The proper regulation and supervision of funds has become increasingly important in the past years. Proper regulation and supervision of such investment schemes, seeks to lessen client and economic risk through thorough license conditions and enhanced supervision by financial regulators. However, too much of a good thing in this case can have significant repercussions since over regulation would reduce the jurisdiction’s attractiveness for funds and fund managers and in the case of the EU, the block as a while. Thus, finding the right balance between regulation and flexibility is paramount for a thriving fund domicile. Malta seems to have found such a balance.
The AIFMD Directive
With the implementation of the Alternative Investment Fund Managers Directive or AIFMD, things have changed significantly throughout the European jurisdictions since the new directive essentially imposes new regulations on fund managers increasing compliance costs which have undoubtedly affected the entities at the fund level. Through increased regulation, the directive seeks to enhance consumer protection and reduce macroeconomic risks and follows a string of other regulations and directives which include the Capital Requirement Regulation and Directive, also known as the CRD IV package, the European Market Infrastructure Regulation or EMIR, and the second Market in Financial Instrument Directive or Mifid II, which is expected to be concluded in the near future.
Some provisions of AIFMD also seek to prevent Madoff-like Ponzi schemes. Fund managers, falling within the scope of AIFMD, are now subject to stricter regulations, the obligation of appointing a third party depository to hold fund assets and additional reporting and transparency requirements. These compliance requirements inevitably increase costs for fund managers making funds with lower capital less attractive for fund managers. Since an Alternative Investment Fund or AIF is essentially any non-UCITS fund, the old Professional Investment Funds or PIFs regime under the Maltese regulatory regime, which has proved to be extremely popular in the past with start-up funds, fall entirely under the scope of the AIFMD. This posed a challenge to the Maltese regulatory structure since the old regime was one of the reasons which made Malta a strong fund domicile.
The relevant authorities have however decided to keep the old regime in parallel to the AIFMD regime through the De Minimis exemption allowing the old PIF regime to keep functioning within AIFMD. This allows managers managing new start-ups funds falling within the exemption, to be able to utilise the old regime and not needing to be full AIFMD compliant,since the old regime has proved to be very flexible in accommodating a variety of start-up funds, including hedge funds, private equity, venture capital and real estate funds. The De Minimis exception applies depending on the assets managed by the AIFM and if such an AIFM is classified as De Minimis, the fund manager would not need to be fully AIFMD compliant. The De Minimis exception applies to AIFMs which manage directly or indirectly less than 100 million in leveraged AIFs or less than 500 million in non-leveraged funds which do not offer redemption rights exercisable during a period of five years following the initial investment in the funds.
Making use of the De Minimis exception however, negates the primary advantage of the AIFMD. Fully compliant AIFM acquire a European passport to manage and distribute EU AIFs in the EU without the need to acquire separate licenses or authorisations in other member states. De Minimis AIFs and thus funds which fall under the old professional investor fund regime will require separate authorisations from other member states and the fund managers cannot make use of the AIFMD passport. Should a De Minimis AIFM wish to make use of the passport, the fund manager must become fully AIFMD compliant.
Malta’s benefit as a jurisdiction shines through due to the old PIF scheme remaining viable coupled with other benefits provided.
The PIF schemes provide an increased flexibility due to the separate PIF classifications of investors which allows a PIF to be set up depending on the level of investor being targeted which affect the regulatory requirements required to be adhered to by the PIF. Maltese funds, not just PIFs, can be set up as a trust, a company, a partnership or through a contractual fund which also gives a number of structuring options for fund managers.
Maltese law also allows funds to be either self-managed, without the need to appoint an external fund manager, or externally managed by a fund management company. Malta further offers numerous other benefits for fund set-ups including low set-up costs due to low fees and relevantly low professional and salary costs, a very accessible and flexible regulator and an attractive tax regime which can reduce effective tax to as low as 5% in certain cases. With over 600 funds licensed, Malta has become an ideal location for the establishment of start-up funds seeking a solid but reputable and on-shore jurisdiction with the possibility to acquire a pan-European Passport in the future. This is a distinct advantage against other European fund domiciles like Luxembourg with much higher operating costs and fees.
Dr Josef Cachia, Legal Advisor at KSi Malta www.ksimalta.com