June deadline for Cayman EU funds passport
(CNS Business): The Cayman Islands can expect a decision on its inclusion in the EU’s AIFMD (Alternative Investment Fund Managers Directive) Passport scheme by June, which, if granted, would secure future access to European investors for funds either managed or registered in Cayman. The funds industry is keenly awaiting a resolution to this long drawn out regulatory change, with most US managers currently avoiding Europe altogether or relying on reverse solicitation – where the investor contacts them – leading to uncertainty over exactly what constitutes marketing in the various EU countries.
The European Commission recently published a letter written to the European Securities and Markets Authority (ESMA), inviting ESMA to complete the assessment of the second wave of six non-EU jurisdictions, which includes Cayman, by 30 June 2016.
This timeframe was confirmed by Garth Ebanks, Deputy Head of CIMA’s Investments and Securities Division, at the Cayman Alternative Investment Summit (CAIS) earlier this month, while participating in the regulatory panel. Ebanks highlighted the change in the law to introduce the concept of EU-connected funds and EU connected managers, which positions Cayman for acceptance into the new EU Passport regime.
From the US fund manager’s perspective, Emma Dickson, general counsel at Criterion Capital Management, said that the change in law in Cayman did not, unfortunately, provide relief for managers currently relying on reverse solicitation to distribute funds in Europe, which from what she hears in the industry is the “vast, vast majority”.
Under reverse solicitation, the manager is not required to be registered with any European regulator because the investor has sought participation with the fund manager, rather than the other way around. While this route means fund managers avoid the complexity of the various national private placement regimes in Europe – which is the other way non-EU funds can still be sold in Europe until the AIFMD Passport takes over – reverse solicitation can be problematic because the rules differ quite significantly between different countries.
Managers could fall foul of regulations and be seen as actively marketing by, for example, having information published on a website, speaking at an industry conference or leaving a client a business card, so they need to be extremely cautious.
“What we are looking for in reverse solicitation is some clarity on a jurisdiction by jurisdiction basis,” Dickson said. “The UK is at the forefront of this and they have given some indication of activity that you can do, which is essentially blessed, so people are really looking for additional clarity on what activities would constitute true marketing. We are keeping our eyes on the various jurisdictions where we see demand to see if we can get any deeper knowledge from the regulator in that specific country about how they interpret these laws.”
Hayden Isbister, partner and head of the corporate group for Mourant Ozannes in Cayman, said that the majority of their US clients are relying on reverse solicitation or just avoiding Europe altogether. “I think it remains to be seen what will happen over time with the introduction of the opt-in regimes,” he said.
Also on the panel was Lisa Stanton, in-house counsel at Darsana Capital Partners. While she agreed that most US managers are relying on reverse solicitation, some are talking about what is involved in the Private Placement Regimes and perhaps thinking about the top two or three jurisdictions where they might want to market and go ahead and register there, she said. “Some people are biting the bullet and I don’t think it’s as scary as it was at the beginning.”
The Cayman Islands and other so-called ‘third countries’, or non-EU jurisdictions, had initially expected a decision on the EU Passport last summer, however ESMA’s high workload in assessing the regulatory frameworks of the first group of non-EU fund centres being examined, meant they still had to finish assessing Hong Kong, Singapore and the US, having granted access to Jersey, Guernsey and Switzerland.
This has left the fund industry in the second group of so-called ‘third countries’, Cayman, Bermuda, Australia, Japan, Canada and the Isle of Man, waiting for a further year to discover their fate in terms of their ability to market to one of the biggest investor bases in the world.
Category: Finance, Financial Services
Just to clarify, the eventual inclusion of Cayman in the EU passport regime will be of minimal use to US fund managers as the US hasn’t been approved yet. So a US manager with a Cayman fund will not be able to avail itself to the EU passport regime. However, at least it puts Cayman on the same footing/situation as other offshore jurisdictions.
I would also disagree that “most” are relying on the reverse solicitation exception. Many funds with a meaningful number of EU investors are using the NPPR approach (its fairly straightforward in most circumstances). Relying on reverse solicitation is a band-aid approach, as an investor in a distressed fund can later refute this.