June Update: Notified Alternative Investment Funds

By Admin Admin With With 0 Comments

On April 1st, 2016 the MFSA launched the Notified Alternative Investment Fund (NAIF) regime. The regime is a clear sign of a shift from the concept of AIFs being regulated and supervised products. The MFSA aims to provide AIFMs with a solution to market AIFs within the EU in the shortest possible timeframe.

The notification process of funds is applicable to Alternative Investment Funds (‘AIFs’) that are promoted to Professional Investors or Qualifying Investors. Applicable AIFs shall be managed by a full-scope Alternative Investment Fund Manager (‘AIFM’) or alternatively an EU AIFM which is in possession of a management passport in terms of the AIFMD. AIFs will be eligible for notification if they are not in possession of a license issued by the MFSA. The AIFM making a notification in respect of an AIF undertakes responsibility for the fulfilment of the AIF’s obligations.

The notification process cannot be requested for the following collective investment schemes:

  • Self-managed AIFs;
  • AIFs that are not marketed and sold exclusively to professional and/or qualifying investors;
  • AIFs with the main objective of investing in immovable property funds;
  • Loan funds (subject to a number of conditions); and
  • AIFs that invest in non-financial assets

 

A Notified AIF may be open-ended or closed-ended, and established – under the respective Maltese legislation – as:

  • An investment company with variable share capital;
  • An investment company with fixed share capital;
  • An incorporated cell company;
  • An incorporated cell of a Recognized Incorporated Cell Company;
  • A limited partnership;
  • A unit trust; or
  • A contractual fund.

 

Professional Investors are those who are considered to be professional clients or those who may be treated as professional clients. Investors are considered to be Qualifying Investors subject to the following criteria:

  • They must invest a minimum of €100,000 in the AIF;
  • They must declare to the AIFM and the AIF, in writing, that they are aware of and accept the risks associated with the proposed investment; and
  • They must satisfy at least one of the following:
  1. A body corporate which has net assets in excess of €750,000 or which is part of a group which has such net assets;
  2. An unincorporated body of persons or association which has net assets in excess of €750,000;
  3. A trust where the net value of the trust’s assets is in excess of €750,000;
  4. An individual whose net worth, or joint net worth with that of the person’s spouse, exceeds €750,000; or
  5. A senior employee or Director of Service Providers to the Notified AIF.

 

Procedure

The AIFM must submit the notification pack to the MFSA within 30 calendar days from the resolution date of the governing body of the AIF approving the prospectus.

  • EU/EEA AIFMs may submit a notification request to the MFSA for an AIF to be included in the List of Notified AIFs. Third country AIFMs will be able to submit their notifications once their country is granted passport rights under the AIFMD.
  • The notification request shall be accompanied by the following documents:
  1. A prospectus containing the minimum contents as set out in the Investment Services Rules for Investment Services Providers (the ‘Rules’);
  2. A resolution by the governing body of the AIF certifying that the prospectus has the minimum contents and that it has been drafted in accordance with the Rules and the appropriate pro-forma template;
  3. A self certification by the AIFM that, having regard to any delegate manager(s) or advisers, it has the necessary competence and experience to manage the AIF and/or monitor effectively any delegate. The self certification must be in respect of the applicable investment strategy;
  4. A joint declaration by the AIFM and the governing body of the AIF, by which each undertakes responsibility for the AIF, including the obligations arising under the AIFMD;
  5. A declaration by the AIFM confirming that it has carried out the necessary due diligence with regard to the service providers and the governing body of the AIF. This must include a statement stating that the AIFM is satisfied with the outcome of the due diligence.
  • The prospectus must be drafted in accordance with the Pro-Forma Template that is attached to the Rules. The minimum contents include the following:
  1. Information concerning the AIF (e.g. name and type of AIF);
  2. Establishment date of the AIF;
  3. Identification of the AIF’s auditor;
  4. Disclosure on conflicts of interest;
  5. Explanation regarding the AIF’s winding up, dissolution or liquidation procedures.

 

Notification of Sub-Funds

The procedure for the notification of additional sub-funds is the same as the procedure used for the notification of AIFs. The necessary information for the sub-fund(s) and class(es) may be included:

  • In the main prospectus;
  • In a separate document that is distributed with and directly references the main prospectus; or
  • In a prospectus which contains all relevant information for the Notified AIF, and the relevant sub-fund(s) and/or class(es) concerned, which references the existence and brief terms of the other sub-fund(s) and/or class(es).
  • The MFSA will include the AIF in the List of Notified AIFs within 10 working days from the date of filing of a duly completed notification pack.

