Laying the bait
30 October 2013
Post-AIFMD, Malta witnessed heightened interest from EU fund managers in redomiciling their offshore investment schemes to Europe, says Valetta Fund Services’s Joseph Camilleri
Image: Shutterstock
Four years ago, on 30 April 2009, the European Commission published a draft directive for alternative investment fund managers (AIFMD), a legislation designed to regulate the asset managers of alternative investment schemes.
However, the measures therein are also indirectly applicable to alternative investment funds (AIFs). Meanwhile, the directive has been implemented on the 22 July 2013, and alternative fund managers are required to fully comply with these established terms within a year, that is, by 22 July 2014.
The AIFMD seeks to regulate EU AIFMs managing EU and/or non-EU AIFs, as well as non-EU AIFMs managing one or more EU AIFs and non-EU AIFMs which market one or more AIFs in the EU, irrespective whether such AIFs are EU AIFs or non-EU AIFs.
The AIFM may be either an external manager, which is the legal person appointed by the AIF or on behalf of the AIF and which through this appointment is responsible for managing the AIF or, where the legal form of the AIF permits an internal management and where the AIF’s governing body chooses not to appoint an external AIFM, the AIF itself, which shall then be authorised as an AIFM (ie, a self-managed AIF).
This means that the only instance that falls outside the scope of the directive is the one in which neither the manager nor the fund have an EU link.
There are many factors that have led the EU to address the need for greater transparency and investor protection in the maze of AIFs. Among these, there was the need to achieve a harmonised European regulatory system for AIF managers. In other words, and with particular reference to Malta, all investment funds that are: non-UCITS retail funds; non-UCITS self-managed schemes; professional investor funds (PIFs); and private funds—and all their managers—are covered by this directive.
AIFMD provides a lighter regime for AIFMs where the cumulative assets under management of the AIFs being managed by the AIFM fall below a threshold of €100 million and for AIFMs that manage only unleveraged AIFs that do not grant investors redemption rights during a period of five years where the cumulative AIFs under management fall below a threshold of €500 million. De minimis AIFMs are exempt from most of the requirements of the AIFMD, and are only required to comply with very limited requirements under the AIFMD.
The objective of the directive was to address ‘systemic risk’, an intrinsic characteristic of alternative investment funds. However, the directive is perceived to have a protectionist objective, albeit unstated. This has prompted a number of EU-based fund managers, managing non-EU funds to re domicile their offshore funds to an onshore jurisdiction wherein Malta featured prominently as a suitable domicile for such business in view of the presence of the Continuation of Companies Act that was enacted in 2002.
In fact, the Maltese Companies Act in 2002 had introduced the Continuation of Companies Regulations well before AIFMD was designed, which enabled foreign companies, once they are redomiciled from a foreign State to Malta, to proceed with their existence as legal entities in Malta. The legislation provided (and still provides) that a legal entity may be redomiciled in both directions, that is both to and from Malta.
This legislation has certainly been of great benefit to the Maltese economy since there were several companies from different countries across different economic sectors (commercial, holding, real estate activities, treasury services and other sectors), which have opted to re domicile to Malta. Undoubtedly, the flow was much more prominent in redomiciliations towards Malta rather than from Malta to other states.
Shortly after the first draft of AIFMD was issued, and following the first reactions about the possible impact of the directive on the alternative funds sector, there were a number of EU operators of offshore funds that re domiciled their fund platforms, from offshore centres, to the EU jurisdictions in order to sustain the business model revolving around the promotion of hedge funds in the EU marketplace and at the same time retain the performance history of the redomiciled fund as a result of the uninterruption of the legal entity.
There are other alternatives to the formal re domiciliation which is explained above. In fact, other managers opted for other paths to set up their investment schemes in Malta. These solutions include:
The structuring of master/feeder funds intended for EU investors, having the feeder fund set up in Malta, in turn investing in a master fund which is based in an offshore jurisdiction;
EU cloned funds of offshore funds—creating new funds cloning the structures of offshore funds, there again to cater for investors in the EU market; and
Asset swaps between an offshore fund, and one created in Malta having similar characteristics to obtain a similar result as a redomiciliation of a fund, where assets and investors migrate from country A to country B.
