IMPACT OF AIFMD ON MALTESE FUNDS AND THEIR SERVICE PROVIDERS
SUMMARY OVERVIEW – IMPACT OF AIFMD ON MALTESE FUNDS AND THEIR SERVICE PROVIDERS:
1.1. The deadline for implementation of Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers1 (“AIFMD”), by the EU Member States is 22 July 2013. However, there are various transitional provisions and special provisions on the transposition of certain rules in relation to third countries, which make the application of such rules dependent on a positive advice / opinion from ESMA, and a delegated act from the European Commission. For the relevant timeframes, see Annex I.
1.2. The AIFMD will concern, essentially:
1.3. Various implementing measures are yet to be issued. ESMA issued its first technical advice related to possible implementing measures to the European Commission in November 2011; such measures concern, for example:
The European Commission is expected to issue implementing (“Level 2”) measures mid-2012.
1.4. The UCITS IV Directive4 is currently under review (referred to as “UCITS V”), in order to ensure alignment with the AIFMD, particularly as regards depositaries and remuneration of managers.
1.5. In December 2011, the European Commission published proposals for a Regulation on European Venture Capital Funds (“EVCFs”) and a Regulation on European Social Entrepreneurship Funds (“EuSEFS”), which set out uniform rules and requirements for these types of funds and their managers. Once the requirements defined in the proposals are met, qualifying fund managers and managers of social investment funds will be able to market their funds across the EU using the label “European Venture Capital Funds” and “European Social Entrepreneurship Funds” respectively. The scope of application of the proposed Regulations is restricted to non-UCITS fund managers, established within the EU and registered with the competent authority in their home Member State in accordance with AIFMD, provided that the manager manages portfolios of EuSEFS or EVCFs whose assets under management (“AuM”) in total do not exceed EUR 500 million.
Passporting rights are granted to managers for the marketing of their funds under the designation “European Social Entrepreneurship Funds” or “European Venture Capital Funds”, subject to registration of the manager with the competent authority of its home Member State.
The proposed Regulations are intended to become applicable on 22 July 2013, which would coincide with the implementation deadline of the AIFMD.
2. Scope of application of the AIFMD
2.1. The AIFMD lays down the rules for authorisation, ongoing operation and transparency of AIFMs which manage and / or market AIFs in the EU.5 AIFMs will require authorisation under the AIFMD,6 and will enjoy passport rights for the management and/or marketing of AIFs throughout the EU.
2.2. In the case of internally managed AIFs (under Maltese law, SICAVs may be organised as self-managed funds), the AIF is also considered to be the AIFM and should therefore comply with all requirements for AIFMs under the AIFMD and be authorised as such.
The self-managed AIF would be subject to the rules on delegation, including the requirement that delegation concerning portfolio management or risk management, may be conferred only on undertakings which are authorised or registered for the purpose of asset management and subject to supervision or, where that condition cannot be met, only subject to prior approval by the competent authorities of the home Member State of the AIFM. Thus, it appears that if the self-managed AIF would delegate day-to-day management functions to a third party investment manager, the latter would not per se be required to be an AIFM authorised under AIFMD (subject to certain conditions).
2.3. A “light regime” (the so-called “Article 3 exemption”) will apply to:
Registration and reporting requirements apply, but no passport rights, unless the AIFM opts in7 (or if the manager can market its EVCFSs or EuSEFs to eligible investors within the EU under the proposed Regulations; see point 1.5 above). AIFMs that fall under the Article 3 exemption, will not be subject to any requirements imposed by the AIFMD other than the said registration and reporting requirements; this means, for instance, that the requirement to appoint a local depositary (see section 6 below) will not apply to the AIFs managed by such AIFMs.
2.4. Excluded from the scope of application of AIFMD are:
(i) holding companies;
(ii) institutions for occupational retirement provision which are covered by Directive 2003/41/EC, including, where applicable, the authorised entities responsible for managing such institutions and acting on their behalf referred to in Article 2(1) of that Directive or the investment managers appointed pursuant to Article 19(1) of that Directive, in so far as they do not manage AIFs;
(iii) supranational institutions, and similar international organisations, in the event that such institutions or organisations manage AIFs and in so far as those AIFs act in the public interest;
(iv) national central banks;
(v) national, regional and local governments and bodies or other institutions which manage funds supporting social security and pension systems;
(vi) employee participation schemes or employee savings schemes;
(vii) securitisation special purpose entities.
The AIFMD does not apply to AIFMs in so far as they manage one or more AIFs whose only investors are the AIFM or the parent undertakings or the subsidiaries of the AIFM or other subsidiaries of those parent undertakings, provided that none of those investors is itself an AIF.
