ESMA timing on AIFMD now difficult to predict

The nature of the delay by the European Securities Markets Authority (ESMA) on whether to extend the alternative investment fund managers' directive (AIFMD) passport to investment fund managers and investment funds based in 12 non-EU countries including the Cayman Islands means uncertainty around the timing of the final decision, according to Walkers.

ESMA revealed in July that it was to delay its recommendation to the European Commission on whether to grant a third country passport to Cayman Islands Alternative Investment Fund managers under the Alternative Investment Fund Managers Directive (AIFMD), partly due to the fact that Cayman is in the process of implementing a new regulatory regime.

Walkers points out that whilst ESMA is of the view that there are no significant obstacles regarding competition and market disruption impeding the application of the passport to the Cayman Islands, it wishes to further examine criteria on investor protection and effectiveness of enforcement before affirming that the passport should be extended to the Cayman Islands.

Part of this process involves ESMA completing its review of draft rules and regulations supplied by the Cayman Islands government as part of the assessment process – following its initial review, ESMA has confirmed that the draft rules and regulations seem to show that the Cayman Islands' proposed new AIFMD-like regime would be broadly similar to the AIFMD framework, but ESMA still needs to undertake a more in-depth analysis, Walkers has said.

Meanwhile, additional legislative changes are underway in the Cayman Islands to address the Cayman Islands Monetary Authority's (CIMA's) power to impose administrative fines for breach of regulatory laws, regulations and rules, and CIMA is currently developing a macro-prudential policy framework which will enhance its already robust systemic risk framework.

But Walkers has warned that while it is not certain when the extension of the passport to non-EU countries will occur. It stresses that ESMA has advised in its Opinion that the Commission and co-legislators may also wish to consider fiscal matters and anti-money laundering regimes, in addition to ESMA's advice, before extending the passport to any jurisdiction.

“With so much uncertainty still surrounding the timing of the extension of passports to third countries, investment managers domiciled in any of Bermuda, the Cayman Islands, Guernsey or Jersey who intend to obtain a passport, when available, should note they will be required to obtain the relevant investment manager's licence under the applicable domestic law and also to obtain an authorisation from their intended EU member state of reference,” Walkers said.

“For the time being, investment managers should continue to take advantage of the NPPRs to market their funds into the EU pending any further decision of the European Commission.”