AIFMD passport and Cayman Islands funds
By Harjit Kaur, Partner, Maples and Calder
Published: 18 December 2015
The announcement by the Chair of the European Securities and Markets Authority (ESMA), Steven Maijoor, in October 2015 that the Cayman Islands would be included in the second wave of jurisdictions to be assessed for the AIFMD passport is welcome news for managers of alternative investment funds, given the prevalence of the Cayman Islands as a jurisdiction for offshore hedge funds.
Third country passport – current state of play
In July 2015, ESMA issued an opinion and advice ("July Opinion") to the European Parliament, Council and Commission (EC) on the application of the AIFMD passport and whether it should be extended to non-EU jurisdictions. As ESMA has taken a "country-by country" approach, the July Opinion included an assessment of six jurisdictions, with a positive recommendation to two of those (with a third subject to certain conditions). ESMA deferred its decision in respect of the other three jurisdictions assessed, being Hong Kong, Singapore and the US.
In its July Opinion, ESMA also recommended the deferral of the extension of the AIFMD passport to non-EU jurisdictions until a larger number of jurisdictions had been assessed by it. The EC appears to have indicated its agreement with this approach and ESMA's opinion and advice on the second wave of jurisdictions ("Second Opinion") is expected in the first half of 2016. The Second Opinion is also expected to include ESMA's definitive conclusion on whether the AIFMD passport should be extended to Hong Kong, Singapore and the US.
Cayman Islands well placed for extension
The Cayman Islands is well placed to receive a favourable assessment from ESMA as part of the Second Opinion. Cayman Islands funds already satisfy the minimum requirements prescribed by the AIFMD in order to be marketed to the EU member states under the passport: the Cayman Islands has an extensive network of tax information exchange agreements in place with the various EU member states, and the Cayman Islands regulator, the Cayman Islands Monetary Authority, is a party to the requisite cooperation agreements with its counterparts in almost all of the EU member states.
Another element of ESMA's assessment of each non-EU jurisdiction is a review of its regulatory regime. The Cayman Islands has been developing an AIFMD compliant opt-in regime which will enable Cayman funds and managers to take full advantage of the AIFMD once the passport is extended to the Cayman Islands. In August, the necessary amendment laws required to implement the new opt-in regime were passed, and the relevant supporting regulations which will set out the detail (but which are expected to mirror the requirements of the AIFMD) are expected imminently. This, together with the fact that the Cayman Islands affords reciprocity of access for EU funds and managers to investors in the Cayman Islands, makes it very likely that it will receive a positive recommendation from ESMA.
The status quo and position with respect to NPPRs
Pending ESMA's assessment of a larger number of jurisdictions and the EC's subsequent decision on whether to extend the AIFMD passport to non-EU jurisdictions, the status quo remains. That is, Cayman funds, like all non-EU funds, may continue to be marketed into EU member states under the existing national private placement regimes (NPPRs).
Should the AIFMD passport be extended to non-EU jurisdictions, both the passport and the NPPRs are expected to function in parallel for at least three years, following which there would be another assessment by ESMA and the EC as to whether the NPPRs should cease to exist. Representatives of both ESMA and the EC have indicated that the extension of the AIFMD passport to non-EU jurisdictions will not result in the automatic withdrawal of the NPPRs at the end of the three-year period, particularly in view of the fact that the assessment in respect of the AIFMD passport extension is being undertaken on a country-by-country basis. Managers content to market their Cayman funds into the EU under the existing NPPRs are expected to be able, therefore, to continue doing so for at least the next few years.
Practical considerations for managers of Cayman funds
Prior to passport extension
As ESMA's Second Opinion is not expected until mid-2016, and given that a decision on the third country passport will only be made after ESMA has assessed a larger number of jurisdictions, it is likely to be some time before the passport becomes available to non-EU jurisdictions. In the intervening period, managers of Cayman funds can continue to market their funds into the EU under the NPPRs.
Managers who wish to avail of the passport during this period will need to be based in the EU and would need to establish an EU fund (since only EU managers of EU funds are currently able to apply for a passport under the AIFMD). Becoming authorised as an alternative investment fund manager (AIFM) poses certain challenges, particularly for managers that are not already based in the EU, such as US managers. In particular, such managers would first need to establish a presence in a member state of the EU and deal with the challenges involved, including identifying office space and recruiting staff with the requisite skills. Becoming authorised as an AIFM also means that such managers would need to comply with all of the requirements of the AIFMD, which poses a significant compliance burden. In these situations, utilising the services of a third party service provider providing AIFM solutions (sometimes referred to as the "host AIFM") can be an attractive proposition.
Following passport extension
Once the AIFMD passport is extended to non-EU jurisdictions, existing EU managers that are already authorised as AIFMs will have the option to market their Cayman funds into the EU using the passport, although such managers would need to comply with all of the requirements of the AIFMD. In practice, this should be fairly straightforward and should only require compliance with the additional requirement to appoint a depositary in respect of such Cayman funds. This is because EU managers are currently required to comply with all of the requirements of the AIFMD other than the requirement to appointment a depositary in accordance with Article 21 of the AIFMD (provided one or more entities are appointed to perform the "depositary-lite" functions set out in Article 21(7)-21(9) of the AIFMD) in order to market Cayman funds into the EU under the NPPRs.
In respect of non-EU managers, provided the passport is also extended to the jurisdiction in which the manager is based, then such managers would also have the option to apply for a passport in respect of their Cayman funds. However, such managers would need to become authorised as an AIFM in their "member state of reference" (determined in accordance with the AIFMD), which can pose a significant regulatory and compliance burden. Non-EU managers based in jurisdictions to which the passport is not extended are unlikely to be able to apply for a passport. In both of these cases, utilising the services of a third party "host AIFM" may provide a neat solution.
 At the Economic and Monetary Affairs Committee ("ECON") session held on 13 October 2015.
 At the ECON session held on 13 October 2015.
 At the ECON session held on 13 October 2015.