The Malta Alternative Investment Fund Manager - EY · PDF fileThe local industry continues to enjoy the commitments of ... safekeeping and administration in relation to shares

The Malta AlternativeInvestment Fund ManagerA technical guideJune 2016

It is my great pleasure to welcome you to our 2016 edition of “The Malta Alternative Investment Fund Manager – A technical guide.”

The Alternative Investment Fund Managers directive is a European-wide directive which aims to establish a common set of requirements applicable to Alternative Investment Fund Managers(AIFMs) and a harmonized regulatory framework for any alternativeinvestment activity within the EU. It has also introduced new regulatory concepts such as the passporting regime for AIFMs tomarketing of Alternative Investment Funds.

The local industry continues to enjoy the commitments of the local government as well as the Malta Financial Services Authority whichstrive to preserve a leading regulatory and legislative regime that is attractive to foreign business while maintaining investor protection. The implementation of the regulatory agenda continues unabated, with much focus and discussion on depositary reform, remunerationpolicies and practices, the future of money market funds, extension of the AIFM directive passport to non-EU domiciled products and managers, and the likely impact of MiFID II all being in the headlines.

The purpose of this practical guide is to provide, in a clear and concise format, an overview of the Malta AIFM regime and how it isimpacted by the AIFM directive. I hope you find this guide useful.

Our asset management advisory team looks forward to your feedback and in supporting you over the coming years so that we may collectively realize the many opportunities offered by thisindustry.

Ronald AttardCountry Managing PartnerErnst & Young Limited +356 2134 2134 [email protected]

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| The Malta Alternative Investment Fund Manager

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Forward

In this report

Professional Investor Funds

Requirements of a PIF

Setting up and running a PIF

Investment Restrictions

Key service providers

Authorisation

Salient features of PIFs

Distribution of PIF products

PIF structures

Fund information and reporting obligations

Admissibility for Listing

Taxation

How can we help you?

Glossary

01 The AIFM directive

02 Operating conditions for AIFMs

03Remuneration04Valuation05Delegation of AIFM functions06Risk management07

Passporting08Authorization09Transparency and reporting requirements10Depositary11De minimis AIFM regime12Taxation13How can we help you?14

Capital requirements

4

8

14

18

20

24

30

34

36

40

46

50

52

Glossary15 54

Annex16 57

Malta’s key success factors 2

12

2 | The Malta Alternative Investment Fund Manager

• The Maltese workforce provides Malta with a competitive edge through a high-quality labor force at competitive rates. A key attraction of the Maltese labor force is its language skills and its advanced level of education.

• Financial services are an attractive career proposition for well-trained, highly motivated graduates and support personnel. Training in this sector is provided through institutions such as the University of Malta, Institute of Financial Services, the Malta Institute of Accountants, the Malta Institute of Management and renowned European Institutions.

Highly skilledlabor force

• Given Malta’s membership in the EU, legislation is reflective of EU legislation and directives. Therefore, further to having a legislative structure that facilitates the conduct of business in or from Malta, it provides foreign investors in Malta with the assurance of the quality and consistency synonymous with the EU.

• As an EU member state, businesses in Malta can passport their services to all other member states while the growing markets of North Africa and the Middle Eastern countries bordering the southern coast of the Mediterranean basin are easily accessible.

• The government is continually striving to simplify bureaucracy and shorten decision-making times.

Businessfriendlylegislativeframework

Soundregulatoryframeworkand accessibleregulator

• Malta’s legislation is in line with EU law and built on best practices from other finance centres. All financial services fall under one regulator, the Malta Financial Services Authority (MFSA). Companies benefit from streamlined procedures, reduced bureaucracy and lower regulatory fees.

• The MFSA is signatory to almost 30 Memoranda of Understanding with foreign regulators in order to provide a smooth trading environment for the financial services sector. One of Malta’s most appreciated advantages is the accessibility of the regulator, which establishes constructive working relationships with companies investing in Malta.

• Malta consistently scores high on the stability stakes, and its regulatory framework is also deemed to be particularly strong.

Malta’s key successfactors

The Malta Alternative Investment Fund Manager | 3

Small, activestock exchange

• Full member of International Organization of Securities Commissions (IOSCO) and the World Federation of Exchanges (WFE); following Malta’s accession to the EU, the Malta Stock Exchange, together with the exchanges of the other accession countries, was granted the status of full member of the Federation of European Securities Exchanges (FESE). Major sectors of the Maltese economy are represented on the lists of the Malta Stock Exchange.

• Since being set up in 1992, almost €3b worth of capital has been raised on the market for the private sector through the issue of corporate bonds and equity while a further €15b worth of Government of Malta stocks and treasury bills have been issued and fully taken up. Investor base of over 75,000 individual investors, which is a significant number given Malta’s economic size and population. The focus of the Malta Stock Exchange is mostly domestic.

Cost competitiveenvironment

• Competitive labor costs, rental rates and general expenses compared to mainland Europe. Companies in Malta can benefit from an extensive network of double taxation treaties as well as from a number of business promotional incentives.

• Malta has excellent communication links with regular flights to main international airports as well as fully digitalized national telephone network. Malta boasts a truly modern infrastructure with one of the highest broadband access rates in the EU.

• International connectivity is ensured by two satellite stations and four submarine fiber-optic links to mainland Europe. A wide range of quality office and industrial space with commercial office space in purposely built developments or stand-alone blocks readily available at affordable prices.

Infrastructure

01 The AIFM directive


1 Directive 2009/65/EC of the European Parliament and of the council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (recast)

• An asset 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 (external AIFM) 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 authorized as AIFM (internally managed or self-managed AIFs)

Also, under this directive any investment fund not classified as a UCITS shall be deemed to be an AIF. The Malta Financial Services Authority (MFSA) yet allows for an alternative regime to AIFs that may beestablished in Malta, namely Professional Investor Funds (PIFs). PIFs are similar to AIFs in that they are promoted to professional and sophisticated investorshowever, unlike AIFs, do not fall within the full scopeof the AIFM directive and thus way only be managedby De minimis AIFMs (see Section 12).

1.1 The AlFM directive in brief

The AIFM directive aims to establish common requirements for the authorization and supervision of Alternative Investment Fund Managers (AIFMs). Itprovides a harmonized regulatory framework for theactivities within the EU of all Alternative Investment Funds (AIFs), including AIFMs that are not registeredin any EU or EEA member state (non-EU AIFM).

Specifically, the AIFM directive shall apply to:

• EU AIFMs which manage one or more AIFs irrespective whether EU AIFs or non-EU AIFs • Non-EU AIFMs which manage one or more EU AIFs • Non-EU AIFMs which market one or more AIFs in the EU irrespective of whether such AIFs are EU AIFs or non-EU AIFs

This directive imposes certain conditions on AIFMs such as remuneration provisions, the requirement to appoint additional service providers (e.g., a depositary)however it has also introduced passporting provisionsfor AIFMs to market AIFs within the EU, which willeventually replace the current national private placement regime. The AIFM directive has adopted a“one size fits all” approach under which a single set ofrules shall govern AIFMs of AIFs which are not covered by the UCITS directive.1

1.2 Determination of an AIFM and AIF

Under the AIFM directive, each AIF managed within the scope of this directive is to have a single AIFM, which shall be responsible for ensuring compliance with this directive. The AIFM shall be either:

EY supports asset managers through the creation of an AIFM compliant structure that meets the regulatory requirements,tax specifications based on an efficientoperating model.

