AIFMD in Malta: Frequently Asked Questions

Dr. Maria Chetcuti Cauchi | 27 May 2013

AIFM in Malta Frequently Asked Questions

Malta AIFMD One Stop Shop

The Alternative Investment Fund Managers Directive ("AIFMD") is one of the most important legal developments affecting the financial services sphere in recent years. The AIFMD is of particular importance in Malta due to the significant growth in alternative investment fund business that the jurisdiction has experienced post-EU accession. This page provides answers to some of the questions that fund managers, directors and service providers more frequently ask in this context. 

Which entities fall within the scope of AIFMD?

The AIFMD will apply (in whole or in part) to:

  • EU fund managers which manage or market an EU AIF;
  • EU fund managers which manage or market a non-EU AIF;
  • Non-EU fund managers which manage an EU AIF;
  • Non-EU fund managers which market an AIF (whether EU or not) in the EU;

The AIFMD will apply to AIFs not requiring authorisation pursuant to the UCITS regime. This is independent of the legal structure or the investment strategy of the AIF.

The AIFMD defines “AIFs” to mean: “collective investment undertakings, including investment compartments thereof, which … raise 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.” The fund managers who manage these funds shall potentially fall under the AIFMD. Where the AIF is self-managed, the AIF itself would be considered to be the AIFM for the purposes of the AIFMD. In non-self managed funds the Directive generally applies to, and regulates, fund managers rather than the AIFs, however, certain parts of the AIFMD will affect an AIF which is managed by an AIFM (e.g. reporting requirements, custody/ depositary provisions and use of leverage).

Are there any exemptions from the scope of Directive?

The AIFMD does not apply to occupational pension schemes, employee schemes, holding companies, national central banks, certain supra-national, institutions, national, regional and local governments, and securitisation SPVs.

Additionally, there are limited exemptions for the following AIFMs:

  • An AIFM which manage AIFs which have assets under management not exceeding €100 million, including assets acquired by leverage;
  • An AIFM which has assets under management of the AIFs it manages not exceeding €500 million, where there is no leverage and there are no redemption rights exercisable until five years following the initial investment in each AIF.

What are the Directive's provisions on risk management?

Under the AIFMD and the Level 2 Delegated Acts Regulation, The AIFM will have to have in place a well-documented risk management policy covering all risks faced by the AIFs. The Risk Manager will need to set quantitative and/ or qualitative risk limits for each AIF which is managed by the AIFM which covers market, credit, liquidity, counterparty and operational risks. Risk measurement includes requirements for backtesting, stress testing and scenario analyses and the rules also require remedial action for breaches of limits. The risk management systems should be subject to an annual review by senior management. The function may be performed by a third party in certain instances.

The Level 2 Measures outline the role and responsibilities of the AIFMs permanent risk management function and defines the conditions to be satisfied in order to ensure the functional and hierarchical separation of risk management, which includes a requirement that personnel in risk management should not be supervised by the head of operating units, including portfolio management and that they should not perform activities within the operating units. The basis for calculating their remuneration should be independent of the performance of the operating units.

AIFMs should have appropriate qualitative internal control mechanisms to avoid or mitigate operational failures, including professional liability risks. Therefore, an AIFM should have, as part of its risk management policy, adequate policies and procedures for operational risk management, appropriate to the nature, scale and complexity of its business. These procedures and policies should enable an internal loss database to be built up to serve for the as a means of assessing the operational risk profile.

What organizational requirements does the directive impose?

AIFMs will be required to have in place adequate and appropriate human and technical resources necessary for the proper management of the AIFs they manage. This includes administrative and accounting procedures and adequate internal control mechanisms. AIFM will be required AIFMs to establish a well-documented organisational structure clearly assigning responsibilities. The documentation will have to define control mechanisms and ensures a good flow of information between all parties involved. AIFMs must have in place policies and procedures designed to detect any risk of failure to comply with their obligations under the AIFMD. The permanent compliance function and the permanent internal audit function should be separate and independent from other functions of the AIFM. AIFMs will also be required to establish systems to safeguard information and ensure business continuity.

What are the Directive's provisions on valuation?