In the preamble to the AIFMD it is also indicated that “[i]nvestment undertakings, such as family office vehicles which invest the private wealth of investors without raising external capital, should not be considered to be AIFs in accordance with this Directive.”
2.5. The AIFMD does not appear to capture or prohibit passive marketing/reverse solicitation.
3. Maltese AIFs
3.1. AIFs carrying on activities in or from Malta are currently regulated in Malta, and require (in principle) a collective investment scheme (“CIS”) licence issued by the Malta Financial Services Authority (“MFSA”). For regulatory purposes, a distinction is currently made between:
Thus, retail non-UCITS CISs, PIFs and Private CISs would be captured by the definition of an AIF in terms of the AIFMD.
3.2. Maltese law and regulation governing the above mentioned funds (i.e. CISs other than UCITS), will need to be reviewed in the light of AIFMD, including in connection with the following key issues:
For Maltese AIFs managed by an EU AIFM11 (established outside Malta), the implementation of the AIFMD regime will effectively mean that if the EU AIFM requires authorisation under AIFMD as implemented in its jurisdiction (and it obtains such authorisation), it will be able (and will have) to exercise its passport rights in order to manage the Maltese AIF, and will be entitled to market the Maltese AIF throughout the EU, following the prescribed notification procedure.
If a Maltese AIF is managed by a non-EU AIFM (e.g. based in Switzerland), it appears that such AIFM would be able to continue to manage the Maltese AIF for the time being and market the Maltese AIF in the EU under the respective national private placement regimes for a transitional period. If and when the relevant provisions on third countries come into effect (which is not expected to happen before mid-2015 –see Annex I) and the non-EU AIFM falls within the scope of application of the AIFMD, then the non-EU AIFM would need to apply for authorisation under AIFMD at some point, possibly, between 2015 and 2018. If and when the non-EU AIFM is authorised under the AIFMD (as implemented in the non-EU AIFM’s Member State of reference), it would need to ensure compliance with the AIFMD regime in respect of the Maltese AIF(s) it manages (including the requirement to appoint a depositary established in Malta – see section 6), and would be entitled to exercise its passport rights to manage and market AIFs in Malta and throughout the EU, subject to certain conditions (see Annex II).
As far as the appointment of fund administrators, depositaries, and investment advisors are concerned, please refer to sections 5 to 7 below.
4. Maltese Fund Managers
4.1. Fund managers operating in or from Malta are currently regulated in Malta, and require (in principle) an investment services licence issued by the MFSA. UCITS management companies are subject to special rules derived from the UCITS IV Directive, whilst other fund management companies are subject to rules applicable to investment firms in general (based on MiFID), supplemented by certain specific requirements. Thus, AIFMs are already regulated in Malta, but the regulatory regime will need to be revised in view of AIFMD. The upside will be that AIFMs authorised in Malta will be able to exercise their passport rights throughout the EU under the AIFMD.
4.2. Under the AIFMD regime, Maltese AIFMs will be required to apply for authorisation by the MFSA, and once granted in accordance with the requirements and conditions set out in the AIFMD, such authorisation will be valid for all EU member States.13 AIFMs performing activities before 22 July 2013 will need to take all necessary measures to comply with national law transposing the AIFMD, and submit an application for authorisation within one year of that date (i.e. by 22 July 2014). AIFMs, in so far as they manage AIFs of the closed-ended type before 22 July 2013 which do not make any additional investments after 22 July 2013, may however continue to manage such AIFs without authorisation under the AIFMD. Furthermore, AIFMs, in so far as they manage AIFs of the closed-ended type whose subscription period for investors has closed prior to the entry into force the AIFMD (i.e. 21 July 2011) and are constituted for a period of time which expires at the latest three years after 22 July 2013 (i.e. 22 July 2016), may also continue to manage such AIFs without the need to comply with the AIFMD except for Article 22 (regarding annual reports) and, where relevant, Articles 26 to 30 (setting out the obligations for AIFMs managing AIFs which acquire control of non-listed companies and issuers), or to submit an application for authorisation.
4.3. External AIFMs must be authorised under the AIFMD, and may only engage in the following activities:
(i) The activities referred to in Annex I to the AIFMD, namely:
- Investment management functions, which an AIFM shall at least perform when managing an AIF: portfolio management and risk management;
- Other functions that an AIFM may additionally perform in the course of collective management of an AIF: (a) administration; (b) marketing; (c) activities
related to the assets of AIFs;
(ii) additional management of UCITS, subject to authorisation under the UCITS Directive.