1.3 Activities of an AIFM

The principal activity of an AIFM is to engage in the management of AIFs however it may also, subject to the relevant authorization, manage UCITS for which itmust at least perform the portfolio management and risk management functions. It may also perform the activities of administration, marketing and certain other limited activities related to assets of the AIFs, in the course of managing the AIFs.

The MFSA may authorize an AIFM to also provide the following ancillary services:

• Discretionary portfolio management• Non-core services comprising: Investment advice, safekeeping and administration in relation to shares of investment funds and reception and transmission of orders in relation to financial instruments

An AIFM may not be authorized to provide only the ancillary services outlined above and may not providethe non-core services without being authorised to provide discretionary portfolio management services.

Self-managed AIF may only engage in the internal management of that AIF.

1.4 Local regulations

The Maltese Investment Services Act (the Act) providesthe statutory basis for regulating investment companiesconstituted in or operating in or from Malta.2

Every license for an AIFM is subject to standard licenseconditions which are set out in full in the Investment Services rules for Investment Services Providers (the rules). These rules provide the basic principles to which license holders must adhere in acting as

AIFMs. In certain circumstances, the standard requirements can be tailored to meet specificcircumstances.

1.5 Interaction with other EU directives

As noted an AIFM may be authorized to also manageUCITS and provide ancillary services. An AIFM would require authorization by the MFSA to act as a “UCITSManagement Company” to manage UCITS in line with the UCITS directive, and thus have a dual authorizationunder the Act. As the requirements under the AIFM directive and UCITS directive are similar it is expected that an AIFM be largely compliant with the UCITS directive and that the authorization process to also actas a UCITS management company should be straightforward considering that the operational arrangements are to remain unchanged and that the information which was previously submitted to the MFSA need not to be resubmitted, provided that they remain up to date.

An AIFM may also provide ancillary services under theprovisions of the AIFM directive provided that the conditions on initial capital, organizational requirements and conduct of business in the MiFIDare also adhered to.3 However, since AIFMs mayundertake a limited scope of activities and that the AIFM directive presides on the provision of the ancillary activities, an AIFM cannot be authorisedunder the MiFID.

1.6 Falling within the scope of the AIFM directive

In general, the scope of the AIFM directive relates toentities managing AIFs as a regular business — regardless of the legal structure, whether open-endedor closed-ended AIFs, listed or otherwise — which raises


2 Investment Service Act, 19943 Articles 12, 13 and 19 of MiFID


capital from a number of investors with a view ofinvesting that capital at the benefit of those investors in line with a predefined investment policy.

An asset manager which satisfies one of the following thresholds would fall under the full scope of the AIFM directive (Full scope AIFM):

• Either directly or indirectly, through a company with which the asset manager is linked by common management or control, or by a substantive direct or indirect holding, manage portfolios of AIFs whose assets under management, including any assets acquired through use of leverage, in total exceed a threshold of €100m Or• Either directly or indirectly, through a company with which the asset manager is linked by common management or control, or by a substantive direct or indirect holding, manage portfolios of AIFs whose assets under management in total exceed a threshold of €500m when the portfolios of AIFs consist of AIFs that are unleveraged and have no redemption rights exercisable during a period of 5 years following the date of initial investment in each AIF

The AIFM directive also provides for a lighter regime for entities which fall below the above mentioned thresholds (De minimis AIFM) and thus subject to different requirements to a full scope AIFM (see Section 12). Entities that fall below the thresholds may still “opt-in” to the AIFM directive and be authorized as a Full scope AIFM.

A decision tree to determine whether an entity would fall within the scope of the AIFM directive is presentedin Figure 1 on page 7.

1.7 Calculation of the value of assets under management

In order to be exempt from the full provision of theAIFM directive, an AIFM must calculate the assets under management of each AIF for which it would be appointed as AIFM. UCITS managed by the AIFM and AIFs for which the AIFM manages under a delegation mandate are excluded from the calculation.

For this purpose, financial derivative instrument positions should be converted into their equivalentposition, cross-investments (e.g., master-feeder structures) do not need to be counted twice and any foreign exchange or interest rate hedging positions are not to be taken into account. Only absolute values of the assets are to be taken into account for the calculation. An AIFM shall calculate the value of assets under management at least annually. It shall also be required to implement procedures to monitor such value on an on-going basis.

1.8 Exemptions

The AIFM directive provides for specific exemptions tocertain type of entities or institutions which would otherwise fall within the definition of the AIFM, in particular: Holding companies; managers of pension funds; employee participation or savings schemes;supranational institutions; national central banks;national, regional and local governments and bodiesor institutions which manage funds supporting socialsecurity and pension systems; securitization specialpurpose entities; insurance contracts or joint ventures.Family offices which invest the private wealth ofinvestors without raising external capital are also exempted.


Does the entitymanage any AIFs?

Outside scope ofthe AIFM directive

Does the entityqualify for specific

exclusion (e.g., holding company) ?

Outside scope ofthe AIFM directive

Are the sole investors inthe AIFs the entity itself;part of the same group; orinvestment undertakingswithout raising external

capital?

Outside scope ofthe AIFM directive Does the AIF use

leverage and/or are investors able to redeem their holdings in the AIF

within 5 years from initial subscription?

Is the value of all(unleveraged)

AIFs greater than€500m?

Is the value of all(leveraged)

AIFs greater than€100m?

Full scope AIFM

De minimis AIFM

Yes No

Yes No

Yes No

Yes

No

NoYes

In so far AIFMs that manage AIFs whose only investorsare the AIFMs themselves or their parent undertakings, their subsidiaries or other subsidiaries of their parent undertaking and where those investors are not themselves AIFs would also fall outside the scope of the AIFM directive.

Figure 1 - Decision tree for applicability of AIFM directive

2.2 Implications under the AIFM directive

Licensed AIFMs authorized to provide portfolio management services are subject to the Investor Compensation Scheme directive (ICS directive). However, the ICS directive allows for member statesto exempt certain firms which only service exemptinvestors, which exemption was applied in Malta to professional clients.

In this respect, Malta-based AIFMs that are authorised to provide portfolio management services solely to professional clients are exempt from the requirement to participate in and contribute to the InvestorCompensation Scheme. This implies that Malta-basedAIFMs may be exempted from this directive if certainconditions are met.

2.1 General operation of AIFMs

AIFMs are to ensure that they at all times: • Act honestly, with due skill, care and diligence• Act in the best interests of AIFs or the investors of the AIFs they manage and market integrity• Employ effectively the resources and procedures that are necessary for the proper performance of their business activities • Take all reasonable steps to avoid conflicts of interest or to identify, manage and monitor and, where applicable, disclose, those conflicts of interest which cannot be avoided • Comply with all regulatory requirements applicable to the conduct of their business activities• Treat all AIF investors fairly

The AIFM directive sets out the requirements for the general operation of an AIFM including therequirement to establish an independent compliance,internal audit, risk management and investment management functions. The AIFM would also be subject to remuneration and valuation obligations (See Sections 4 and 5, respectively).

