affected if the UK leaves the EU.
Law firm Carey Olsen said in a note that Guernsey and Jersey together have more than £500bn ($658bn) of assets under management.
Ben Morgan, Guernsey funds partner at Carey Olsen, said in the note: “The extension to Guernsey and Jersey of the passporting regime will mean that the entire fund structure can be domiciled in the Channel Islands, something which should be welcomed by all investors, including those in EEA member states, given the resultant cost and time savings associated with having everything in one place.”
Dan O’Connor, Jersey funds partner, added: “We expect to see the influx of new fund managers and the record growth in fund assets under management that Guernsey and Jersey have been experiencing to continue.”
More on fund regulation:
Changes in delegation could lead to increased costs for investors and retaliation from other domiciles.
EU funds routinely delegate portfolio management to hubs including New York, Tokyo and Hong Kong.
The regulator recommended changes in 19 areas including harmonizing the AIFMD and UCITS regimes.
Most funds are managed cross-border using passporting rights.
KPMG is researching how the alternative fund regulation has worked in practice.