By way of derogation, Member States may authorise external AIFMs to provide the following services:
Self-managed AIFs are treated as AIFMs, but may only engage in internal management activities as described in Annex I to the AIFMD (described in paragraph (i) above).
4.4. Although fund management is subject to robust regulation in Malta already, material changes to the current regime for non-UCITS fund managers in Malta are expected to relate to certain ongoing requirements, for instance, regarding the following:
4.5. As of 22 July 2013, AIFMs established and authorised in Malta under AIFMD, should in principle be allowed to:
(i) manage Maltese AIFs;
(ii) manage EU AIFs (established outside Malta), directly on a cross-border basis or by establishing a branch, subject to notification to the MFSA;
(iii) manage non-EU AIFs which are not marketed within the EU, provided that appropriate cooperation arrangements are in place between the MFSA and the supervisory authority of the third country where the non-EU AIF is established;
(iv) market units of any Maltese AIF and any EU AIF it manages to professional investors in Malta, subject to notification to the MFSA;
(v) market units of any Maltese AIF and any EU AIF it manages to professional investors in EU Member States (other than Malta), subject to notification to the MFSA (i.e. passporting); the Maltese AIFM would need to make arrangements for the marketing of AIFs and, where relevant, arrangements to prevent marketing to retail investors, in accordance with the laws of the Host Member State/s;
(vi) during a transition period (expected to end in 2018 - see Annexes I and II), market units of non-EU AIFs it manages to professional investors in the EU, under the respective national private placement regimes (and subject to stricter rules which Member States may impose, where applicable), provided that: (i) appropriate cooperation arrangements are in place between the MFSA and the supervisory authority of the third country where the non-EU AIF is established and (ii) the said third country is not black-listed by the FATF.31 If and when the relevant provisions in relation to third countries become applicable (which is not expected to happen before mid-2015 – see Annex I), then a Maltese AIFM should also be allowed to market units of any non-EU AIF it manages to professional investors in the EU, subject to notification to the MFSA (in other words, to passport), provided that: (i) appropriate cooperation arrangements are in place between the MFSA and the supervisory authority of the third country where the non-EU AIF is established; (ii) the said third country is not black-listed by the FATF; and (iii) the said third country has entered into an exchange of information on tax agreement with Malta and any other Member States where the units are intended to be marketed. Under the passporting regime, the Maltese AIFM would need to make arrangements for the marketing of AIFs and, where relevant, arrangements to prevent marketing to retail investors, in accordance with the laws of the Host Member State/s.
4.6. A Member State may allow AIFMs to market units or shares of AIFs they manage to retail investors (i.e., an investor who is not a professional investor – see definition in footnote 29) in that Member State’s territory, in accordance with AIFMD, irrespective of whether such AIFs are marketed on a domestic or cross-border basis or whether they are EU or non-EU AIFs. In such cases, Member States may impose requirements on the AIFM or the AIF which are stricter than the requirements applicable to the AIFs marketed to professional investors in their territory in accordance with the AIFMD (without discrimination against EU AIFs established in another Member State and marketed on a cross-border basis).
5. Fund Administrators
5.1. Fund administrators operating in or from Malta require a recognition certificate issued by the MFSA. Currently, Maltese PIFs (and retail non-UCITS funds) may appoint a fund administrator directly, or the fund’s investment manager may delegate the administration function to a third party fund administrator; if no fund administrator is appointed, the investment manager will be responsible for this function itself). In view of the AIFM’s duties related to valuation of assets and calculation of NAV, it appears that, if and when the AIFM is authorised under AIFMD, the fund administrator would need to be appointed by the AIFM (or the self-managed AIF), in accordance with the relevant rules on delegation under AIFMD.
5.2. The AIFMD contemplates the possibility for AIFMs to appoint an external valuer to perform the valuation function, subject to certain conditions; otherwise, such function remains with the AIFM, which would need to ensure however that the valuation task is functionally independent from the portfolio management, and that the remuneration policy and other measures ensure that conflicts of interest are mitigated and that undue influence upon the employees is prevented.
It is understood that the fund administrator would not be considered to be an external valuer, if and to the extent that such administrator is responsible for the calculation of the AIF’s net asset value, but not for the valuation of the AIF’s assets.
6. Custodians and Prime Brokers
6.1. Currently, Maltese law and regulation require that Retail CISs and PIFs targeting Experienced Investors entrust the fund’s assets to a custodian for safekeeping; the custodian is also responsible for monitoring the extent to which the investment manager abides by the investment and borrowing restrictions to which the fund is subject. PIFs targeting Qualifying or Extraordinary Investors would generally be expected to appoint a custodian or prime broker(s) for the safekeeping of the PIF’s assets (in which case the custodian or prime broker is not required to assume a monitoring function in respect of the activities of the investment manager), but may adopt adequate alternative safekeeping arrangements instead, subject to the MFSA’s approval.
