Alternative Investment Funds (hereinafter referred to as “AIF”s), regulated by the Investment Services Act, are a special class of Collective Investment Schemes.

An AIF is defined as a collective investment scheme, including sub-funds thereof, which raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors, and which does not qualify as a UCITS Scheme in terms of the UCITS Directive.

The Alternative Investment Funds Managers Directive, however, considers the following not to be considered as AIFs:

 

  1. A holding company;
  2. An institution for occupational retirement provision;
  3. Employee participation schemes or employee savings schemes;
  4. Securitisation special purpose vehicle.

 

A self-managed AIF may only be authorised to provide the licensable activities which consist in the internal management of the AIF. A self-managed AIF must perform portfolio management and risk management, at the very least. They may also perform administrative and marketing functions, and also activities related to the assets of the AIFs.

Investors

The manager of the AIF, and/or any appointed intermediary, may sell the AIF to Professional Investors and, where permitted, may be marketed to or invested into by Retail Investors, Experienced Investors, Qualified Investors and Extraordinary Investors. It is important to note that the marketing of an AIF in jurisdictions outside Malta to investors other than Professional Investors is not automatic.

Professional Investors

A professional investor is a person who may take his own investment decisions in light of his knowledge and experience. The following are considered professionals in all investment services and activities:

 

  1. Entities which are required to be authorised or regulated to operate in the financial markets (including credit institutions, investment firms, insurance companies etc);
  2. Large undertakings meeting any two of the following requirements:
    • Balance sheet total of €20,000,000
    • Net turnover of €40,000,000
    • Own funds of €2,000,000
  3. National and regional governments, public bodies that manage public debt, Central banks, international and supranational institutions;
  4. Other institutional investors whose main activity is to invest in financial instruments, including entities dedicated to the securitisation of assets or other financing transactions.

 

Experienced Investors

An Experienced Investor is also a person who may take his own investment decisions in light of his knowledge and experience. In fact, persons who qualify as Professional Investors automatically qualify as Experienced Investors.

For a person to qualify as an Experienced Investor, if he is not a Professional Investor, such person must:

 

  1. Be a person who has relevant work experience having held a professional position for at least one year in the financial sector or a person who has been active in this type of investments; or
  2. Be a person who has reasonable experience in the acquisition and/or disposal of funds of a similar nature or risk profile, or property of the same kind as the property, or a substantial part of the property, to which the AIF in question relates; or
  3. Be a person who has made investments amounting to €100,000 within the past 2 years at an average frequency of 3 per quarter; or
  4. Provide any appropriate justification.

 

The minimum investment required for individual Experienced Investors is of €10,000. In the case of joint holders, the minimum remains the same per investor.

It is important to note that the AIF should be in possession of a completed “Experienced Investor Declaration Form” where the investor confirms that he has understood the risks that are involved and why he or she is an “Experienced Investor”. In the case of a holding company, every investor must complete this form. The same form is to be completed by the director(s)/general partner(s) in the case of a company or partnership and the trustee in the case of a trust.

Qualifying Investors

For a person to be considered a “Qualifying Investor”, such person must meet at least one of the following criteria:

 

  1. A body corporate with net assets exceeding €750,000 or which is part of a group which has net assets in excess of this amount;
  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 or the majority of the Board of Directors (in the case of a body corporate) or the General Partner (in the case of a partnership) has reasonable experience in the acquisition and/or disposal of funds or a similar nature or risk profile or property of the same kind as the property to which the AIF in question relates;
  5. An individual whose net worth or joint net worth with that individual’s spouse is in excess of €750,000;
  6. A senior employee or Director of Service Providers to the AIF;
  7. A relation or close friend of the promoters limited to a total of 10 persons per AIF;
  8. An entity with (or which are part of a group with) €3.75 million or more under discretionary management, investing on its own account;
  9. The investor qualifies as an AIF which is sold to Qualifying or Extraordinary Investors;
  10. An entity, whether body corporate or partnership wholly owned by persons or entities satisfying any of the criteria listed above which is used as an investment vehicle by such persons or entities.

 

It is important to note that the minimum investment requirement is of €75,000 and this applies to each individual Qualifying Investor. The requirement of a “Qualifying Investor Declaration Form” applies as in the case of Experienced Investors.

