The Alternative Investment Fund Managers Directive (the Directive) entered into force on the 22 July 2013. Malta was the first EU Member State to completely transpose the Directive ahead of schedule and as a result the Malta Financial Services Authority (MFSA) was in a position to accept applications for the licensing of both Alternative Investment Fund Managers (AIFMs) and Alternative Investment Funds (AIFs) as of such date.
What is an Alternative Investment Fund?
For the purposes of the Directive, an Alternative Investment Fund is any collective investment undertaking which raises capital from investors with a view to investing such money in accordance with a defined strategy, and which does not require authorisation in terms of the UCITS Directive.
The definition of an AIF is therefore very wide and most types of funds, be they hedge funds, private equity funds or real estate funds would be caught by the definition.
Alternative Investment Funds in Malta
Licensing Requirements
The Investment Services Act (Chapter 370 of the Laws of Malta) prohibits collective investment schemes from issuing or creating units or carrying on any activity in or from Malta, unless they are in possession of a collective investment scheme licence issued by the MFSA. A similar prohibition exists in respect of any collective investment scheme set up in terms of Maltese Law issuing or creating units or carrying on any activity from any country or territory outside of Malta.
A collective investment scheme licence can be issued to an entity to operate as a retail collective investments scheme, whether UCITS or otherwise, professional investor fund or alternative investment fund in terms of the Directive.
As part of the implementation process of the Directive, the MFSA issued the Investment Services Rules for Alternative Investment Funds (the AIF Rules) containing the standard licence conditions applicable to alternative investment funds.
The AIF Rules govern both third-party managed AIFs and self-managed AIFs, with the latter being subject to additional requirements akin to those applicable to AIFMs in terms of the Directive.
An AIF established in terms of Maltese law can take several legal forms, and additional rules apply to each specific legal form in terms of Appendix 1 to the AIF Rules (the Appendix). An AIF may thus be established as a limited partnership, an investment company or as an incorporated cell company, amongst others. The majority of collective investment schemes in Malta are set up as investment companies with variable share capital public limited companies (SICAV plc), and where relevant, it is this legal form which we will be considering here.
Appointment of Officers and Service Providers
An AIF is required to appoint a minimum number of officers all of whom must satisfy the fitness and properness test of the MFSA and be approved to take up office, before they can act for the AIF. The replacement of such officers throughout the life of the AIF is also subject to prior MFSA approval. Any such change must be submitted to the MFSA for approval at least 21 business days in advance. To this end, the AIF is required to submit, in respect of each prospective officer, a detailed personal questionnaire. Prospective AIF officers undergo strict due diligence checks by the MFSA before being approved by the Maltese regulator to take up office.
As a requirement for authorisation, an AIF is required to appoint the following principal officers and service providers:
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Board of Directors
The Board of Directors of an AIF must be composed of at least three directors, typically one of whom will be resident in Malta. They must all however be fit to hold office with a licenced collective investment scheme.
The MFSA encourages the appointment of multiple independent directors, being directors who are independent of the investment manager, sponsor and other service providers, and it is a requirement under the Appendix to the AIF Rules, that at least one member of the Board of Directors be independent.
Corporate Directors may only be appointed to act as Directors of an AIF where these are regulated in a recognised jurisdiction.
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Alternative Investment Fund Manager
Other than in the case of a self-managed fund in which additional requirements would be applicable, the AIF is required to appoint an Alternative Investment Fund Manager to take responsibility for the portfolio management and risk management of the AIF.
The AIFM may either have a place of business in Malta or be licenced as a European AIFM, authorised to manage the type of AIF in questions, and who has passported AIF management services to Malta in terms of the AIFMD.
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Depositary
The AIF must appoint a single Depositary who will be responsible for the safekeeping of the AIF’s assets. The Depositary would principally have the following responsibilities
(i) monitoring of the AIF’s cashflows;
(ii) custody of the AIF’s financial instruments;
(iii) verifying the ownership interest of the AIF in other assets;
(iv) ensuring that the dealings in the shares of the AIF are carried out; and
(v) ensure that the value of the shares in the AIF is calculated according to applicable rules.
The Depositary must be independent of the AIFM and must act in the best interests of the shareholders.
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Auditor
The AIF must appoint an MFSA-approved auditor, and is required to change the auditor if the MFSA so requests.
