How to do cross-border business under AIFMD
The management and marketing of alternative investment funds in the EU is subject to the Alternative Investment Fund Managers Directive (AIFMD). While the AIFMD introduced a passport for entities located within the EU, third country funds and managers are currently excluded from the common internal market of the EU. However, there are other opportunities to access the European market.
The Swiss regulation for collective investment schemes is very accommodating of international market players. Of some 8 560 collective investment schemes authorised in Switzerland, only 1 485 are of Swiss origin. For the distribution of foreign collective investment schemes to qualified investors in Switzerland, the sole requirements are the appointment of a Swiss representative and paying agent. The distribution to non-qualified investors is also possible, although in this case more stringent requirements apply.
Especially considering the Capital Markets Union, asset management will play an important role in the EU in the coming years. Since funds from abroad should be attracted as well, the cross-border business is of greater interest in the near future.
National private placement regime
The marketing of third country funds in EU member states currently takes place based on national cross-border regimes (national private placement regime, NPPR). This means the national regulation of each target country has to be analysed by the third country market player and compliance is required with all the different regulations of each targeted EU member state. There are huge differences among member states’ third country cross-border regulations – in fact, in certain countries, the marketing of third country funds is not even possible.
Delegation of management activities
Not only the marketing of third-country funds within the EU is of interest to foreign market players, also the possibility to provide management services to EU based investment funds is an attractive business opportunity. According to AIFMD, either the asset management or the risk management may be delegated by the EU manager to a manager located in a third country. Requirements for such a delegation are:
- The third country manager needs to be properly registered and / or authorised as well as supervised; and
- A cooperation agreement between the supervisory authority of the respective EU member state and the third country manager’s supervisory authority has to be in place.
While such delegation may be interesting for third country managers, its extent is rather limited, due to the restriction to one of two management activities (either asset management or risk management), amongst other restrictions.
Extension of the passport to third countries?
Besides the limited access to the EU market based on the NPPR and delegation of management activities, AIFMD foresees a possibility for the introduction of a third country passport. With the latter, third country funds could be marketed to professional investors all over the EU. Furthermore, third country managers could act as fund managers of EU alternative investment funds. Third country market participants would need to comply with AIFMD though. As a basic requirement, the respective third country will need to provide for information exchange in tax matters, must not be black listed for anti-money laundering purposes (FATF) and must have a cooperation agreement in place.
Unclear yet when EU decides on third country passport
In July 2015, the European Securities and Markets Authority (ESMA) issued its first opinion that would serve to underpin the decision by the EU Commission on whether or not to extend the passport to particular third countries. Subsequently, the EU Commission asked ESMA to conduct further research and evaluations. In July and September 2016, ESMA issued the final reports. It concluded, among others, that for the extension of the AIFMD passport to Switzerland as well as to Canada, Guernsey, Japan and Jersey, there are no significant obstacles.
In theory, the EU Commission had three months to issue a delegated act confirming (or rejecting) ESMA’s advice. However, due to political factors (among others Brexit) the decision has been postponed. Currently, it is unclear when the EU Commission will finally decide on the extension of the AIFMD passport to third countries (if at all). Until then, marketing from Switzerland may take place based on the NPPR and the management can be executed by Swiss asset managers by way of delegation.