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Malta Emerges as a Stronger Fund Domicile After AIFMD

April 2015 - Finance. Legal Developments by Chetcuti Cauchi Advocates.

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It is fair to say that AIFMD was not very well received by the Maltese burgeoning industry when it was first announced in April 2009. The initial draft appeared to have been drafted hastily and did not take into account certain characteristics of the local regulatory regime (such as the availability of self-managed fund structures) leading many to speculate that the Directive could disrupt the growth of the Maltese funds industry.Another issue that arose during regulatory gestation of the directive was the requirement for full scope AIFMs to appoint a single depositary for each AIF it manages, in the jurisdiction where the AIF is domiciled; a requirement which, due to the, at the time, limited depositary infrastructure could also have dampened growth.

Malta Emerges as a Stronger Fund Domicile After AIFMD

It is fair to say that AIFMD was not very well received by the Maltese burgeoning industry when it was first announced in April 2009. The initial draft appeared to have been drafted hastily and did not take into account certain characteristics of the local regulatory regime (such as the availability of self-managed fund structures) leading many to speculate that the Directive could disrupt the growth of the Maltese funds industry.  Another issue that arose during regulatory gestation of the directive was the requirement for full scope AIFMs to appoint a single depositary for each AIF it manages, in the jurisdiction where the AIF is domiciled; a requirement which, due to the, at the time,` limited depositary infrastructure could also have dampened growth.

Now that the Directive is in force and managers are getting to grips with ongoing compliance questions, it has become apparent that the local industry was well equipped to tackle the transition, and that the jurisdiction is well placed to continue its rapid growth as a fund domicile of choice. It transpires that Malta’s regulatory regime pre-AIFMD was already robust and sophisticated, taking the edge off the transition.

This is not to say that the market has been completely unaffected. It is certainly the case that Europe as a whole is less friendly to small start-up funds today than it was pre-AIFMD. This is particularly true with respect to funds which make extensive use of leverage and which can thus very rapidly hit the full-scope thresholds under the Directive. However thanks to a certain characteristics of its fund regime Malta has maintained its appeal as a domicile for fund start-ups. More importantly, the Directive has greatly increased the jurisdiction’s appeal as a domicile for fund managers. Taken together these developments have led to the emergence of a Maltese domicile that is more mature and sophisticated, less focused on high-volume fund start-ups and capable of supporting EU-wide management structures.

AIFs and PIFs: Parallel Regimes for De Minimis and Full-Scope Funds

Malta has chosen to retain its popular pre-AIFMD Professional Investor Fund (PIF) regime in parallel with the development of an Alternative Investment Fund (AIF) rulebook geared for full-scope business. This decision has proven to be a wise one, with PIFs remaining a popular choice among start-up managers looking for a regulated EU vehicle which can benefit from the de minimis exemption under the Directive.

Rapid Development of Depositary Infrastructure

While Malta’s depositary/custodian infrastructure still lags some way behind that of its competitors, the jurisdiction has gained lot of ground since the coming into force of the directive such that in practice it is rare to encounter a structure that the local infrastructure cannot support effectively. There have been three key positive developments in this regard, namely: the implementation of a depositary lite regime through the introduction of a new investment services license type (investment services license category 4B); the full use of the derogation under Article 61(5) regarding the depositary requirement, giving the local infrastructure time to grow; and the entry into the market of a number of reputable new players, introducing a healthy element of choice and competition.

Reasonable Implementation of Remuneration Rules

The jurisdiction has taken a start-up friendly approach to the implementation of remuneration rules, allowing, after duly considering the specific circumstances of the applicant, for the disapplication of certain requirements on the basis of proportionality. Malta has also adopted a ‚Äėno look-through‚Äô approach with respect to the application of the remuneration rules to delegates. A Malta AIFM delegation portfolio management functions to a UK MiFID manager would therefore not lead to the application of the AIFM remuneration code against the UK manager, which would remain subject only to the MiFID remuneration rules as implemented in the UK.

Malta: An EU Hub For Fund Managers

The well-publicized sweetener given to the alternative investment fund management industry with the regulatory medicine is of course passporting i.e. the ability for an EU manager to manage and market funds throughout Europe, riding on an authorisation granted by a single member state.  This has significant implications for the Maltese industry, as it means that an AIFM established in Malta can, for example, manage funds established in Luxembourg, and freely sell such funds to investors in France and Germany, to give one example of the many possible permutations. Combined with Malta‚Äôs well known attractions, such as its low cost and fiscal base and its approachable regulator, this positions the jurisdiction as an ideal starting-point for non-EU managers looking to enter the continental market, as well as start-up managers looking for a business friendly hub jurisdiction that can support their growth.

For additional information about AIFMD, we kindly invite you to read the following:

Investment Funds

AIFM in Malta: Frequently Asked Questions

Malta AIFMD: Revision of the Investment Services Rulebook

Malta Professional Investor Funds Post-AIFMD

Author: Dr Charles Cassar, Senior Manager, London Office

Dr Charles Cassar leads the financial services regulatory team at Chetcuti Cauchi Advocates. Dr Cassar has advised clients from a variety of sectors of the financial industry including investment advisors, funds and their managers, insurance principals and intermediaries, banks and financial institutions. Dr. Charles Cassar is particularly interested in the intersection between technology and financial services, and has built a clientele which includes forex brokers, online payment institutions and virtual currency operators. Dr Cassar regularly delivers training sessions, career talks and seminars and has spoken at the University of Malta, Maastricht University and Society Education.