Law firm Walkers says the confirmation of the final terms of the Alternative Investment Fund Managers Directive and the removal of uncertainty for non-European Union fund managers marketing non-EU funds in the EU is a very positive development for the investment funds industry in the Cayman Islands, British Virgin Islands and Jersey.
The final terms of the Directive, which were approved by the European Parliament on 11 November, allow for the distribution of non-EU funds to professional investors in the EU through both a private placement regime and a passport system.
The private placement regime, which has been the traditional method of distribution in the EU for non-EU funds, will remain in place at least until 2018. It is proposed that this regime will transition in 2015 to allow full access to an EU passport marketing regime to non-EU funds on the same terms as EU funds. EU funds will become eligible for a passport in 2013.
"The confirmation that non-EU fund managers will be able to continue marketing Cayman Islands, BVI and Jersey funds to professional European investors is excellent news for the industry," says Rod Palmer, partner and global head of investment funds with Walkers.
The private placement marketing regime introduces certain conditions for non-EU funds to be distributed in the EU. Those conditions include the need for supervisory co-operation agreements between the regulator of the EU member state in which a fund is being marketed and the regulator of both the fund manager and the fund. In addition, the country in which both the fund and the fund manager are established cannot be on the Financial Action Task Force (FATF) blacklist. Funds also need to comply with certain basic transparency and reporting requirements.
"The Cayman Islands, BVI and Jersey are very highly rated by the FATF in respect to their anti-money laundering regimes, which means they will not have to make any changes in their funds’ operations to comply with the Directive," says Richard May, partner with Walkers based in the British Virgin Islands.
Access to the EU marketing passport will be subject to similar conditions to the private placement regime. In addition to satisfying those conditions, the non-EU fund manager will require to be authorised in an EU member state (its member state of reference).
OECD-compliant tax information exchange agreements will need to be in place between the fund domicile and both the fund manager’s EU member state of reference and each other member state in which the fund interests are proposed to be marketed.
"In our recent discussions on the Directive, the Cayman Islands Monetary Authority confirmed their commitment to entering into co-operation agreements with EU regulators as a matter of priority," says Jennifer Thomson, partner with Walkers in the Cayman Islands. "This follows Cayman’s long history of working with regulators worldwide and reflects Cayman’s own strong regulatory framework. We know Jersey and BVI regulators share this commitment as well."
Each of the Cayman Islands, BVI and Jersey appears on the OECD’s White List of nations which have substantially implemented the internationally agreed standards on tax and information exchange, and they continue to enter into new tax information exchange agreements with EU member states, among others. Currently the Cayman Islands, BVI and Jersey have collectively entered into nearly 60 TIEAs, with more pending.
"A further positive outcome for the industry is that the Directive does not apply to passive marketing or reverse solicitation of non-EU funds," adds Jonathan Heaney, head of the investment funds group in Walkers’ Jersey office. "This means that European investors may contact non-EU fund managers and invest in Cayman, BVI or Jersey funds even if the fund manager does not satisfy the conditions of the Directive."