Funds & Investment Services: AIFMD

Malta was the first EU Member State to successfully transpose the Alternative Investment Fund Managers Directive 2011/61/EU into Maltese law.

The MFSA, on the 27th June 2013, launched its new Investment Services Rulebooks in order to further incorporate the new rules in relation to the Alternative Investment Fund Manager Directive.

Co-operation arrangements have currently been signed between the MFSA and 34 non-EU securities regulators, with responsibility for the supervision of alternative investment funds (AIFs), including jurisdictions such as the USA, Canada, Brazil, India, Switzerland, Australia, Hong Kong and Singapore. The European Securities and Markets Authority (ESMA) negotiated the agreements on behalf of all 27 EU Member State securities regulators.

These arrangements are an essential part of ensuring compliance with the AIFMD and are requisite for the allowance of non-EU AIFMs to access EU markets or for the allowance of non-EU AIFMs to perform fund management activities on behalf of EU managers. The arrangements also cover co-operation in the cross-border supervision of depositaries and AIFMs’ delegates.

The arrangements started to apply on the 22 July 2013 and have facilitated the exchange of information, crossborder on-site visits and mutual assistance in the enforcement of the respective supervisory laws.

One of the main advantages of the new AIFMD Regulations is the possibility of passporting these AIFM services through the establishment of a branch, as described in the Investment Services Act (Alternative Investment Fund Manager) (Passport) Regulations, 2013.

EU AIFMs may also passport the marketing of units or shares of an EU AIF pursuant to the provisions of the Directive as contained in the Investment Services Act (Marketing of Alternative Investment Funds) Regulations, 2013.

There is also the possibility of passporting Portfolio Investment Services, as in accordance with article 6(4) of the AIFMD, AIFMs may also be authorised to provide discretionary portfolio services on a client-by-client services regulated in accordance with certain provisions of Directive 2004/39/EC (MiFID). These services will be included in the MFSA’s passport notification to the host EEA Member States. It is essential, however, to note that in line with the Commission’s view, Member States have the right to refuse passporting of these MiFiD Services.

All transitional cross-border and third-country services agreements will continue to be applicable for two more years, until July 2015.

Any previously authorised EU AIFMs may continue management and marketing without a passport of non-EU AIFs on a private placement basis in the EU for an interim period until 22 July 2015, subject to the full Directive provisions but with a depository lite, and may then potentially obtain a full EU passport in 2015 following deliberations by ESMA.

Also, non-EU AIFMs may continue management and marketing without a passport of AIFs (whether EU or non-EU) on a private placement basis in the EU without the necessity of full AIFMD compliance and without a depository until 2015. Following this interim period an EU passport may be granted subject to full Directive applicability.

In accordance with the obligations of the Investment Services Rules for Investment Services Providers the delegation of functions by a Depositary to a prime broker of any of its custody tasks in accordance with the Standard Licence Conditions (SLCs) 4.15 to 4.18 of these Rules is permitted so long as the requirements and conditions are met. One of these requirements is that the Licence Holder should be able to demonstrate to the MFSA that there is a genuine objective reason behind such delegation.

As well as other conditions stipulated in the SLCs 4.23 and 4.24, the Licence Holder would only be able to declare itself free of liability in a situation of delegation of functions, if, among other requirements, this is done by the means of a written contract as specified in paragraphs (b) and (c) of SLC 4.24.

The contractual discharge would also need to be justified through the giving of clear and objective reasons which may include those in article 102 of the Level II Regulation.

Subject to the fulfilment of these conditions, the MFSA accepts some leeway between the arrangements themselves, provided that the chosen model still falls within the scope of Article 21 of the AIFMD and the Level II Regulation.

The MFSA is ready to continue providing industry guidance regarding the matter of depositary models for fund structures.

Under the new Directive all EU Alternative Investment Funds (AIFs) are legally obliged to appoint a sole depositary who will operate in the AIF’s EU domicile or in another EU Member State (in the case of those States such as Malta, which exercised the derogation found in Article 61[5]) who is required to take care of the Core Depositary Services which are:

– the safe keeping of AIF assets
– the monitoring of AIF cash-flow
– the operation of the AIF itself

Once the non-EU AIF marketing passport is introduced as planned, sometime in July 2015, the single depositary requirement will also be extended to non-EU AIFs, apart from three exceptions:

• where the non-EU AIF will not be directed in any way towards the EU, these depositary provisions do not apply;
•  where the AIF has no redemption rights within 5 years from the date of the initial investment and which does not normally invest in assets that must be held in custody (such as real estate), EU Member States have the option to permit the AIF to appoint a single depositary entity that carries out depositary functions as part of its professional or business activities in respect of which it is subject to mandatory professional registration or rules on professional conduct and which can provide sufficient financial and professional guarantees to the MFSA; and
• where the non-EU AIF will be marketed within the EU through the national private placement regimes found in Article 36 of the Directive, the AIF is not obliged to appoint a sole depositary but must appoint one or more entities just to provide the abovementioned Core Depositary Services.

As the latter category of AIF is not subject to such stringent rules concerning delegation, strict liability, domicile, type of entity and conflicts of interest set forth under Article 21 of the Directive, it has become informally known as the ‘depositary-lite’. The depositary-lite regime was constructed as a mechanism to permit hedge funds that qualify to continue to use their original Prime Brokers to safeguard their assets whilst appointing one or more other entities to perform the cash-monitoring and oversight functions.

According to the AIFMD, any managers that wish to delegate managerial functions to third parties may do so, however they are obliged to notify the competent authority and provide an objective justification of the new delegation structure. Notwithstanding this, the AIFM shall continue to retain the power to perform senior management functions in particular in relation to the implementation of investment policy and investment strategies. It must also retain the expertise and resources to effectively oversee the delegated tasks and to manage the risks which could arise as a result of the delegation.

Subject to the foregoing the MFSA may allow certain portfolio and risk management tasks to be delegated in line with the Directive (including partial delegation of both activities) and shall determine the extent of delegation that may be allowed following a review of the proposed delegation structure.

Any delegation of management duties to a Sub-Manager must first be notified to the MFSA and these delegations would have to comply with a number of conditions, as contained in Section 4 of Part BIII of the Investment Services Rules for Investment Services Providers. The liability of the AIFM will in no case be affected by delegation of any its functions to third parties.

In line with Article 13 of the AIFMD, the MFSA’s approach is that remuneration policies and practices shall apply at the level of the AIFM – specifically to “those categories of staff, including senior management, risk takers, control functions, and any employees receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers, whose professional activities have a material impact on the risk profiles of the AIFMs or of the AIFs they manage.”

The approach adopted by the MFSA does not require that entities to which portfolio management or risk management activities may have been delegated be subject to similar remuneration requirements as the AIFM.