AIFMs are required to put in place appropriate and consistent procedures in order to ensure that proper and independent valuation of the assets of the AIF can be performed for each AIF that they manage at least once a year. The valuation function may be  either performed by an external  valuer which is independent of the AIF, the AIFM and any other  persons with close links to the AIF  or the AIFM itself as long as the  valuation process is independent of  the portfolio management and  remuneration policies of the AIF and that measures are in place to  identify and resolve conflicts of  interest.

How is the AuM (assets under management) calculated?

The AIFM has to calculate total Assets under management by determining the value of all assets it manages, without deducting liabilities, and valuing financial derivative instruments (FDIs) at the value of an equivalent position in the underlying assets. Valuing FDIs as if the underlying assets were acquired by the fund represents a key policy choice as this method of valuation best reflects the AIF’s exposure to those assets.

How are capital requirements calculated?

Article 9 of the AIFMD Directive sets out the minimum “initial capital” and “own funds” that AIFMs are required to have. Self-managed AIFs must have a minimum initial capital of €300,000, and external AIFMs must have a minimum of €125,000.

Where the value of the portfolios of AIFs managed by the AIFM exceeds EUR 250 million, the AIFM shall provide an additional amount of own funds. That additional amount of own funds shall be equal to 0.02 % of the amount by which the value of the portfolios of the AIFM exceeds EUR 250 million but the required total of the initial capital and the additional amount shall not, however, exceed EUR 10 million.

In addition, regulatory capital must be at least equal to one quarter of annual audited expenditure of the fund manager.

An AIFM must perform its regulatory capital calculations on a quarterly basis.

How does the directive regulate leverage?

AIFMs that use leverage are required by the AIFMD to disclose information regarding the overall level of leverage employed, the leverage arising from the borrowing of cash or securities and the leverage arising from positions held in derivatives, the reuse of assets and the main sources of leverage in their AIFs.

AIFM managing or marketing AIFs in the EU that employs leverage, are required to disclose to investors “on a regular basis”:

  • any changes to:

(i)     the maximum level of leverage that the AIFM may employ on behalf of the AIF; and

(ii)    any right of reuse of collateral or any guarantee granted under the leveraging arrangement; and

  • the total amount of leverage employed by the AIF.

What are the leverage reporting requirements under the Directive?

An AIFM that manages an AIF employing leverage on a substantial basis is required to make available to its home Authority information about:

  • the overall level of leverage employed by such AIF;
  • a break-down between leverage arising from the borrowing of cash or securities;
  • leverage embedded in financial derivatives;
  • the extent to which assets have been re-used under leveraging arrangements;
  • the five largest sources of borrowed cash or securities and the amounts of leverage received from each of those entities; and
  • any other information required by the home Authority for the effective monitoring of systemic risk.

Are there limits to the use of leverage?

Under the AIFMD, AIFMs will have to set leverage limits in respect of each AIF they manage. The AIFM must show that the leverage limits for each AIF it manages are reasonable and that the AIF complies with the leverage limits it set at all times.

Authorities will however also be permitted to impose their own limits on the level of leverage that an AIFM may employ; the Authority must notify ESMA and ESRB (European Systematic Risk Board) beforehand.

Will Malta’s existing PIF regime be retained post-AIFMD?

Malta’s existing Professional Investor Fund (PIF) regime shall be retained post-AIFMD. The PIF Regime shall be retained in parallel with the AIF Regime (which will be regulated by the AIF Rulebook).

De minimis fund managers and third country managers will be able to establish a collective investment scheme in terms of the Investment Services Act and regulated by the Investment Services Rules for Professional Investor Funds.

Which fund licenses will be available in Malta post-AIFMD?

The Maltese Authority has informed operators that existing fund managers and self-managed schemes have a one year transitional period with effect from 22nd July 2013 so as to register either as a ‘de minimis' AIFM or to apply for a full AIFM license and satisfy the requirements of the AIFMD. The MFSA has recommended that the relevant self-assessment questionnaire forms should be filed before 31st March 2014.