Certain functions may be delegated in proportion withthe nature, scale and complexity of AIFM’s business and the nature and range of services and activities undertaken in the course of its business (See Section 6).

Irrespective of the organizational structure, the AIFM’scompliance with its regulatory obligations would fall under the responsibility of the AIFMs board of directors and senior management (if appointed).

A schematic of an AIFM’s operational arrangement isset out on page 9 (solid arrows indicate reporting lines and dotted arrows denote alternative arrangements).4

4 This is a general representation of an AIFM operational arrangement and variations may be applicable.

EY supports asset managers by defining anefficient operating model, formation of internal policies and procedures and assisting in the selection of serviceproviders.


02 Operating conditions for AIFMs


Figure 2 - Operational arrangement of an AIFM

Investmentmanagement

Investmentcommittee

Portfoliomanager

Valuation Valuationcommittee

Remuneration Remunerationcommittee

Riskmanagement

Risk committee/risk manager

ComplianceCompliance officer

MLRO

Auditor

Internal audit

Third-partyinvestment manager

External valuer

Administrator

Depositary

External delegates/service providers

(appointed by the AIFM)Board of directors

Senior management

AIFAIF

Board of directors Board of directors

Auditor 1 Auditor 2

External service provider(appointed by AIF)

Inve

stor

s


Conditions and restrictions

• Determine and monitor the AIFM’s strategy and implementation • Review policies and procedures • Assessment and approval of findings and recommendations obtained from the different compartments within the AIFM

• Supervision of delegated functions • Establish, monitor, and review the investment performance of the AIFs under management• Establish and review guidelines for investments• Issue of rules for asset selection• Set up the portfolio structure and asset allocation • Make recommendations and report on the investment management to the AIFM’s board of directors

• Undertake the day-to-day portfolio management in line with guidelines issued by the Investment Committee• Report to the Investment Committee and/ or AIFM’s board of directors (as applicable)

• Valuation of the AIF’s assets

• Establish and implement a remuneration policy • Periodically review the general principles of the remuneration policy• Ensure compliance with policies and procedures for any remuneration payable to the AIFM’s staff • Report any recommendations to the AIFM’s board of directors

• Establish and adopt effective arrangements to calculate and monitor risk management techniques• Monitor compliance with risk limits• Report findings to the AIFM’s board of directors • Monitor the AIFM’s activities in compliance with the licensing requirements• Assessing the effectiveness of the measures and procedures put in place• Advise and assist the relevant person/s carrying out the relevant activity to comply with the relevant licensing requirements• Report findings and recommendations to the AIFM’s board of directors • To monitor the AIFM’s activities in compliance with the anti-money laundering requirements• To assess the adequacy/ effectiveness of the measures and procedures put in place• Report findings and recommendations to the AIFM’s board of directors • Implement an audit plan to test the AIFM’s systems and internal controls• Issue recommendations based on the results obtained and report to the AIFM’s board of directors• Verify compliance to the recommendations

AIFM board of directors

Senior management

Investment committee

Portfolio manager/ investment manager

Valuation committee/ external valuer

Remuneration committee

Risk committee/ risk manager

Compliance officer

MLRO

Internal audit


The requirements relating to professional indemnity insurance are outlined in the table below.

3.1 Initial capital and own funds

The initial share capital of AIFMs is of at least €125,000 in addition to own funds of 0.02% of the amount by which the value of portfolio of AIFs managed by the AIFM exceeds €250m, provided that the total own funds does not exceed €10m. Any own funds may be invested in liquid assets or assets readily convertible to cash in the short term and shall not include speculative positions.

For the purpose of calculating the value of the portfolio, all AIFs managed by the AIFM are to be taken into account (including AIFs for which it has delegated certain functions) but AIF portfolios that theAIFM is managing under delegation are to be excludedfrom the calculation.

3.2 Professional liability

Under the AIFM directive, professional liability risk is the risk of “loss or damage caused by a relevant person through the negligent performance of activitiesfor which the AIFM has legal responsibility”. The specific risks are detailed in the Level 2 Regulation.5 An AIFM may cover professional liability risks either byhaving:

• Additional own fundsOr• Hold professional indemnity insurance that adequately compensates against any liability arising from professional negligence

Additional own funds must be equal to at least 0.01%of the value of the portfolios of AIFs managed.The AIFM is to recalculate the additional own funds requirement at the end of each financial year and such amount shall be adjusted accordingly.

5 Articles 12(1) and (2) of commission delegated regulation (EU) No 231/2013 of 19 December 2012 supplementing directive 2011/61/EU

Elements of a professional indemnity insurancecover

• Have an initial term of no less than one year • Have a notice period for cancellation of at least 90 days • Shall cover all professional liability risks defined in the level 2 regulation• Is taken out from an EU or non-EU undertaking authorised to provide professional indemnity insurance, in accordance with Union law or national law, and is provided by a third-party entity • The coverage of the insurance for an individual claim shall be equal to at least 0.7% of the value of the portfolios of AIFs managed by the AIFM • The coverage of the insurance for claims in aggregate per year shall be equal to at least 0.9% of the value of the portfolios of AIFs managed by the AIFM

03 Capital requirements



4.1 Principles of remuneration

AIFMs must adopt a remuneration policy which governs all of the payments made by it to certainmembers of its staff in exchange for the services rendered, which activities have a material impact on the AIF’s risk profile. It should broadly promote sound and effective risk management and not encourage risk taking which is inconsistent with the risk profile of

the AIFs it manages. The policy is to be reviewed bythe AIFM’s board of directors or senior managementon a periodic basis, at least annually.

An AIFM must determine the remuneration policies and practices in accordance with a detailed list ofprinciples set out in Annex II to the AIFM directive (Annex II principles).

EY supports asset managers in providing regulatory intelligence, and defining or reviewing the remuneration process and the formation of internal policies and procedures.


The Annex II principles

• The remuneration policy must include measures to avoid conflicts of interest.• The management body of the AIFM must periodically review the remuneration policy and is responsible for its implementation.• The implementation of the remuneration policy must be subject to an independent review at least annually.• Guaranteed bonuses should be “exceptional” and may only occur in the context of hiring new staff for the first year of service.• Payments related to the early termination of a contract must reflect performance over time and not reward failure.• The fixed and variable components of total remuneration should be appropriately balanced with the fixed component to represent a sufficiently high proportion of the total remuneration. • At least 50% of any variable remuneration must consist of non-cash variable payments such as units or shares in the AIF, which will be subject to an appropriate retention policy designed to align incentives with the interests of the AIF and its investors.• At least 40% of variable remuneration should be deferred over a period which is appropriate in view of the life cycle and redemption policy of the AIF. The period shall be at least 3 to 5 years unless the life cycle of the AIF concerned is shorter.• The variable remuneration must be paid or vest only if it is sustainable according to the financial situation of the AIF as a whole. The total variable remuneration must generally be “considerably contracted” where subdued or negative financial performance of the AIF occurs, including through reducing payouts of amounts previously earned (including by malus or clawback arrangements).• AIFMs that are significant in terms of their size, their internal organization and the nature, the scope and the complexity of their activities must establish a remuneration committee. The members of which are not to perform any executive functions in the AIFM or AIF.