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Compliance Officer
Whilst ultimate responsibility for compliance by the AIF with its licence conditions and the AIF Rules rests with the Board of Directors, an AIF is required to appoint a compliance officer to assume responsibility for the compliance function and for the AIF’s compliance reporting requirements in terms of the AIF Rules on a day-to-day basis. The Compliance Officer role may be carried out by a contracted third-party.
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Money Laundering Reporting Officer
The AIF is required to appoint a Money Laundering Reporting Officer (MLRO). Responsibility for the AIF’s compliance with its Prevention of Money Laundering obligations rests with the Board of Directors. However, the MLRO ensures day-to-day compliance with such obligations. The MLRO must be an officer of the AIF of sufficient seniority and command so as to effectively influence the AIF’s anti money laundering and terrorist finance policy. The MLRO must therefore be in employment with, or the executive director of AIF and resident in Malta. The functions of an MLRO cannot generally be outsourced or carried out by a non-executive director of the AIF, or by the company secretary of AIF where such company secretary does not hold any other position within the organisation. Neither can the role of MLRO be carried out by a person who undertakes an internal audit function within the organisation.
It is however possible for the MLRO duties of a collective investment scheme to be carried out by the MLRO of the administrator of the AIF in accordance with an outsourcing agreement entered into between the AIF and the Administrator.
The Compliance Officer and MLRO of an AIF must be persons who have proven competence to properly fulfil the obligations associated with such role. To this end, prospective Compliance Officers and MLROs are required to submit to the MFSA a completed Competency Form detailing their relevant qualifications and experience with respect to such office in addition to the submission of a Personal Questionnaire.
An AIF may also appoint:
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An Administrator
The Administrator of the AIF is generally appointed to act as the share registrar of the AIF, therefore to take care of the issuance and allotment and redemption of shares in the AIF as well as to calculate the NAV of the AIF;
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An External Valuer
The External Valuer is responsible for the proper valuation of the AIF’s assets, the calculation of the NAV and its publication. Where appointed, the External Valuer must be a legal or natural person independent of both the AIF and the AIFM and of any other person with close links to such AIF and AIFM. The role of External Valuer may be carried out by the AIFM itself provided that the valuation task is functionally independent form the portfolio management function, and measures are undertaken to ensure that conflicts of interest are mitigated. Where the External Valuer function is delegated, possibly to the Administrator, such delegation is carried out by the AIFM and not by the AIF, unless the AIF is self-managed. Delegation of the External Valuer function does not however diminish the Investment Manager’s liability towards the AIF with respect to such function.
Types of AIF and applicable investment restrictions The AIF Rules issued by the MFSA currently allow the setting up of four types of AIFs aimed at investors of varying degrees of investment experience, and with corresponding investment restrictions.
Therefore a Maltese AIF can be set up as an AIF targeting retail investors, professional investors, experienced investors, qualifying investors and extraordinary investors: the latter three categories corresponding to the categories the professional investor funds (PIFs) that may be licensed in Malta and which remain the mainstay of the local funds industry.
The AIF Rules impose different levels of restrictions, with more stringent rules applying with respect to AIFs targeting retail investors. Thus, for example, whilst AIFs targeting retail investors are subject to borrowing restrictions, and cannot enter into cross sub-fund investments (being an investment by one sub-fund of an AIF in another sub-fund of the same AIF), such restrictions do not apply to AIFs targeting Professional Investors, which are only subject to the investment restrictions listed in their specific offering documentation and is allowed to invest up to the maximum limit allowed by MFSA rules (being 50%) by way of cross sub-fund investments.
Self-managed AIFs
A self-managed AIF is subject to additional requirements in terms of the AIF Rules, in line with the rules applicable to AIFMs. Thus, a self-managed AIF is required to abide by applicable financial resources requirements, and is required to have own funds equivalent to an initial capital of at least equal to EUR 300,000, with additional own funds being required where the portfolio of the AIF exceeds EUR 250 million. A self- managed AIF is, amongst others, required to set up an in-house investment committee which may include members of the Board of Directors, have a separate risk management function, abide by conduct of business rules and implement appropriate conflict of interest and remuneration policies, as would a stand-alone AIFM.
The investment services field has been one of the fastest growing sectors of the financial services industry in Malta, and there remains a strong interest in the registration of both AIFs and AIFMs with the demand currently on the increase. The registration process is straightforward and can be handled efficiently. The MFSA remains an accessible regulator, always ready to meet with promoters, and whilst uncompromising on principles and enforcing applicable rules, it strives to be open to developments and, where possible, to assist promoters in seeing their projects through.