The Alternative Investment Fund Managers Directive (AIFMD) was adopted in Malta in 2013, making Malta one of the early adopters of this EU legislation. AIFMD provides a regulatory level playing field for all investment managers operating within the EU and is mainly geared towards regulating fund managers and the funds (Alternative Investment Funds AIF) under their management. The introduction of the Notified Alternative Investment Fund (NAIF) is a direct offshoot of the Directive.
What is a NAIF?
From a fund/subscriber perspective it feels and acts like a regulated AIF, with an offering prospectus that must be based on a pro-form template as defined in the Investment Services Act, Chapter 370 and Subsidiary Regulations and for which templates are provided on the MFSA’s website. The NAIF can be set-up as either open-ended or closed-ended and established as an investment company (either a SICAV or INVCO), a limited partnership, a unit trust, a contractual fund or an incorporated cells of a recognised incorporated cell company. The one major difference to a regulated AIF is that the NAIF per se, is not licensed by the Malta Financial Services Authority (MFSA), a concept not historically associated with the Maltese financial industry.
One should also note that loan funds, self-managed funds and funds whose investment objectives include non-financial assets cannot be structured as NAIFs. One would assume that the local regulator would have wanted to keep AIFs that have strategies deemed to pose investors to “higher risk” as directly regulated activities. It is also not possible to transform a licensed AIF to a NAIF, but the contrary would be possible.
Who can launch a NAIF?
AIFMs which are regulated by the MFSA, an EU AIFM that has passported its licence in Malta under Article 33 of the AIFMD and in limited circumstances third country AIFMs, if passporting rights have been granted to the country where the Investment Manager is established, such as in Jersey.
A very important process is the fit and proper test that the AIFM must complete on all parties, such as, but not limited to, the Directors, Money Laundering Reporting Officer, Administrator and Custodian. Once this is adequately documented and completed, the Notification Process with the MFSA can commence. Firstly, all legal documentation is prepared in draft form and approved by all parties. Once the legal structure is incorporated, a Board Meeting for the NAIF is held whereby all agreements are executed and the following documents are completed for submission to MFSA within 30 calendar days:-
- Final Prospectus of the AIF having the minimum contents required by the Investment Services Rules;
- A resolution by the AIF certifying that the prospectus has the minimum contents prescribed in Investment Services Rules;
- Joint declaration by the governing body of the AIFM and AIF, undertaking responsibility for the AIF, for regulatory obligations arising under AIFMD;
- Tabling of declaration to the NAIF Board by the AIFM that it has carried out the necessary due diligence on the service providers of the NAIF and the governing body.
Time is money!
The MFSA is conscious of the fact that time to market is critical for any AIFM that has committed seed capital. The NAIF will significantly reduce the regulatory side of the application process, with the MFSA committing to listing complete applications for NAIFs within ten working days. The time to market reality is somewhat different and still takes a reasonable amount of time to arrive at the listing stage, especially when the AIFM is going through the process for the first time. By eliminating the perceived double regulation scenario, that is the AIFM and the actual NAIF, the MFSA has shifted the onus of ensuring the AIFMD compliance and NAIF rules on the AIFM. Due to the novelty of the product and the risk of regulatory issues in case of compliance visits, our experience with AIFMs who have launched or are currently working on launching a NAIF is that the AIFMs have themselves over regularised. Just to be safe!
How big is the unregulated fund market in Europe?
Hard to tell especially since the RAIF in Luxembourg does not require any notification to the Commission de Surveillance du Secteur Financier (CSSF) and the QIAIF, which is the most comparable fund structure in Ireland is actually a licensed fund.
With just over 40 full scope AIFMs regulated in Malta, one would expect to see more than two Notified AIF’s listed by the MFSA.
The question is whether the MFSA’s recent introduction of new application packs, which are to be in line with the “Guide to submitting a complete application for a collective investment scheme license”, and the Authority’s commitment to provide feedback to the applicant within a maximum timeframe of twenty days depending on the fund’s structure, has actually made the NAIF a redundant regime for AIFMs.
In our opinion, the NAIF regime is a very important addition to the Funds’ spectrum that continues to put Malta as one of the key European fund jurisdictions, but there are very important things that need to be considered. All supporting legislation needs to be brought up to speed, especially in terms of ensuring that taxation exemptions apply de factum. Other factors to be considered are educating clients, the general market and all service providers of the NAIF’s potential and characteristics besides expanding the type of funds that can be set-up under the regulation.