To this effect, notwithstanding that it has been argued that AIFMD brings about costly measures, both in order to adhere to the rules and also to meet several onerous obligations imposed on the fund managers or the self-managed funds (should this be the case), the ability to distribute AIFs cross border in Europe is markedly a highly important benefit.
However, the measures therein are also indirectly applicable to alternative investment funds (AIFs). Meanwhile, the directive has been implemented on the 22 July 2013, and alternative fund managers are required to fully comply with these established terms within a year, that is, by 22 July 2014.
The AIFMD seeks to regulate EU AIFMs managing EU and/or non-EU AIFs, as well as non-EU AIFMs managing one or more EU AIFs and non-EU AIFMs which market one or more AIFs in the EU, irrespective whether such AIFs are EU AIFs or non-EU AIFs.
The AIFM may be either an external manager, which is the legal person appointed by the AIF or on behalf of the AIF and which through this appointment is responsible for managing the AIF or, where the legal form of the AIF permits an internal management and where the AIF’s governing body chooses not to appoint an external AIFM, the AIF itself, which shall then be authorised as an AIFM (ie, a self-managed AIF).
This means that the only instance that falls outside the scope of the directive is the one in which neither the manager nor the fund have an EU link.
There are many factors that have led the EU to address the need for greater transparency and investor protection in the maze of AIFs. Among these, there was the need to achieve a harmonised European regulatory system for AIF managers. In other words, and with particular reference to Malta, all investment funds that are: non-UCITS retail funds; non-UCITS self-managed schemes; professional investor funds (PIFs); and private funds—and all their managers—are covered by this directive.
AIFMD provides a lighter regime for AIFMs where the cumulative assets under management of the AIFs being managed by the AIFM fall below a threshold of €100 million and for AIFMs that manage only unleveraged AIFs that do not grant investors redemption rights during a period of five years where the cumulative AIFs under management fall below a threshold of €500 million. De minimis AIFMs are exempt from most of the requirements of the AIFMD, and are only required to comply with very limited requirements under the AIFMD.
The objective of the directive was to address ‘systemic risk’, an intrinsic characteristic of alternative investment funds. However, the directive is perceived to have a protectionist objective, albeit unstated. This has prompted a number of EU-based fund managers, managing non-EU funds to re domicile their offshore funds to an onshore jurisdiction wherein Malta featured prominently as a suitable domicile for such business in view of the presence of the Continuation of Companies Act that was enacted in 2002.
In fact, the Maltese Companies Act in 2002 had introduced the Continuation of Companies Regulations well before AIFMD was designed, which enabled foreign companies, once they are redomiciled from a foreign State to Malta, to proceed with their existence as legal entities in Malta. The legislation provided (and still provides) that a legal entity may be redomiciled in both directions, that is both to and from Malta.
This legislation has certainly been of great benefit to the Maltese economy since there were several companies from different countries across different economic sectors (commercial, holding, real estate activities, treasury services and other sectors), which have opted to re domicile to Malta. Undoubtedly, the flow was much more prominent in redomiciliations towards Malta rather than from Malta to other states.
Shortly after the first draft of AIFMD was issued, and following the first reactions about the possible impact of the directive on the alternative funds sector, there were a number of EU operators of offshore funds that re domiciled their fund platforms, from offshore centres, to the EU jurisdictions in order to sustain the business model revolving around the promotion of hedge funds in the EU marketplace and at the same time retain the performance history of the redomiciled fund as a result of the uninterruption of the legal entity.
There are other alternatives to the formal re domiciliation which is explained above. In fact, other managers opted for other paths to set up their investment schemes in Malta. These solutions include:
The structuring of master/feeder funds intended for EU investors, having the feeder fund set up in Malta, in turn investing in a master fund which is based in an offshore jurisdiction;
EU cloned funds of offshore funds—creating new funds cloning the structures of offshore funds, there again to cater for investors in the EU market; and
Asset swaps between an offshore fund, and one created in Malta having similar characteristics to obtain a similar result as a redomiciliation of a fund, where assets and investors migrate from country A to country B.
To this effect, notwithstanding that it has been argued that AIFMD brings about costly measures, both in order to adhere to the rules and also to meet several onerous obligations imposed on the fund managers or the self-managed funds (should this be the case), the ability to distribute AIFs cross border in Europe is markedly a highly important benefit.
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