During the post-AIFMD era, whereby most jurisdictions seem to have fallen into a regulatory hibernation with reference to funds, Malta has once again proven to be abreast of developments. The Malta Financial Services Authority (‘MFSA’) has recently announced the launch of a new framework applicable for notification of Alternative Investment Funds (the ‘Notified AIFs’) which will be promoted to Qualifying or Professional Investors (as defined below).
The new framework will be applicable to collective investment schemes which are not in possession of a licence issued by the MFSA, in terms of the Investment Services Act (Chapter 370 Laws of Malta), and are managed by a full-scope Alternative Investment Fund Manager (‘AIFM’), authorised and regulated under Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers (‘AIFMD’). In respect of such a collective investment scheme, an AIFM, which is in possession of either (i) a licence granted by the MFSA under the Investment Services Act or (ii) a management passport under Article 33 of the AIFMD, shall make a notification to the Regulator undertaking responsibility for it and for the fulfilment of its obligations. Third country AIFMs will be able to submit a request for notification of an AIF once passport rights under the AIFMD have been extended to their country of establishment.
Under the novel regime, the Notified AIFs may be established as either closed-ended or open-ended and can avail themselves of any legal structure from the wide spectrum already in place, catering for both corporate and unincorporated forms (e.g. SICAV, INVCO, Incorporated Cell Company, Incorporated Cell of a Recognised Incorporated Cell Company, contractual fund etc.). However, the following types of collective investment schemes shall fall outside the scope of the notification process: (1) funds which do not fall under the definition of ‘AIFs’, (2) self-managed AIFs, (3) AIFs which are sold and promoted to investors other than those who fall under the definition of ‘Qualifying’ or ‘Professional Investors’ (see below), (4) AIFs managed by third country AIFMs (pre-passport), (5) loan funds and (6) AIFs that invest in non-financial assets such as antiques, works of art etc. (currently real estate funds are excluded from the notification process as well but this will most probably be amended as per MFSA’s preliminary feedback).
As stated above, Notified AIFs may be marketed only to Professional and Qualifying Investors. ‘Professional Investors’ are investors who are considered to be professional clients or may, on request, be treated as professional clients within the meaning of Annex II to Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (‘MiFID’). ‘Qualifying Investors’ (a new regulatory term introduced by MFSA) are defined as those investors who (a) invest a minimum of EUR 100,000 or its currency equivalent in the AIF – which amount shall not be reduced below this threshold at any time by means of a partial redemption, (b) declare in writing to the AIFM and the AIF that they are aware of and accept the risks associated with the proposed investment and (c) either have net assets in excess of EUR 750,000 or are senior employees or Directors of service providers to the Notified AIF.
As soon as the duly completed notification pack (the notification request along with a Prospectus and supplementary documentation) has been filed with the MFSA, the Authority will proceed to include the AIF in the list of Notified AIFs within ten business days. The same period applies in case of amendment of a Notified AIF’s Prospectus as well. Such inclusion shall not be construed as licence, authorisation or approval on behalf of the MFSA whereas a list of Notified AIFs in good standing (hereinafter referred to as the ‘List’) will be maintained and updated on the Authority’s website. The procedure used for the notification of AIFs shall also be used for the notification of additional sub-funds.
Since the new framework essentially places reliance on the AIFM’s regulated status, it follows that the said AIFM has increased powers and responsibilities placed on its shoulders to offset the lack of direct prudential regulation with reference to the investment product. In view of such reliance policy, the AIFM, prior to submitting a request for the AIF’s inclusion in the List, is required to perform the ‘fitness and properness’ test on both the service providers as well as the governing body of the AIF and may therefore veto any appointment thereof on such grounds. Furthermore, any rights (other than any rights to income or capital) of any founder or similar shares must be transferred to and exercisable only by the AIFM upon inclusion of the AIF in the MFSA’s List.
The attractive tax regime currently applicable to licenced collective investment schemes (based on the dual classification into prescribed and non-prescribed funds) will be extended to the Notified AIFs as well, thus easing the investors’ minds. This decision was hailed by the industry as it put an utterly appealing package deal on Malta’s investment table, placing the country once again in the vanguard of pioneering jurisdictions.
The Notified AIF regime puts Malta on a level playing field with Luxembourg, a long established fund domicile. The latter has recently introduced the Reserved Alternative Investment Fund (RAIF – or fonds d’investissement alternatif réservé, FIAR) framework. Whereas a detailed comparison between the two regimes is outside the scope of this article, reference should be made to the main difference between the two products. Whereas the notification to the MFSA constitutes a sine qua non for the establishment of a Notified AIF, upon the receipt of which it will be included in the respective List maintained and updated on the Regulator’s website as per above, RAIFs are not registered with the Luxembourg supervisory authority (the Commission de surveillance du secteur financier, CSSF). They are established through a notarial attestation of their constitutive documents, which must then be deposited with the Register of Trade and Companies (‘RCS’) in order to be published in the Mémorial, the official Luxembourg State Gazette.
Malta has made the wiser choice here as the inclusion of the Regulator in the whole procedure (even within such limited scope as has been described above) may add another layer of protection in the eyes of the potential investors, thus providing the sought after safeguards for such investment endeavours. If one takes into consideration other regulatory discrepancies as well (e.g. the requirement for appointment of local depositary for RAIFs whereas lack of any such requirement for Notified AIFs), then the scales are unambiguously tilting towards Malta as an AIF domicile alternative.
It is expected that requests for inclusion in the List will start being received by the MFSA from around the middle of the second quarter of 2016.
Malta’s Notified AIF framework will unequivocally be a game-changer in the funds world. This is due to the fact that, whereas the AIFMD was meant as a predominantly management regulation ensuring adequate supervision (and regulation) of AIFMs, rather than the funds themselves, the industry’s bitter experience was a profound regulation overlap between the manager and the product (thus raising compliance costs and ultimately impeding investment on behalf of professional investors who, due to their higher level of sophistication should be granted more leeway). Malta, boasting a track record when it comes to a pro-investor mentality (evidenced e.g. through the preservation of the PIF alongside the AIF regime), has once more proven itself to be a true regulatory torchbearer uniquely positioned to cater for the investment industry.