04 Remuneration


4.2 Applicability of remuneration provisions

In general, an AIFM shall have remuneration policies and practices for those categories of staff — referred to as “Identified Staff” — whose professional activities have a material impact on the risk profile of the AIFM or the AIFs it manages that are consistent with andpromote sound and effective risk management and donot encourage risk taking which is inconsistent with the risk profile of the AIFs it manages.6

Identified Staff shall be subject to the remunerationprovisions unless the AIFM is able to demonstrate thatsuch staff, while it may be classified as “Identified Staff”, have no material impact on the AIF’s risk profilein undertaking their duties.

For this purpose, remuneration shall consist of:

• All forms of payments or benefits paid by the AIFM• Any amount paid by the AIF itself, including carried interest• Any transfer of units or shares of the AIF, in exchange for professional services rendered by the AIFM’s identified staff

AIFMs may also set up a remuneration committee that would be responsible for the implementation andadaptation of the provisions in the AIFM’s remuneration policy and, if established, must operate independently and at least be composed by a majority of members who do not perform any executivefunction within the AIFM.

4.3 Applicability of the proportionality principle

AIFMs may in certain cases have the remuneration provisions related to the establishment of the remuneration committee and the requirements on thePay-Out process disapplied entirely subject to the authorization of the competent authorities.7

The MFSA had issued “Guidelines to the Financial Services Industry on the application of theProportionality Principle” on March 2014. These guidelines note that, in taking measures to comply with the remuneration principles, AIFMs should complyin a way and to the extent that is appropriate to theirsize, internal organization and the nature, scope and complexity of their activities.

The AIFM is to consider all of the three factors cumulatively. By way of example, an AIFM which is significant only with respect to one or two criteria may still be able to derogate from the requirement to eitherestablish the remuneration committee or from applying the requirements related to the Pay-Out process. The MFSA’s guidelines further provide thatan AIFM may not apply lower thresholds based on proportionality and the specific numerical criteria mayonly be disapplied in their entirety that where it passes the proportionality test. For example, the specific numerical criteria set out in Annex II principles (e.g., the minimum portion of 40% to 60% of variable remuneration that should be deferred), if disapplied,may only be disapplied in their entirety otherwise it must be complied with in full without variation.

6 Referring to senior management, risk takers, control functions and other risk takers, including members of the board of directors (executive and non-executive) and persons involved in the portfolio management function7 Refers to the requirements on: Variable remuneration in instruments; retention; deferral; and ex-post incorporation of risk for variable remuneration (e.g., clawback/malus arrangements)


The following tables illustrate the thresholds under/above which the MFSA’s guidelines and the corresponding principlesmay be applied or disapplied.

4.4 Delegation

Contrary to ESMA’s guidelines on remuneration, the MFSA in its guidelines noted that third-party entities to which either the portfolio management or riskmanagement is being delegated will not be subject tothe remuneration requirements applicable to the AIFM.8

4.5 Disclosure

Without prejudice to confidentiality and data protection provisions, relevant information on the remuneration policy and any updates in case of policy changes shouldbe disclosed by the AIFM in a clear and easily understandable way, which amongst others refers toinformation on:

• The decision-making process used for determining the remuneration policy including composition of the remuneration committee• The linkage between pay and performance 8 ESMA guidelines on sound remuneration policies under the AIFMD (ESMA/2013/232)

Value of portfolio ofthe AIF under management

Do the rules on the“Pay-Out Process” applyto the AIFM?

Does the AIFM need to establish a remuneration committee?

Type of AIFunder management

Leveraged

Unleveraged

Less than €100mBetween €100m and €1.25bOver €1.25b

Less than €500mBetween €500mand €6bOver €6b

NoMay be disapplied on the basis of proportionality Yes. Full application




• The criteria used for performance measurement and the risk adjustment• Information on the performance criteria on which the entitlement to shares, options or variable components of remuneration is based • The main parameters and rationale for any annual bonus scheme

The AIFM directive provides some further detail on remuneration disclosure including how total remuneration should be disclosed and the content and format of the disclosure of remuneration. Yet, suchdisclosure may be made on a proportionate basis with limited qualitative and very basic quantitative information to be provided.


5.1 Implementation of valuation policies and procedures

AIFMs must have in place policies and procedures to ensure proper and functionally independent valuation of the assets of AIFs under management. AIFMs must also document the procedures for calculating the NAVof each AIF managed.

In its technical advice, ESMA identifies the generalprinciples to be adopted by AIFMs in developing and implementing the policies and procedures related tothe valuation function.9 In addition to the valuationmethodologies that will be used for each type of assetin which the AIF may invest. An AIFM shall not invest in a particular type of asset for the first time unless appropriate valuation methodologies have been identified in advance.

The policies are also to set out the obligations, roleand duties of all parties involved in the valuationprocess. The policies should outline how a change to the valuation policy, including methodology, may be effected. Where the valuation is carried out by theAIFM itself, the policies must also include details of any safeguards to be put in place for the independent performance of such task. Where an external valuer isappointed, the policies and procedures should set out the process for the exchange of information betweenthe AIFM and external valuer.

If a model is used to value the assets, it must be explained in the policies and procedures. Any model to be implemented must be validated by a person notinvolved in the building process of the model, with thevalidation process to be appropriately documented. Policies and procedures are to be reviewed at least annually and prior to the engagement of the AIF.

EY supports asset managers in defining and reviewing the valuation process and the formation of internal policies and procedures.

9 ESMA’s technical advice to the European Commission on possible implementing measures of the Alternative Investment Fund Managers directive (ESMA/2011/379)


When setting up its procedures, the depositary shouldhave a clear understanding of the valuation methodologies used by the AIFM or the external valuer to value the AIF’s assets. The frequency of suchchecks should be consistent with the frequency of theAIF’s asset valuation. Also, the depositary should takeall necessary steps to ensure that appropriate valuation policies and procedures for the assets of the AIF are effectively implemented.

5.2 Valuation function

The valuation function must be either performed by:

• The AIFM itself subject to the task being independent from the portfolio management and safeguards are in place to mitigate any conflicts of interest or undue influence upon the employees performing such task, being independent from the remuneration policy. Or• An external valuer subject to mandatory professional registration recognized by law or to legal or regulatory provisions or rules of professional conduct, independent from the AIFM, AIF and any other persons with close links to the AIF or AIFM.

05 Valuation

The depositary appointed for an AIF shall not be appointed as external valuer of that AIF, unless it hasfunctionally and hierarchically separated the performance of its depositary functions from its tasksas external valuer and the potential conflicts of interest are properly identified, managed, monitored and disclosed to the investors of the AIF.

External valuers must provide professional guarantees.The professional guarantees are to contain evidence ofthe external valuer’s capabilities in performing the valuation task, including evidence of:

• Sufficient personal and technical resources in respect of the AIF’s investment strategy and specific asset • Adequate procedures safeguarding proper and independent valuation • Adequate knowledge and understanding in respect of the AIF’s investment strategy and specific asset

In case that an external valuer is appointed to valueonly parts of the AIF’s portfolio, the external valuer isrequired to provide resources, procedures, knowledge and understanding which are sufficient in respect of such asset.

An AIFM itself or a delegated third-party may carry out the calculation of the net asset value and such activity shall not constitute as valuation of underlying assets provided that the AIFM or third-party is not providing valuations for individual assets, including those requiring subjective judgement, but simply incorporates into the calculation process the valuation of assets obtained from the valuer.