De minimis fund managers and third country managers will be able to establish funds in terms of the Investment Services Act and regulated by the Investment Services Rules for Professional Investor Funds. Therefore, the categories of fund licenses which will be available in Malta post-AIFMD are:

  • UCITS Schemes;
  • Non-UCITS Retail Schemes (Retail AIFs for AIFMs);
  • Professional Investor Funds (AIFs for de minimis AIFMs or Non-EU AIFMs); and
  • Alternative Investment Funds (AIFs for full AIFMs).

What are the Regulatory reporting requirements?

Apart from the reporting requirement discussed above for AIFMs using leverage, AIFMS will be obliged to provide specific information to investors ahead of their investment decision such as a description of the investment strategy, objectives and investment restrictions of the AIF and a description of the types of assets in which the AIF may invest.

AIFMS will also have to furnish details of the leverage techniques that may be employed, together with all associated risks, and any applicable investment restrictions. There also exists an obligation to submit annual reports to the Authority with details on the AIF’s performance, risk evaluation and use of specific instruments or strategies, such as derivatives or gearing.

The AIFM will have to submit a report for each of the EU AIFs it manages and for each of the AIFs it markets in the EU, for each financial year; the annual report shall be provided to investors on request. The annual report shall be made available to the Authority of the AIFM’s home Member State as well as the home Member State of the AIF.

The annual report shall at least contain the following:

  • a balance-sheet or a statement of assets and liabilities;
  • an income and expenditure account for the financial year;
  • a report on the activities of the financial year;
  • any material changes in the information during the financial year covered by the report;
  • the total amount of remuneration for the financial year, split into fixed and variable remuneration, paid by the AIFM to its staff, and number of beneficiaries, and, where relevant, carried interest paid by the AIF;
  • the aggregate amount of remuneration broken down by senior management and members of staff of the AIFM whose actions have a material impact on the risk profile of the AIF.

AIFMs will have the obligation to provide the below information in respect of each of the EU AIFs they manage or market in the EU, to the Authority:

  • the percentage of the AIF’s assets which are subject to special arrangements arising from their illiquid nature;
  • any new arrangements for managing the liquidity of the AIF;
  • the current risk profile of the AIF and the risk management systems employed by the AIFM to manage the market risk, liquidity risk, counterparty risk and other risks including operational risk;
  • information on the main categories of assets in which the AIF invested; and
  • the results of the stress tests

In the case of AIFMs with AUM of more than €100m or €500m (unleveraged) but less than €1bn - such report is required every 6 months. In the case of AIFMs with AUM of more than €1bn such report required quarterly.

Additionally, where an AIFM manages an individual AIF which has €500M in assets or more, the reporting requirement in relation to that AIF, in particular, will be required quarterly, irrespective of the total AUM of the AIFM.

Upon request by the AIFM’s home State Authority, AIFMs must furnish the following documents:

  • an annual report of each EU AIF managed and/or marketed by the AIFM
  • for the end of each quarter a detailed list of all AIFs which the AIFM manages.

I am a non-EU AIFM managing an EU AIF, how does the directive impact me?

The Directive will apply to non-EU AIFMs that intend to either:

  • market one or more AIF in the EU (irrespective of whether or not the AIF is an EU based or non-EU based AIF) or
  • manage one or more EU AIF

Non-EU AIFMs managing EU AIFs and/ or marketing AIFs managed by them in the EU require prior authorisation by the competent authorities of their Member State of reference and must have a legal representative established in the Member State of reference who will be the contact point of the AIFM in the EU. The Member State of reference is essentially the Member State with which the AIFM has its closest connection.

In order for the non-EU AIFM to obtain authorisation there must be in place an OECD compliant tax treaty between the AIFM’s country of establishment and the AIFM’s Member State of reference. A non-EU AIFM must comply with the Directive unless the AIFM is able to demonstrate that certain conditions exist that warrant non-compliance.

From the date of transposition, a non-EU AIFM must comply with the transparency requirements, requirements on portfolio company disclosure and asset stripping. Another requirement provided for by the AIFMD is the requirement of co-operation agreements in place between the regulator of the AIFM, the regulator of the EU state in which the AIF is located, and the non-EU AIFM itself.  A non-EU AIF cannot be established in a country designated as non-cooperative by FATF.


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