By Bailey McCann, New York From Opalesque

Earlier this month, European regulators met to discuss passporting for private funds. Specifically at issue was whether to make the passport available to outside jurisdictions like Hong Kong, the US and Cayman. ESMA published its Work Programme for 2016 on October 7, and in that the regulator said it wouldn’t be publishing its second opinion on the passport issue until the end of next year. That timeline was buried in a footnote, and it seems that the regulator was hoping the extension would be handled quietly, while it focuses on building a consensus among member states.

Germany, specifically, is playing hardball with regulators on this issue.

“There was a concern initially, before AIFMD came into force, that Germany would take a very hard line on AIFMD and only permit marketing with a passport, but then there was an outcry from other countries, big German investors, etc. Then, they introduced a fairly onerous private placement route with a requirement for a fund depositary. There is a concern that if the passport is only extended to some jurisdictions they could retreat back to their original stance,” Lisa Cawley, a partner at Kirkland & Ellis tells Opalesque.

If the passport is only extended on a case-by-case basis, key jurisdictions like Cayman or the US could be left out in the cold. “The big question is whether no one gets a passport until everyone can get it. There are limited reciprocal arrangements with the U.S., and there is a concern that once a passport becomes available to some non-European jurisdictions, national private placement routes could be switched off by some countries which would be problematic,” Cawley adds.

In his opening statement to the Economic and Monetary Affairs Committee at the European Parliament on October 13, ESMA Chair Steven Maijoor said that the regulator was continuing to assess the US, and would also consider additional jurisdictions including Australia, Canada, Japan, the Cayman Islands, the Isle of Man and Bermuda.

Those remarks were welcomed within Cayman, which has recently enacted new legislation in order to become more AIFMD friendly. As Opalesque previously reported, Cayman set up AIFMD regimes designed specifically to woo ESMA. Bermuda also has retooled its own regulatory regimes with the goal of being approved for passporting.

Regardless of what countries ESMA approves, the regulator itself will have to implement a new scheme for supervisory and legislative requirements in order to extend the passport outside of the EU at all.

In the interim, fund managers are relying on national private placement regimes where they want to market. That system, which has been in place for a few years, has become more straightforward. Cawley adds that any upset to the private placement regime over a passport battle could do more harm than good. “The national private placement regime is working, people have gotten used to the process now and are beginning to understand all of the rules,” she says. For those managers that have been waiting on the sidelines for the passport, it’s beginning to look like private placements may be a more viable alternative – at least over the next five years. Watch this space.

For more on this story go to: http://www.opalesque.com/657553/ESMA_buys_time_on_passporting755.html

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