Extraordinary Investors

For a person to be considered an “Extraordinary Investor”, such person must meet at least one of the following criteria:

 

  1. A body corporate which has net assets in excess of €7.5 million or which is part of a group which has net assets in excess of that amount;
  2. An unincorporated body of persons or association which has net assets in excess of €7.5 million;
  3. A trust where the net value of the trust’s assets is in excess of €7.5 million;
  4. An individual whose net worth or joint net worth with the individual’s spouse is in excess of €7.5 million;
  5. A senior employee or Director of Service Providers to the AIF;
  6. The investor qualifies as an AIF which is sold to Extraordinary Investors;
  7. An entity, whether body corporate or partnership wholly owned by persons or entities satisfying any of the criteria listed above which is used as an investment vehicle by such persons or entities.

 

It is important to note that the minimum investment requirement is of €750,000 and this applies to each individual Qualifying Investor. The requirement of a “Extraordinary Investor Declaration Form” applies as in the case of Experienced Investors and Qualifying Investors.

Standard Licence Conditions Applicable To Alternative Investment Funds

General Requirements

All AIFs must be fully compliant with the Investment Services Act, Regulations and Rules and may me managed either via an external manager or by the AIF itself (a self-managed AIF).

Once the Collective Investment Scheme Licence has been issued, the AIF should commence operation within 12 months, and should notify the MFSA if it cannot start operating within this time. It is expected that the AIF co-operates with the MFSA in an open and honest manner and inform it of any relevant information, including a change of name, a change of address, material changes to the conditions for initial authorisation, the departure of a senior post holder, any material change to its business, among others. Furthermore, the AIF is expected to obtain the written consent of the MFSA before taking certain decisions, such as ceasing operations, sell any part of the undertaking, among other decisions.

It is important to note that the AIF must keep annual accounting records, and submit copies of annual audited financial statements, and pay promptly all amounts due to the MFSA.

Governing Body of the AIF

Every AIF should have a governing body, including the Board of Directors, Trustees or General Partners were applicable). The governing body is responsible for ensuring that the AIF is compliant with all rules at all times.

The body should be composed of one or more directors who are independent of the AIFM and the Custodian. The Governing Body must act honestly and in good faith at all times in what they consider to be the best interests of the AIF and its investors. The members of the body should at all times exercise its powers independently without any form of subordination. Furthermore, where delegation of powers takes place, the exercise of such powers shall remain under the supervision of the Governing Body.

Service Providers

The AIF is obliged to appoint an AIFM, a Custodian, an Auditor, a Compliance Officer and a Money Laundering Reporting Officer.

Alternative Investment Fund Manager (AIFM)

The AIF may appoint a single external AIFM, who would be responsible for portfolio management and risk management and other permitted services. However, appointment of an AIFM is not mandatory. Having said that, where an AIFM is not appointed, the AIF shall be subject to all the Standard Licence Conditions prescribed in the Rules,

It is important to note that if an AIFM is to be appointed, or replaced, the MFSA must agree with that appointment, and the contents of the agreement. Furthermore, the MFSA has the right to request the replacement of the AIFM.

Fund Administrator

The AIF may, at its discretion, appoint an administrator. However, where an administrator is not appointed, the administration function must still be performed by the AIFM. The MFSA shall examine whether the fund administrator chosen is appropriate and where the administrator is establishment in Malta, one is issued with a Fund Administration Recognition Certificate.

Custodian

Every AIF must have a single custodian, who holds a Category 4 Investment Services Licence (issued by the MFSA or an EU Credit Institution). This appointment must be evidenced by a written contract, which shall, among other things, regulate the flow of information required for the Custodian to perform its functions.

It is important to note that the Custodian must be independent from the AIF and must act solely in the interests of the Unit or shareholders. If this independence is compromised, the circumstances therein should be declared to the MFSA. If any changes are planned to the functions of the custodian, the MFSA must be informed prior to giving effect to such changes and the MFSA may object to the proposed changes.

Prime Broker and Counterparties

The AIF may appoint one or more prime brokers or counterparties. The AIFM, on behalf of the AIF, enters into a written contract outlining the applicable terms, of which the custodian shall be informed.

Compliance Officer

The AIF must always be compliant with its licence conditions, and the responsibility for this compliance rests with the Board of Directors in the case of an investment company, with the General Partner(s) in the case of a limited partnership and with the AIFM in the case of a unit trust or a common contractual fund.

The AIF must have and maintain adequate policies and procedures designed to ensure that any risk of non-compliance with the law (which includes all applicable legislation), regulations and rules is detected. Thus, the AIF must ensure that a Compliance Officer is appointed.

The MFSA must consent to the appointment or replacement of a Compliance Officer.  Where a compliance officer resigns or is removed, the MFSA must be notified immediately.

The above rules in relation to the compliance officer are likewise applicable to the Money Laundering Reporting Officer.