5.3 Frequency of valuation of assets

The assets of an AIF must be valued and the NAV calculated at least once a year.

For open-ended AIFs, financial instruments must be carried out each time the NAV is calculated. The valuation of ‘other assets’ must be carried out when the last determined value is no longer fair or proper, if not, at least annually.

For closed-ended AIFs, such valuations and calculations must be carried out in case of anincrease or decrease of the capital. While no definitionhas been prescribed as to what is defined as an increase or decrease in capital, it is expected that capital call on committed capital will not be consideredas a capital increase.

5.4 Liability

The AIFM is responsible for the proper valuation of the assets of the AIFs managed, the calculation and publication of the NAV. The AIFM’s liability towards theAIF and its investors shall, therefore not be affected bythe fact that the AIFM has appointed an external valuer. However, the external valuer shall be liable to the AIFM for any losses suffered by the AIFM as a result of the external valuer’s negligence or intentional failure to perform its tasks.


The AIFM may delegate the investment managementfunction to third parties which entities are authorized by competent authorities to provide such services.13

An AIFM may not delegate (nor the delegate when sub-delegating) the investment management functionto the AIF’s depositary (or its delegates) or any otherentity whose interests may conflict with those of the AIFM or the investors of the AIF unless certain conditions are satisfied.

An AIFM may not delegate to third parties the performance of the investment management functionto an extent that it may be considered a letter-boxentity.

6.1 Conditions and general principles for delegation

An AIFM may delegate functions to third partiesprovided that:

• The AIFM is able to justify the delegation on objective reasons10 • The delegate has sufficient resources to perform the respective tasks and the persons who effectively conduct the business of the delegate must be of sufficiently good repute and sufficiently experienced• Any investment management function is to be delegated to entities which are authorised to provide asset management and subject to the supervision of the competent authority of its Home member state• A cooperation agreement11 must be enacted between the competent authority of the AIFM’s Home member state and the supervisory authority of the third country12 entity in case the investment management function is delegated to an entity established in a third country (See Annex 1 for the list of cooperation arrangements signed by the MFSA)• The delegation must not prevent the effectiveness of supervision of the AIFM nor must it prevent the AIFM from acting, or the AIF from being managed, in the best interests of its investors• The AIFM must demonstrate that the delegate is qualified to undertake the functions delegated, that it was selected with due care and that the AIFM is able to monitor the delegated activity, to give at any time further instructions to the delegate and to withdraw the delegation with immediate effect when this is in the interest of the AIF’s investors

EY supports asset managers in regulatoryassessment and defining delegation policies and procedures.


10 ESMA clarifies that “objective reasons for delegating” relates to delegation for the purpose of a more efficient conduct of the AIFM’s management of the AIF including, but not limited to optimizing the business functions, cost saving, expertise of the delegate in administration/specific markets/investments, and/or access of the delegate to global trading capabilities11 A cooperation agreement allowing for cross-border activities to take place and permitting EU regulatory bodies to supervize compliance of a non-EU entity with the AIFM directive when is involved managing AIFs

06 Delegation of AIFM functions


General principles for delegation of AIFM functions

• The delegation does not allow for the circumvention of the AIFM’s responsibilities or liability. • The obligations of the AIFM towards the AIF and its investors under the AIFM directive should not be altered due to the delegation.• The conditions with which the AIFM must comply in order to be authorised in accordance with the AIFM directive, and to remain so, should not be undermined.• The AIFM should ensure that the delegate carries out the delegated functions effectively and in compliance with applicable laws and regulatory requirements and must establish methods for reviewing the services provided by each delegate on an ongoing basis. The AIFM should take appropriate action if it appears that the delegate may not be carrying out the functions effectively or not in compliance with applicable laws and regulatory requirements.• The AIFM should retain the necessary expertise and resources to supervise the delegated tasks effectively and manage the risks associated with the delegation. The AIFM should also ensure that the delegate properly supervises the carrying out of the delegated functions, and adequately manages the risks associated with the delegation.• The AIFM should ensure that continuity and quality of the delegated tasks are maintained also in case of a termination of delegation by either transferring the delegated tasks to another third-party or incorporating it into the AIFM.• The respective rights and obligations of the AIFM and the delegate should be clearly allocated and set out in a written agreement. In particular, the AIFM must contractually ensure its instruction and termination rights. The agreement should make sure that sub-delegation could take place only with the AIFM’s consent.• Whenever the portfolio management is delegated, the delegation must be in accordance with the investment policy of the AIF. The delegate should be instructed by the AIFM how to implement the investment policy and the AIFM should monitor whether the delegate complies with it on an ongoing basis.• The delegate must disclose to the AIFM any development that may have a material impact on its ability to carry out the delegated functions effectively and in compliance with applicable laws and regulatory requirements.• The delegate must protect any confidential information relating to the AIFM, the AIF affected by the delegation and the investors of these AIFs.• The delegate must establish, implement and maintain a contingency plan for disaster recovery and periodic testing of backup facilities while taking into account the types of delegated functions.

12 Third country refers to a country which is not an EU or EEA member state.13 For the purpose of this section, the term ‘investment management’ refers to both portfolio management and risk management on a collective basis.


6.2 Sub-delegation

The AIFM directive allows for the delegate to sub-delegate any of the functions delegated provided certain conditions are fulfilled. One of the conditions is that the delegate must seek the AIFM’s consent priorapproval to sub-delegate. The AIFM should demonstrate its consent to each sub-delegation in writing; ‘general consent’ given in advance by the AIFMto each sub-delegation may not suffice. The AIFM is to notify the competent authority of its Home member state of all sub-delegation arrangements. The conditions and principles for delegation shall apply also to the sub-delegate (see Section 6.1).

No sub-delegation of portfolio management or risk management shall be conferred on the depositary (or its delegates) or any other entity whose interestsmay conflict with those of the AIFM or the investors ofthe AIF.

6.3 Liability

The AIFM’s liability towards the AIF and its investors shall not be affected by the fact that the AIFM has delegated functions, or being sub-delegated, to a third -party.


EY supports asset managers in defining orreviewing the risk management process and the formation of internal policies and procedures.


7.1 Risk management function

An AIFM must establish and maintain a permanent risk management function which is responsible for: • The implementation of the risk management policies and procedures in order to identify, measure, manage and monitor on an ongoing basis all risks relevant to each AIF it manages• Ensuring that the risk profile of the AIF is disclosed to investors in line with the provisions included in the AIFM directive• Monitoring the compliance with the risk limits and notifying the AIFM’s board of directors and/or supervisory function in a timely manner when it considers the AIF’s risk profile inconsistent with these limits or sees a material risk that the risk profile will become inconsistent with these limits• Providing regular updates to the board of directors/ senior management at a frequency proportionate to its nature, scale and complexity of the AIF or the AIFM’s activities (see Section 7.3)

The risk management function is to be functionally and hierarchically separate from other operating units (including investment management).

An AIFM may consider whether to integrate a fully separate risk management function or to delegate either the investment management or risk management function to a third-party while retaining the other function. The AIFM may also, according tothe proportionality principle, appoint individuals engaged in the risk management function not independent from the other operating units (see Section 7.1.1).

Two common structures generally adopted by AIFMs established in Malta are described on pages 25 and 26.

