AIFMD – A Good Deal for Malta

Malta has been, for the past number of years, an attractive fund domicile, particularly due to the Professional Investor Fund (PIF) regime, which regulates most forms of collective investment undertakings, including hedge funds and private equity funds.  Indeed, Malta has emerged as a jurisdiction for funds, complementary to traditional European fund domiciles, such as Luxembourg and Ireland.  Malta, coupled with it being a cost-efficient jurisdiction, offers a sound but flexible regulatory environment.  Such PIFs are targeted at financially professionals, high net-worth individuals and are primarily regulated by the rules issued by the Malta Financial Services Authority (MFSA). 
 
The Maltese legal system is a reflection of the cross-currents which have influenced Malta’s history and also European history as a whole.  The Roman Civil Law and English Common Law systems have, together with the more recent European Union legislative influence, interacted to shape the Maltese legal system.  One of the most hotly debated European directives affecting the non-retail fund industry has been the Alternative Investment Fund Managers Directive (AIFMD), an area which had been left in a pan-European regulatory void.  The proposed AIFMD was aimed at providing harmonised regulatory standards for all managers of such alternative investment funds (AIFs) within scope, although the rules now introduced by virtue of the Directive will impact the AIFs themselves.  The Directive must be transposed into national legislation by the 22 July 2013.  As a result of the directive, all investment funds in the EU can be categorised as falling in two sectors: either UCITS already regulated by the UCITS directive or AIFs regulated by the AIFMD.  On the 19 December 2012 the EU Commission issued the much awaited Level II Implementing measures of the AIFMD by virtue of a delegated regulation, which, being a regulation, shall have direct effect in all EU Member States. 
 
The AIFMD shall introduce an EU marketing passport for AIF managers to market their funds in all 27 Member States of the EU through a single authorisation process, similar to that under the UCITS Directive.  However, the EU marketing passport will, at first, only be available to EU managers in the course of marketing EU funds.  During the first two years post national transposition of the AIFMD, that is between 2013-2015, EU marketing by non-EU managers and of non-EU funds would be regulated by national private placement regimes.  Such managers are thus faced with the choice of either establishing an EU base and complying with the AIFMD in order to access the European market, or not to market their funds in the EU.  As from 2015, the EU marketing passport shall then be available to non-EU managers and their funds, although such opportunity will only exist if they comply with the AIFMD.  This has sparked interest from a number of offshore managers to establish a base in European jurisdictions, such as Malta, in order for them to benefit from the EU passport from an earlier date.  Furthermore, various rules introduced by the Directive and the Implementing Regulation appear to elaborate the rules already imposed on managers under the Markets in Financial Instruments Directive (Directive 2004/39/EC) (MiFID) – this ought to ensure a smoother process of implementation and compliance
 
One may ask; does Malta stand to gain in a legislatively harmonised fund industry? Will Malta retain its competitive edge? The answers to these questions are, in my view, quite simply, yes.  The benefits which the Maltese jurisdiction affords are the result of having an innovative and responsive regulator and a skilled workforce.  The legislative framework offering a wide range of vehicular-type solutions will continue to give Malta a competitive edge - Malta offers a wide range of fund structures, ranging from open-ended and closed-ended corporate entities, trusts, limited partnerships, contractual structures, incorporated cell companies to recognised ICCs.  These structures thus allow fund platforms, private equity firms and any other structure to be set up at ease, many of them also reaping the full benefit of Malta’ extensive network of approximately 60 double tax treaties.  Advantages also accrue in favour of investment services license holders, including those arising out of Malta’s full imputation system of tax which provides a tax efficient system.  Malta’s place within the context of the AIFMD will also stand out in terms of the de minimis fund managers.  The Directive exempts managers of smaller type sized from the requirements of the AIFMD, and grants them the right to opt-in should they wish.  Such exemption is applicable to managers having assets under management, including assets acquired through leverage, which do not exceed one of two thresholds: (i) €100 million; (ii) €500 million where the portfolio consists of AIFs that are not leveraged and have no redemption rights exercisable during a period of five years following the date of initial investment in each AIF.  Malta may thus, continue to benefit from applying an ad hoc regulatory regime for such managers falling within this de minimis exemption.  This opening has yet to be formalised through regulation however the industry is confident that the MFSA will, as it always has, ensure that Malta’s opportunities in this area continue to be maximised to the full.  Furthermore, the local industry had, in the past, identified a required area of growth for Malta and that is the increase of internationally known depositaries in Malta – this matter has been addressed through the passport created by the AIFMD for EU based depositaries (up until 2017) and will ensure that Malta’s presence is the international sphere is maintained. 
 
This new legislation was fraught with uncertainties, mainly due to the fact that so far regulation of investment funds has been scarce, if at all – though this uncertainty has been mitigated to a great extent by the publication of the level II measures.  Certainly, anything new in the legislative and regulatory sphere is always met with fear of the unknown, although this may not lead to terrible consequences.  Indeed, the sound legal framework, coupled with the easy passporting of management and marketing of the AIF’s managers will certainly create a strong EU market, where investors, no matter how professional they deem themselves to be, are well protected.  As for Malta, there are enough indications to show that it shall continue to be a leading domicile of choice for the establishment of funds and for fund managers alike.  The local fund industry, starting from the service providers themselves to the regulatory MFSA, shall certainly strive to maintain Malta’s stable and endearing reputation as a jurisdiction of choice.
 
Laragh Cassar is a partner at Camilleri Preziosi, one of Malta’s leading law firms.  She specialises in investment funds, asset management, banking and corporate finance.  Laragh has advised both local and foreign entities in the provision of investment services in Malta, ranging from the fund management, investment advice and fund administration to the incorporation and/or domiciliation of funds in Malta, together with the licensing of collective investment schemes in Malta both as retail and non-retail funds as well as open-ended and closed-ended schemes.  In addition, she acts as retained counsel to a number of banking, financial institutions and funds in Malta.