One vital responsibility of the compliance officer is the preparation of a compliance report on a bi-annual basis, which should indicate any breaches of the investment and borrowing restrictions, complaints from the shareholders, material valuation errors and the way they were handled, and material compliance issues.

Auditor

An auditor must be appointed for the AIF, and such auditor must be approved by the MFSA. All relevant information required for the auditor to carry out his functions must be made available to said auditor.

A person shall not be appointed auditor if he/she is or his/her firm is:

 

  1. A director, partner, qualifying shareholder, officer, representative or employee of the AIF;
  2. A partner of, or in the employment of, any person in 1 above;
  3. A spouse, civil partner, parent, step-parent, child, step-child or other close relative of any person in 1 above;
  4. A person who is not otherwise independent of the AIF;
  5. A person disqualified by the MFSA from acting as an auditor of an AIF.

 

The AIF shall require its auditor to prepare its management letter in accordance with international accounting standards on auditing. No AIF may prolong the vacancy of an auditor for a period exceeding 4 weeks.

External Valuer

The valuation function is performed either by an external valuer, being a legal or natural person independent from the AIF, or by the AIFM himself. However, in the latter case, the valuation task must be functionally independent from the portfolio management and the remuneration policy and other measures that ensure that conflicts of interest are mitigated and that undue influence upon employees is prevented.

Investment policies, objectives and restrictions applicable to alternative investment funds which are sold to experienced investors

The minimum amount which may be invested in the AIF is €10,000, and it may not be any less than this unless it is the result of a fall in the net asset value. The Manager of the AIF, or the AIF itself in the case of a self-managed AIF, must consistently ensure that the AIF is managed according to the principle of risk spreading. In the case of an AIF investing in alternative assets, the Authority may impose tailored investment restrictions.

The AIF may invest up to 20% of its total assets in securities issued by the same body and up to 30% of its money in market institutions issued by the same body, provided that:

 

  1. The 20/30% limit may be increased to 100% in the case of securities or money market instruments issued or guaranteed by an OECD or EU/EEA Member State;
  2. The 20/30% limit may be increased to 35% in the case of securities and money market instruments guaranteed by a credit institution authorised in the EEA or which is subject to equivalent prudential requirements;
  3. The 20% limit may be increased to a maximum of 30% in the case of transferable securities traded in or dealt on a regulated market which operates regularly, is recognised and is open to the public.

 

One should note that the AIF is not subject to any investment restrictions in relation to investments in a single collective investment scheme, provided that the underlying scheme is a UCITS or other open ended collective investment scheme subject to risk spreading requirements which are at least comparable to those applicable to the AIF itself.

Any changes made to the investment objectives of the AIF must be notified to investors in advance of the change. The notice must be given early enough to allow any investors to redeem their investment and the change should only become effective after all the pending redemptions linked to the change in the investment objectives have been satisfied accordingly.

The AIF may invest directly or indirectly in immovable property. However, there are certain supplementary conditions which must be satisfied.

Investment policies, objectives and restrictions applicable to alternative investment funds which are sold to qualifying investors

The minimum amount which may be invested in the AIF is €75,000, and it may not be any less than this unless it is the result of a fall in the net asset value. The AIF shall be subject to the investment objectives, policies and restrictions outlined in its offering document. The same conditions in respect to changes to the investment objectives apply as in the case of the investment policies, objectives and restrictions applicable to alternative investment funds which are sold to experienced investors.

Under the rules for experiences investors, cross sub-fund investments are not allowed. However, this is not the case for AIFs sold to qualifying investors. A sub-fund may invest in units of one or more sub-funds within the same scheme, subject to this being permitted in the constitutional documents and the Offering Memorandum of the said AIF and subject to other restrictions.

Investment policies, objectives and restrictions applicable to alternative investment funds which are sold to extraordinary investors

The minimum amount which may be invested in the AIF is €750,000, and it may not be any less than this unless it is the result of a fall in the net asset value. The AIF shall be subject to the investment objectives, policies and restrictions outlined in its offering document. The same conditions in respect to changes to the investment objectives apply as in the case of the investment policies, objectives and restrictions applicable to alternative investment funds which are sold to experienced investors. Furthermore, cross sub-fund investment is permitted also under the same conditions as in the case of AIFs sold to qualifying investors.

Investment policies, objectives and restrictions applicable to alternative investment funds which are sold to professional investors

The AIF shall be subject to the investment objectives, policies and restrictions outlined in its Offering Document. It is important to note that where the AIF intends to effect investments through the use of Trading Companies or Special Purpose Vehicles, it shall also be subject to supplementary conditions. The AIF or AIFM shall take all reasonable steps to comply with the investment policies and restrictions of the AIF.