Whilst the custodian of Retail CISs must have an established place of business in Malta and be in possession of a Category 4 Investment Services Licence issued under the Investment Services Act (Chapter 370 of the Laws of Malta), PIFs may appoint a custodian / prime broker established abroad. The custodian (or prime broker) appointed by a PIF must be:
(i) an entity providing the services of a custodian in terms of a Category 4 Investment Services Licence; or
(ii) an entity constituted in a Member State or EEA State and operating from a Member State or EEA State other than Malta, providing the services of custodian to CISs; or
(iii) an entity constituted outside Malta and operating from outside Malta providing the services of a custodian to CISs where the MFSA is satisfied that such entity is of sufficient standing and repute and having the business organisation, systems, experience and expertise deemed necessary for it to act as custodian.
6.2. Under the AIFMD regime, for each AIF it manages, the AIFM will need to ensure that a single depositary is appointed.35 The functions of the “depositary” of an AIF will be primarily: to ensure that the AIF’s cash flows are properly monitored, to hold the AIF’s assets for safekeeping, and to perform “oversight duties” (and to carry out certain other tasks). The AIFMD will also regulate, amongst other matters:
• delegation by the depositary: only the safekeeping of assets may be delegated to a third party, subject to conditions;
• liability of the depositary and its delegates.
The AIFMD requires that the depositary be established in the following location:
• for EU AIFs, in the home Member State of the AIF;
• for non-EU AIFs, in the third country where the AIF is established or in the home Member State of the AIFM managing the AIF or in the Member State of reference of the AIFM managing the AIF.
The competent authorities of the home Member State of an AIF or in case where the AIF is not regulated the competent authorities of the home Member State of an AIFM, may allow credit institutions referred to in paragraph (a) below, established in another Member State to be appointed as a depositary until 22 July 2017.
Pursuant to AIFMD, the depositary must, in principle, be:
(a) a credit institution having its registered office in the EU and authorised in accordance with Directive 2006/48/EC, or
(b) an investment firm having its registered office in the EU, subject to capital adequacy requirements according to article 20(1) of Directive 2006/49/EC, including capital requirement for operational risks and authorised in accordance with MiFID, and which also authorized provide the ancillary service of safekeeping and administration of financial instruments for the account of clients in accordance with Section B(1) of Annex I to MiFID; such investment firms shall in any case have own funds not less than the amount of initial capital referred to in Article 9 of Directive 2006/49/EC; or
(c) another category of institution which is subject to prudential regulation and ongoing supervision and which on 21 July 2011 falls within the categories of
institution determined by Member States to be eligible to be a depositary under Article 23(3) of Directive 2009/65/EC.
For non-EU AIFs, it may also be an entity of the same nature as those referred to in paragraphs (a) and (b), provided that it is subject to effective prudential regulation and supervision.
Thus, under the AIFMD regime, a Maltese AIF, whose AIFM is authorized under AIFMD, would eventually be required to appoint a custodian who is established (including establishment through a subsidiary or branch) in Malta.
6.3. Whilst the AIFMD aims to ensure that AIFs may continue to use prime brokers, it appears that under the AIFMD regime, prime brokers may be appointed as counterparty to the AIF, and also as sub-custodian, and possibly even as depositary. However, in order to avoid conflicts of interest between the depositary, the AIFM and/or the AIF and/or its investors, the AIFMD prescribes that a prime broker acting as counterparty to an AIF shall not act as depositary for that AIF, unless it has functionally and hierarchically separated the performance of its depositary functions from its tasks as prime broker and the potential conflicts of interest are properly identified, managed, monitored and disclosed to the investors of the AIF. Delegation of safekeeping functions by the depositary to such prime broker is allowed, as long as the relevant conditions for delegation by the depositary are met.
6.4. In view of the above, Maltese PIFs (if they will be subject to the AIFMD regime) that have appointed a foreign custodian and/or one or more prime brokers, will need to appoint a custodian established in Malta in due course (see also Annex II, for a schematic overview) and, generally, the custodian and prime brokerage relationships of Maltese AIFs will need to be revisited and related contracts will have to be revised or prepared in accordance with the rules of the AIFMD, as implemented at national level.
7. Investment Advisor
7.1. Currently, a Maltese CIS or its investment manager may appoint an investment advisor, it being understood that the discretionary management function remains with the investment manager (or the CIS, if self-managed).
7.2. The AIFMD does not expressly refer to investment advisors, but it appears that under the AIFMD regime, the investment advisor will need to be appointed by the AIFM.
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