French U-turn brings 'passport' for non-EU AIFMs closer to reality
EUROPE - French authorities' decision not to oppose draft legislation giving alternative investment funds from outside the EU pan-EU marketing rights has brought the 'passport' regime closer to reality, according to Ben Blackett-Ord, chief executive of asset management consultancy firm Bovill.
The issue of funds and managers in third countries marketing within the EU remains one of the most "controversial and problematic" areas of the Alternative Investment Fund Managers (AIFM) directive, said Blackett-Ord at a briefing for investment professionals in London.
There are significant differences between the draft of the legislation from the Council of Ministers and the draft from the European Parliament.
The former does not describe a passport provision for non-EU funds, but leaves decisions about whether they can be marketed in the EU to national regulators, subject to co-operation agreements with other regulators in other member states
The latter makes non-EU funds subject to the directive and therefore eligible for a passport in the same way as EU-based managers in the scope of the law.
France had opposed the passport concept for non-EU funds, but has now reversed this position as long as the proposed European Securities and Markets Authority (ESMA) plays a more prominent role in awarding and monitoring the passports.
It also asks that third countries reciprocate marketing rights to overseas fund managers and that the new regime be delayed until at least 2013.
Blackett-Ord said: "France has been holding out for some time not to allow a passport, but the good news is that it has backed down. This has come about particularly thanks to a lot of pressure from the US."
Ronald Patterson, a partner advising on hedge funds at law firm Eversheds who was not at the Bovill briefing, said: "The French government may deny its proposals were protectionist, but viewed from London or Washington, they certainly looked both protectionist and contrary to G20 commitments.
"A more pragmatic approach from the French is to be welcomed, but there are difficult discussions ahead about the role of the ESMA in approving passports for funds."
When that question was raised at the Bovill briefing, Blackett-Ord said the current picture was unclear, but that because the AIFM directive covers investment managers and not funds, it seemed probable that to qualify for a passport a non-EU manager would have to be subject to all the requirements of the directive - on everything from capital adequacy to remuneration.
This would potentially require local regulators - the SEC for a US manager, for example - to monitor that status as an agent of ESMA.
Alternatives for non-EU managers might be to set up an EU-based subsidiary as a manager of the funds, or establish a marketing subsidiary for funds managed outside the EU. Marketing entities do not appear to be in the scope of the directive.
Blackett-Ord said: "We have seen progress, so we are likely to see some sort of pan-European passport for non-EU funds, coupled with an increased role for the European regulator.
"That is surely a good thing, overall, although it may mean overseas fund managers will have to start making applications to ESMA for these passports."