The European Securities and Markets Authority has published on August 1 an opinion on what rules should apply to alternative fund managers and their cross-border marketing of funds where this might be affected by the failure of European Union member states to adopt the Alternative Investment Fund Managers Directive into national law on time.
According to a survey by Ernst & Young and the Alternative Investment Management Association, only 12 out of 27 member states had transposed the directive into their national legislation by July 29, a week after the formal deadline of July 22 for all countries to do so and the date of entry into effect of the AIFMD's provisions.
ESMA was obliged to take the same course two years ago in order to offer guidance to fund managers and regulators affected by the failure of several member states to adopt the UCITS IV directive on time, a particular problem given the widespread cross-border marketing of retail funds throughout the EU.
Essentially, ESMA argues that managers should not be impeded from managing or marketing funds in other EU member states simply because those countries have failed to meet their obligation to transpose the AIFMD into national law within the deadline.
ESMA notes that the failure of some member states to transpose the directive by the deadline can create difficulties where national regulators do not have the legislative framework in place to allow proper implementation of the rights and obligations conferred under the directive.
Without prejudice to any initiatives that may be taken by the European Commission regarding late transposition of the AIFMD, ESMA says its aim is to address the situation at an operational level to minimise as far as possible the impact on the fund industry and investors that might result from some countries having adopted the legislation and others not.
Specifically, it proposes practical arrangements for activities under articles 31 and 32 of the directive, covering cross-border marketing of funds by a manager with an AIFMD passport, and Article 33, regarding the management company passport, involving one member state that has not transposed the AIFMD.
ESMA acknowledges that not all situations arising from non-transposition can be accommodated by way of practical arrangements that are legally sound, but it has identified various issues that can be addressed through practical arrangements between regulators.
The first problem it highlights is where a manager in an EU member state where the directive has been transposed may not be able to manage an fund established in another member state that has not adopted the directive.
Secondly, managers and regulators in members states that have transposed the AIFMD may face difficulties notifying the marketing of EU-domiciled funds, whether or not set up in the manager's own home member state, to regulators in countries that have not adopted the directive.
ESMA says the arrangements proposed are based on the jurisprudence of the EU Court of Justice regarding the direct effect of provisions contained in relevant directives. According to Article 288 of the Treaty on the Functioning of the European Union, a directive "is binding as to the result to be achieved, on each member state to which it is addressed, but shall leave to the national authorities the choice of form and methods".
Member states are obliged, through the transposition process, to create a legal framework under which the rights and obligations arising from a directive may be recognised with sufficient clarity and certainty to enable citizens to invoke them.
This means EU countries are legally obliged to reconcile their legal order with the objectives of a directive at the end of the transposition period. The EU Court of Justice has ruled that member states are liable for damages in the event of loss resulting from failure to transpose a directive in whole or in part.
Regarding the marketing of EU alternative funds in countries that have not adopted the directive, with respect to articles 31 and 32, ESMA's opinion is that if the manager's home member state has transposed the AIFMD, neither the home regulator of the manager nor the regulator of the country in which the fund is to be marketed may refuse marketing notification because the directive has not been adopted in the latter member state, irrespective of whether the marketing is carried out under freedom of cross-border service provision or via a branch.
As regards the management passport provisions in Article 33 of the directive, ESMA's opinion is that managers established in a member state that has transposed the AIFMD should be able to manage an EU-domiciled fund via the management passport, either on a freedom of services basis or through a branch, in a member state where the directive has not been transposed.
This principle should apply irrespective of the provisions currently in place in the jurisdiction in the country where the fund is to be managed, since the relevant provisions of the directive are of a self-executing nature, provided the manager is authorised to manage the particular type of fund in accordance with Article 33(1) of the AIFMD. Any local restrictions on managers that are not in accordance with the directive should not apply.
In our AIFM Directive blog on our website (see below), we will continue to track and analyse progress toward the full implementation of the AIFM Directive, following the publication of the Level 2 regulation by the European Commission at the end of last year, including the progress of EU member states toward adoption of the primary legislation and the process of drafting technical guidance. You may also find a library of all the main documents related to the AIFMD.
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