07 Risk management


IM report

Investmentmanagement

function

AIFM board of directors

Investmentcommittee

Portfolio manager

Risk managementFunction

RM report

Risk manager

Risk support(e.g., risk management service providers, external

data providers)

Investment committee members/portfolio manager/risk mangers subject to the competency assessment of the MFSA; can be involved in the other function or member to the board of directors subject to principle of proportionality

Day-to-day portfolio management/risk monitoring andpreparation of the Investment management (IM)/Risk monitoring (RM) report

External parties providing support to the risk management function

Responsible for the investment management and risk management function

Model 1: Integrated investment management function

Under this model, the AIFM carries out both functions. The risk management function shall be independent from other operating units unless the principle of proportionality is applied. External parties may be appointed to provide support to the AIFM’s risk management function.

Model 2: Delegating of investment management function and retaining of risk management function

In this model, the AIFM undertakes the risk management function through its own staff and delegates the investment management function to a third-party (e.g., a UK-based MiFID compliant investment firm) provided certain delegation conditions are met (see Section 6). The AIFM must establish procedures for the transfer of information to and from the delegate. External parties may also be appointed to provide support to the AIFM’s risk management function. A variant to this model would be for the delegation of the risk management function instead of the investment management function.

Portfolio Manager

Risk support(e.g., risk management service providers, external

data providers)

Risk management function

RM report

Board of directors

Investment management team

IM delegated

IM report

AIFM EU MiFID entitiesor authorized delegate


RM data


7.1.1 Principle of proportionality

AIFMs may not have the risk management function “functionally and hierarchically separated” but shall still result in the independence performance of such function after applying certain safeguards. The safeguards required, which are to be reviewed at anappropriate interval, shall ensure that: • Decisions by the risk management function are based on reliable data, which is subject to an appropriate degree of control by the risk management function• Remuneration of those engaged in the risk management function is linked solely to such function• The risk management function is subject to an appropriate independent review to ensure that decisions are being arrived at independently • The risk management function is represented in the governing body (i.e., board of directors) at least with the same authority as the investment management function• Any conflicting duties are properly segregated

7.2 Risk management policy

The AIFM must formulate a risk management policy that identifies all the relevant risks which the AIFs it manages may be exposed and the techniques used to manage such risks, the safeguards for independent performance of the risk management function and details of the allocation of responsibilities within the AIFM for risk management function. Such policy should be reviewed at least annually to ensure its effectiveness.

General content of the Risk Management Policy

• The techniques, tools and arrangements that enable the AIFM to manage and measure risk• The techniques, tools and arrangements that enable the assessment and monitoring of the liquidity risk of the AIFs it manages• The allocation of responsibilities within the AIFM pertaining to the risk management function• The risk limits and justification of how these are aligned with the risk profile of the AIF disclosed to investors• The terms, contents, frequency and addressees of reporting by the permanent risk management function to the board of directors or senior management • A description of the safeguards against conflict of interest

The risk management policy must be appropriate to the nature, scale and complexity to the business of the AIFM and of the AIF it manages.

The board of directors must approve and review therisk management policy and arrangements, processes and techniques for implementing the policy on aperiodic basis, at least annually.

The AIFM must also assess, monitor and periodically, at least once a year, review: • The measures taken to address any deficiencies in the performance of the risk management process• The performance of the risk management function • The measures taken to ensure the functionality and hierarchical separation of the risk management function


7.2.1 Risk profile and limits

An AIFM is to establish and implement quantitative and/or qualitative risk limits for each AIF it manages,taking into account all relevant risks covering at least market risk, credit risk, liquidity risk, counterparty risk,and operational risk; taking into consideration the strategies, assets and risk profile of the AIFs (as disclosed to investors). The AIFM may set only qualitative limits provided it is able to justify such approach.

The above implies that the only limitation on AIFMs with regards to risk (as they are not imposed to any investment restrictions) is that they manage the AIF in line with its risk profile.

7.2.2 Risk measurement

An AIFM is required to adopt processes and techniquesthat identifies, measures, manages and monitors the risks to which the AIF may be exposed. This implies that the AIFM shall at least:

• Put in place risk measurement processes and techniques to ensure that the risks of positions taken and their contribution to the overall risk profile are accurately measured and that the risk measurement techniques are adequately documented• Conduct periodic back-tests in order to review the validity of risk measurement arrangements which include model-based forecasts and estimates• Conduct periodic appropriate stress tests and scenario analyses to address risks arising from potential changes in market conditions that might adversely impact the AIF• Ensure that the current level of risk complies with the relevant risk limits • Establish, implement and maintain adequate procedures that, in the event of actual or anticipated breaches of the risk limit policy and procedures of the AIF

• Put in place liquidity management processes for each AIF it manages

Such arrangements are to be proportionate to the nature, scale and complexity of the business of the AIFM and AIF they manage and shall be consistent with the AIF’s risk profile (disclosed to investors).

7.3 Reporting obligations

Risk reporting is a critical part of the risk management function, in terms of internal reporting to the AIFM’s board of directors and externally to competent authorities and investors in the AIF.

7.3.1 Reporting to the AIFM’s board of directors or senior management

The risk management function is to provide regular updates to the AIFM’s board of directors or senior management in order for them to execute their obligations and responsibilities of oversight. Such reports shall at least include information on the consistency and compliance of the AIF’s risk profile with the relevant risk limits and the adequacy of the risk management process, indicating remedial measures that have or may be carried out in the eventof any actual or anticipated deficiencies. The currentlevel of risk incurred by each AIF managed and any actual or foreseeable breaches the relevant risk limitsare also to be disclosed to the board of directors orsenior management.

The frequency of risk reporting to the board of directors or senior management depends on the nature, scale and complexity of the AIFs managed and theAIFM’s activities.

7.3.3 Disclosure to Investors

AIFMs are required, for each AIF it manages or markets in the EU, to periodically disclose to investors: • The current risk profile of the AIF outlining the measures to assess the sensitivity of the AIF’s portfolio to the most relevant risks to which the AIF is or could be exposed• The risk management systems used to manage those risks to which the AIF may be exposed and any changes thereto. Such information is to be disclosed as part of the AIF’s periodic reporting to investors and in its annual report


7.3.2 Reporting to the competent authority

The AIFM directive has introduced new transparency and regulatory reporting obligations for AIFMs (referto Section 10). Specific to risk management, the AIFM shall report for each AIF it manages:

• The risk management systems employed by the AIFM to manage the market risk, liquidity risk, counterparty risk and other risks including operational risk• Any new arrangements to manage the liquidity of the AIF• The current risk profile of the AIF, including: • The market risk profile of the investments of the AIF, including the expected return and volatility of the AIF in normal market conditions • The liquidity profile of the investments of the AIF, including the liquidity profile of the AIF’s assets, the profile of redemption terms and the terms of financing provided by counterparties to the AIF results on the periodic stress testing carried out to ensure the adequacy of the risk measurement and management techniques

See Section 10.4 on the reporting frequency to the competent authority.

8.1 Management passport

The AIFM directive has introduced “management”passport which allows for AIFMs to manage AIFs domiciled in an EU/EEA member state other than their Home member state. The AIF may be managed either directly on a cross-border basis (free provision of services) or through a branch.

