The European Securities and Markets Authority has published its advice to the other organs of the European Union regarding Alternative Investment Fund Managers Directive passports for AIFMs and AIFs in twelve countries outside the EU.

The countries are Australia, Bermuda, Canada, the Cayman Islands, Guernsey, Hong Kong, Japan, Jersey, Isle of Man, Singapore, Switzerland, and the United States. It remains to be seen whether ESMA's recommendations represent the shape of future EU policy, but they are bound to be influential.

At the moment, AIFMs and AIFs based outside the EU must comply with each EU country’s regime when they market funds in that country. Subject to its fulfilment of conditions under the relevant single market directive, a firm based in the European Economic Area is entitled to carry on permitted activities in any other EEA state by either exercising the right of establishment (of a branch and/or agents) or providing cross-border services. This is referred to in the UK's Financial Services and Markets Act 2000 as an 'EEA right' and the exercise of this right is known as ‘passporting’. Passporting rights only apply inside the EEA.

The activities that are 'passportable' are set out in the relevant EU single market directives including the AIFMD.

ESMA has considered the possibility of the EU extending AIFMD 'passports,' which are only available to EU firms, to non-EU AIFMs and AIFs to allow them to market and manage funds throughout its many territories. In each case it has weighed up each country's approach towards the protection of investors from sharp practice, competition, market disruption and the monitoring of systemic risk.

It has made the following points, which the AIFMD has obliged it to formulate, submit to various organs of the EU, and publish.

• It sees no significant reason to ban the funds of Canada, Guernsey, Japan, Jersey and Switzerland from marketing themselves to EU citizens by means of AIFMD passports.
• The AIFs of Hong Kong and Singapore ought to be allowed to use such passports, although their regimes facilitate the access of Undertakings for Collective Investments in Transferable Securities (UCITS) from a limited number of EU countries to retail investors in their territories and ESMA frowns on this.  
• ESMA has no significant objection to the approach that Australia takes towards the disruption of markets and obstacles to competition. Because of this, it believes that AIFMD passports should be available to Australian firms as long as the Australian Securities and Investments Commission exempts all EU countries (and not just some of them, as today) from some of its rules.
• ESMA does not think that the Government of the United States is failing to protect investors from sharp practice and/or failing to monitor systemic risk badly enough to dissuade the EU from letting American firms use AIFMD passports. Having looked at the American rules that deal with competition and market disruption, ESMA makes no objection to American managers marketing funds in the EU to professional investors as long as those funds do not involve any public offering. If there is a public offering, however, an AIFMD passport should not be available.
• For Bermuda and the Cayman Islands, ESMA cannot issue definitive advice (it spells this word, bizarrely, with a capital A) because both countries are in the process of setting up new regulatory regimes and ESMA will have to read the final rules, especially the ones that apply to the protection of investors from sharp practice and the effectiveness of enforcement, before it can pass judgment. Meanwhile, the absence of an AIFMD-like regime in the Isle of Man has made it difficult for ESMA to assess the 'investor protection' regime there, and this seems to have prevented it from forming a coherent view.

ESMA published its first piece of advice about the worthiness or otherwise of six non-EU countries (Guernsey, Hong Kong, Jersey, Switzerland, Singapore and the US) to benefit from 'passporting' in July last year. The European Commission then asked it to assess a further six countries, which it has done with varying degrees of success. It has couched its findings in language of the most peculiar and convoluted sort, using such phrases as "a potential extension of the passport risks an un-level playing field" and such sentences as "There are no significant obstacles regarding the disruption of markets and obstacles to competition impeding the application of the AIFMD passport to Australia." The European Commission, Parliament and Council now have the task of deciphering it.