 

Anti-Money Laundering Obligations

A Money Laundering Reporting Officer (the ‘Officer’) shall be appointed by the AIFM in order to carry out the money laundering reporting function in relation to the AIF. The administrator of the AIF may perform the duties of the Officer in accordance with the outsourcing agreement entered into between the AIFM, the AIF and the fund administrator. Despite the outsourcing agreement in place, the AIF will still remain responsible for compliance with the requirements under the Prevention of Money Laundering and Funding of Terrorism Regulations, as well as for the measures specifically assigned to it, while the administrator will be responsible for carrying out the reporting obligations of the Notified AIF. The AIFM, or its administrator, must submit a periodic report to the MFSA at least on a quarterly basis. This must include a complete list of unit holders of the AIF, details of subscriptions and redemptions carried out by the unit holders within that time period, and a description of the customer due diligence measures carried out on the unit holders.

Due Diligence

The AIFM must carry out the necessary due diligence exercise to ensure that the service providers and the governing body of the AIF are ‘fit and proper.’ This must be done prior to submitting a request for inclusion of the AIF in the list of Notified AIFs. The records of all the evidence and correspondence relating to the due diligence must be kept by the AIFM for not less than 6 years. The relevant records must be updated annually. While the MFSA may carry out random checks on compliance following the inclusion of the AIF in the List of Notified AIFs, it will not carry out any due diligence prior to the inclusion but will rely on the checks and controls carried out by the AIFM in this regard.

The MFSA issued the ‘Guidance Notes on Fitness and Properness Standards For AIFMs of Notified AIFs’ dated June 20th, 2016. As a general rule, the following will be subject to the due diligence assessment:

  • The members of the governing body of the NAIF;
  • The Money Laundering Reporting Officer; and
  • The Service Providers of the NAIF including the administrator, prime broker, and the custodian.

The term ‘fitness’ is to be understood as referring to the necessary qualifications, experience, and competence to carry out the assigned functions. With regard to the standards for ‘properness’ the AIFM should ascertain that the individual is honest and will act ethically and with integrity. Integrity includes being of good repute and acting in a trustworthy manner.

Notification of Changes to the Prospectus

The AIFM must notify the MFSA of any amendments to the NAIF’s prospectus within 30 calendar days from the date of the resolution of the governing body of the NAIF approving the changes to the prospectus. The notification to the MFSA shall include:

  • A copy of the revised prospectus;
  • A resolution of the governing body of the NAIF certifying that the amendments to the prospectus comply with the standards prescribed in the Rules;
  • A confirmation from the governing body of the NAIF that the NAIF currently operates in line with the investment objectives, policies and restrictions as set out in the prospectus (where the changes concern the investment objectives, policies and restrictions);
  • A confirmation from the governing body of the NAIF that the changes to the prospectus are in conformity with the provisions of the constitutional documents.
  • Removal of the AIF from the List of Notified AIFs

 

The MFSA may remove an AIF, including any sub-fund(s), from the List of Notified AIFs at any time at its sole discretion on notice to the AIFM. The AIFM may also make a request to the MFSA for the removal of an AIF or any sub-fund(s) from the List of Notified AIFs in the following instances:

  • Upon expiration of the NAIF from the List of Notified AIFs;
  • Where the custodian has given notice of termination, or is in liquidation, or subject to bankruptcy proceedings, or has had its license to provide custody services in respect of NAIFs suspended or cancelled;
  • Where the AIFM has given notice of termination, or is in liquidation, or subject to bankruptcy proceedings, or has had its license to act as an AIFM suspended or cancelled, and an eligible replacement AIFM has not been appointed within 30 days from the notice of termination;
  • Where any member of the governing body of the NAIF, or any service provider appointed by the NAIF or by the AIFM on behalf of the NAIF, fails to comply on an ongoing basis with the required high standards of the ‘fit and proper’ criteria, and the AIFM has not arranged for a replacement member within 30 days;
  • In all other cases as may be specified in the agreement between the NAIF and the AIFM as grounds for requesting removal of the NAIF from the List of NAIFs; and
  • In all other cases as may be specified in the custody agreement between the NAIF or the AIFM on behalf of the NAIF and the custodian as grounds for requesting removal of the NAIF from the List of Notified AIFs.

 

Once an AIF is removed from the list it must cease trading other than for the purpose of winding down its operations. The AIF or sub-fund(s) must then be liquidated or terminated in accordance with the requirements of Maltese Law.

The Investment Services Act (List of Notified AIFs) Regulations were published in the Government Gazette.