The same conditions in respect to changes to the investment objectives apply as in the case of the investment policies, objectives and restrictions applicable to alternative investment funds which are sold to experienced investors. Furthermore, cross sub-fund investment is permitted also under the same conditions as in the case of AIFs sold to professional investors.

Transparency Requirements

The Constitutional document of the AIF must be approved by the MFSA prior to implementation. The AIF must additionally publish an Offering Document, which must be kept up to date and offered to investors free of charge before they become committed to investing. Any amendments to the Offering Document shall be sent to and agreed with the MFSA before publication.

On an annual basis, the AIF must submit audited financial statements to the MFSA and other information which the MFSA may request. The accounting information given in the report shall be prepared in accordance with the IFRS as adopted by the EU.

Marketing of an AIF

The AIF may only be marketed with a passport in jurisdictions outside Malta if it satisfies the relevant provisions prescribed in the Investment Services Act (Alternative Investment Fund Manager Passport) Regulations and the Investment Services Act (Marketing of AIFs) Regulations. Marketing to foreign jurisdictions may be allowed, but it is not automatic.

Supplementary Licence Conditions Applicable to Self-Managed AIFs

A self-managed AIF may only be authorised to provide for licensable activities which consist in the internal management of the AIF, including portfolio management, risk management, administration, marketing and activities related to the assets of the AIF.

Financial Resources Requirements

The AIF must have sufficient financial resources at its disposal to conduct its business effectively, to meet its liabilities and to be prepared to cope with the risks to which it is exposed. It must have an initial capital of at least €300,000.

The AIF shall maintain own funds equal to or in excess of its capital resources requirement and these shall constitute the AIF’s financial resources requirement. Where the value of the portfolio of the AIF exceeds €250 million, the AIF will be required to provide an additional amount of own funds which is equal to 0.02% of the amount by which the value of the portfolio of the AIF exceeds €250 million. Provided, that the required total of the initial capital and the additional amount of own funds shall not exceed €10 million.

Professional Liability Cover

The AIF must be covered from liability by having either additional own funds which may cover potential liability risks arising from professional negligence or hold professional indemnity insurance.

In the case of own funds, such funds shall be invested in liquid assets or assets readily convertible to cash in the short term. In the case of insurance, the insurance must be purchased from an EU or non-EU undertaking authorised to provide professional indemnity insurance in accordance with Union or Maltese law.

Investment Committee

The management of the assets of the AIF is entrusted with the Board of Directors, at least one member of whom must be resident in Malta. The Board of Directors must set up an investment committee with at least three members. Where the AIF does not appoint an Investment Committee, the functions are to be undertaken by the Directors. The majority of the Investment Committee meetings are to be held in Malta and the minutes of such meeting should be available in Malta for review during the MFSA’s compliance visits.

The Investment Committee shall:

 

  1. Monitor and review the investment policy of the AIF;
  2. Establish and review guidelines for investments by the AIF;
  3. Issue of rules for stock selection;
  4. Set up the portfolio structure and asset allocation; and
  5. Make recommendations to the Board of Directors of the AIF.

 

Permanent Risk Management Function

The AIF shall functionally and hierarchically separate the functions of risk management from the operating units including from the functions of the portfolio management.

The AIF shall implement adequate risk management systems in order to identify, measure, manage and monitor appropriately all risks relevant to its investment strategy and to which it is or may be exposed.

The AIF shall at least:

 

  1. Implement an appropriate, documented and regularly updated due diligence process;
  2. Ensure that all the risks associated with each investment position of the AIF and their overall effect on the AIF’s portfolio can be properly identified, measured, managed and monitored on an ongoing basis;
  3. Ensure that the risk profile of the AIF shall correspond to the size, portfolio structure and investment strategies and objectives of the AIF as provided for in its Constitutional document and/or Offering Document.

 

Liquidity Management Policy

Where an AIF is not an unleveraged closed-ended AIF shall employ an appropriate liquidity management system and adopt procedures which enable it to monitor the AIF’s liquidity risk and to ensure that the liquidity profile of the investment of the AIF complies with its underlying obligation.

The AIF is under an obligation to submit to the MFSA the results of stress tests.

Valuation

The AIF must have appropriate and consistent procedures so that a proper and independent valuation of the assets of the AIF can be performed. The valuation must be carried out at least once a year. The AIF must also inform the investors of the valuations and calculations.

It is important to note that the valuation must be performed either by an external valuer or by the AIF itself. The external valuer may not delegate the function of valuation to a third party. The valuation must be performed impartially and with all due skill, care and diligence.