Notification to this effect is to be provided to the AIFM’s competent authority in its Home member stateof its intention to passport its activities on across-border (where the competent authority has one month to transmit this information to the hostregulator) or by establishing a branch (in which casethe time limit is extended to two months). Anychanges to the information communicated must benotified to the competent authority one month inadvance (or immediately after an unplanned change has occurred).

8.1.1 The notification procedure

Prior to an AIFM benefitting from the passporting provisions to manage EU AIFs other than in theirHome member state, it must notify the competent authority in its Home member state of their intention. The notification must include:

• A notification letter identifying the EU member states in which it intends to manage AIFs directly or establish a branch• A programme of operations noting the services which it intends to perform and identifying the AIFs it intends to manage

In case of establishing a branch, the AIFM must also provide details on the:

• Organizational structure of the branch • Address in the home member state of the AIF from which documents may be obtained• Names and contact details of the persons responsible for the management of the branch

EY supports asset managers in the regulatory assessment and notification for the distribution of the investment fund.

The competent authority of the AIFM shall immediatelynotify the AIFM about the transmission upon which itmay start to provide its services in the host memberstate.

The regulatory authority of the Host member state may not impose any additional requirements on the AIFM in respect of matters covered by the AIFM directive.

8.2 Marketing passport

Marketing relates to any direct or indirect offering orplacement at the initiative, or on behalf, of the AIFM of units or shares of AIFs it manages to investors domiciled in the EU/EEA member states.

Specifically, the AIFM directive defines “marketing” as the “direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM of unitsor shares of an AIF it manages to or with investors domiciled or with a registered office in the EU”. Thismeans that the marketing provisions of the AIFM directive do not apply to “reverse solicitation” or “passive marketing” (i.e., marketing which is not at the direct or indirect initiative of the AIFM).


08 Passporting

In summary, a Full AIFM regime AIF can be marketed to:

• Professional investors in the EU or EEA: An EU AIFM would benefit from the passporting regime to market the units of the AIF they manage to professional investors throughout the EU or EEA Or• Retail investors in the EU or EEA under stricter national rules: Each EU or EEA member states may permit authorized AIFM to market the shares or units of the AIF they manage to retail investors in the member states

An EU professional investor may thus invest, on its own initiative, in AIFs anywhere in the world. This may also be the only route for a non-EU AIFM to access investors in the EU should it not satisfy the passporting provisions under the AIFM directive or theNational Private Placement Regulations (NPPRs).

8.2.1 Marketing of an AIF

The marketing of AIFs depends on whether or not they are managed in line with, and subject to, the full AIFM directive requirements (Full AIFM regime AIF). Full AIFM regime AIFs are AIFs which are managed by an authorised AIFM. Authorised AIFM must meet the full requirements of the AIFM directive.

The marketing regime for EU/ non-EU domiciled AIFs by, or on behalf of, EU AIFMs is summarized below:


DomicilesAIFM AIF

Marketedin the EU?

Is AIFMdirectiveapplicable?

AIFMmarketingregime

Requirementsapplicable to theAIFM and AIF

Requirementsapplicable to thirdcountry domiciles

EUEUEU

EU

EU EUNon-EU

Non-EU

YesNoYes

No

YesYesYes

Yes

PassportNoneNPPRs (until 2018)

Passport(expected in late 2016)

None

Full directiveFull directiveFull directive except the provisions on depositary but an entity must be appointed to execute thedepositary functionsFull directive

Full directive except the provisions on depositary and annual reports

NoneNoneCooperation agreements (1)AML requirements (2)

Cooperation agreements (1)AML requirements (2)Tax agreements (3)Cooperation agreements (1)

(1) Cooperation agreement between the competent authorities of the AIFM home member state and the supervisory authorities of the AIF third country. See Annex 1 for the list of cooperation arrangements signed by the MFSA. (2) The AIF third country is not listed as a NCCT by the Financial Action Task Force (FATF). (3) An OECD model article 26 compliant agreement must be signed between the non-EU AIF third country, AIFM member state and any other EU member state in which the non-EU AIF will be marketed.


8.2.2 The notification procedure

Before an EU AIFM may use the passporting provisionsto market their AIFs to “Professional Investors” in a EU member state, it must notify the competent authorityin its Home member state.

The notification must include:

• A notification letter, identifying the AIF which the AIFM intends to market and information on where it is established• The AIF’s prospectus or instruments of incorporation• The identity of the depositary of the AIF• A description of, or any information on, the AIF available to investors, as well as information that must be provided to them before they invest• Information on where the master AIF, if the AIF is a feeder• Any additional information concerning disclosure obligations of the AIF• The identification of the member state(s) in which it intends to market the AIF• Details of the measures to be undertaken to prevent the AIF from being marketed to Retail Investors

For cross-border marketing (marketing in member states other than the AIFM’s Home member state) the competent authority shall, within 20 days, transmit the complete notification file to the competent authorities of each EU member state which it intends to market the AIF, including an attestation that the AIFM is authorised to manage AIFs with a particular investment strategy. Upon transmission, the competent authority of the AIFM shall notify the AIFMof the transmission. The AIFM may start to market the AIF in the host member state(s) as from the date of such notification. In so far the AIF shall be marketed to“Retail Investors” in host member state (if allowed) shall be subject to law and restrictions of the host member state.

8.3 The national private placement regime

The NPPRs allows AIFMs to market AIFs that are notallowed to be marketed under the passporting regime. This principally relates to the marketing of non-EU AIFs (and AIFs managed by non-EU AIFMs). It also relates to the marketing of feeder EU AIFs having a non-EU master AIF or a master non-EU AIFM.

8.3.1 Eligibility to the NPPRs

Eligible AIFMs will be able to continue to use the NPPRs until 2018, and till late 2017 the NPPRs will bethe sole regime available to eligible AIFMs to market AIFs in the EU. A passporting regime may be phased in though this shall depend on a number of conditions being satisfied.

The NPPR will be available to:

• EU AIFMs marketing non-EU AIFs or feeder EU AIFs having a non-EU master AIF or a master non-EU AIFM14 • Non-EU AIFMs marketing EU AIFs or non-EU AIFs15

• De minimis AIFM marketing EU AIFs or non-EU AIFs

The NPPRs may only be used for marketing to professional investors but eligible AIFMs may obtain specific authorization from the competent authoritiesof each member state where the AIF will be marketed to retail investors. An eligible AIFM may market the AIF in any EU memberstate if it notifies the competent authority of themember state in which it intends to market the AIF. The MFSA has issued notification forms for each classification, that is, a notification form for marketingin terms of Article 36, a notification form for marketing in terms of Article 42 and lastly a notification form for De minimis AIFMs.

14 Article 36 of the AIFM directive15 Article 42 of the AIFM directive

8.3.2 Cooperation agreements

An eligible AIFM must satisfy a number of conditions including the establishment of a cooperation agreement between the competent authorities of eachmember state where the AIF is marketed, the AIF’sHome member state (or the AIF’s country of establishment supervisory authorities for non-EU AIFs) and the supervisory authorities of the AIFM third country of establishment. These cooperation arrangements allow for certain cross-border activities to take place, and permit EU member state regulatory bodies to supervise compliance with the AIFM directivewhen a non-EU entity is involved in either the management or marketing of an AIF within the EU orwhere the AIF is established in a non-EU jurisdiction (see Annex 1 for the list of cooperation arrangements signed by the MFSA).


EY supports asset managers with the investment fund setup an application for authorization, as well as restructuring andliquidation.

Authorisation


Preparatory Pre-licensing Post-licensing

Initial submission of documents for authorization including: • Application form • Draft documents and any

additional information

• Submission of final documents

• Listing on the official list of licensed entities

• Issue of licence

MFS

AM

ain

docu

men

ts

9.1 Initial consideration

In practice, a large amount of work will be performedby the promoters, consultants, auditors or legal advisors and proposed service providers before submission of the application for the licensing of an AIFM.

9.2 Authorization process and requirements

An AIFM established in Malta, should obtain authorization and a licence from the MFSA to be ableto operate. The approval process for setting up a new AIF can be divided into three phases:

Phase 1 — Preparatory phase

• The promoters of the AIFM, with the assistance of the advisors, prepare a detailed proposal of their activities and discuss the terms at meetings with the MFSA in order for the MFSA to provide relevant guidance and clarifications as necessary.

Authorization process

• The promoters of the AIFM submit the draft application documents as outlined below, which documents will be reviewed by the MFSA and may request additional evidence, corrections, or proof of the fit and proper test, among other things.• The MFSA will consider the nature of the proposed AIFM and a decision will be made regarding which SLCs should apply. These represent ongoing requirements which need to be satisfied.

The authorization process can be summarized as follows:

09 Authorization


• Information including personal questionnaire forms on the qualifying founder shareholders (holding 10% or more of the voting rights)• Personal questionnaire forms, competency forms and CVs of the individuals responsible for the investment management and risk management functions• CVs of the individuals involved in the valuation function (if applicable)• Personal questionnaire and competency form of the compliance officer and money laundering reporting officer• Investment management or risk management delegation agreements• A near final risk management policy document

The MFSA recommends applicants to file an application only once all constituents of the project are in final draft form.

Phase 2 — Pre-licensing phase

• When all review points noted in the draft application are resolved, the MFSA will issue an “in principle” approval for a licence. Following this, the promoters of AIFM must: • Finalize any outstanding issues • Submit signed final application documents.• A licence will be issued once all pre-licensing issues are resolved.

Phase 3 — Post-licensing or pre-commencement of business phase

• The MFSA will determine whether the applicant needs to satisfy any post-licensing matters before formal commencement of business can take off.

The initial application documents to be submittedshould at least include:

• Application form• Application fee• A near final draft business plan• A near final draft financial projections for a period of three years• A near final draft of the financial resources statement• A near final draft of the memorandum and articles of association• Resolution from the board of directors• A near final investment committee terms of reference• Information including personal questionnaire forms on the directors or members of the investment committee or portfolio managers or risk managers or members of the remuneration committee and/or valuation committee (as applicable) of the AIFM

EY supports managers with the preparationof financial reports and periodic reportingto the supervisory authority.


The AIFM directive has introduced new transparencyand regulatory reporting obligations for AIFMs in respect of each EU AIF it manages and for each of theAIFs marketed in the EU. To this end, the directive laysthe requirements on AIF’s annual report, disclosure to investors (before investing in the AIF and on a periodic basis thereafter) and reporting to competent authorities.

Generally, the reporting frequency of AIFMs to competent authorities shall depend on: • Whether the AIF is managed or marketed within the EU• The total size of assets under management• Whether the AIFs are leveraged and/ or invest in non-listed companies aiming to acquire control

10.1 Annual reports

The AIFM directive will require the AIFM to produce audited annual reports for each of the AIF it manages or markets within the EU within six months of each ofthe AIF’s financial period. The accounting information in the annual report is to be prepared in line with the accounting standards of the Home member state of the AIF (or third country where the AIF is established).

Minimum content of the annual report

• Balance sheet or statement of assets and liabilities • Income and expenditure account • Report on the activities • Material changes in the information to the information disclosed to investors• Total 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 AIF’s risk profile

10 Transparency and reporting requirements


10.2 Disclosure to investors

10.2.1 Disclosure to investors prior to investment

AIFs must have a prospectus for which the AIF and/orthe AIFM are responsible for. The prospectus must have sufficient information to enable investors to makean informed decision on investing in the AIF. AIFMs shall also, in respect of each EU AIF it manages and AIF marketed in the EU, make available to investors thefollowing information both prior to initial investment and at material changes thereto:

• Investment strategy, objective and details of how any changes may be implemented • The main legal implications of the investment contracts• Intended leverage and collateral arrangements• The identity of the service providers (AIFM, depositary, valuer, auditor, prime broker etc., their obligations, including depositary liability and investors’ rights)• Description of how the AIFM complies with the capitalization requirements • Valuation procedures• Fees and expenses to be borne by investors• Provisions to ensure fair treatment of investors, including details of any preferential treatment• The latest net asset value and historical performance information where available• Latest audited annual reports within 6 months of the year end date• The liquidity management procedures, including how subscriptions and redemptions are processed

Ordinarily, the said information would be included in the AIF’s prospectus, however, the AIFM may resolveto include such information in a separate fact sheet orinternet-based document.

10.2.2 Ongoing disclosure requirements

An AIFM is required to provide, in respect of each of the EU AIF and AIF marketed in the EU, the following information to investors on a periodic basis:

• The percentage of the AIF’s assets which are subject to special arrangements arising from their illiquid nature (e.g., side pocket arrangements)• Any new liquidity management arrangements• The current risk profile and risk management systems employed to manage those risks • If the AIF employs leverage, any change to the maximum level of leverage permitted as well as any re-hypothecation rights or any guarantee granted under the leveraging arrangement and the total amount of leverage that it employs

The frequency thereof will vary depending on ongoing changes under each category outlined above.

10.3 Reporting obligations to competent authorities

Information by the AIFM An AIFM is required to submit the following information to the competent authority of its Homemember state:

• The main instruments in which it is trading, including a break-down of financial instruments and other assets, including the AIFs investment strategies and their geographical/ sector focus • The markets which it is a member or where it actively trades• The diversification of the AIFs portfolio, including, but not limited to, its principal exposures and most important concentrations


Information in respect of each AIF:

• Percentage of assets which are subject to special arrangements arising from their illiquid nature • Any new arrangements for managing its liquidity • Its current risk profile and the risk management systems adopted 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 it invests in • The results of the period stress tests under normal and exceptional circumstances

10.4 Reporting frequency

The table below provides a summary of the reportingfrequency applicable to AIFMs and specific types of AIFs.

Reporting frequency

Regulatory framework Assets under management Frequency

Leveraged

Unlevereged

AIFM

Specific AIF Reporting • AIFs exceeding €500m• unleveraged AIFs investing in non-listed companies and issuers in order to acquire control

• Greater than €100m but not exceeding €1b• Exceeding €1b• Greater than €500m unleveraged with 5 year lock-up period, but does not exceed €1b • Exceeding €1b

Half-yearly

Quarterly

Half-yearly

Quarterly

Quarterly

Annual



16 Article 21(7) of directive 2011/61/EU17 Article 21(8) of directive 2011/61/EU

conditions), or the Home member state of the AIFM or in the member state of reference of the AIFM.

The AIFM directive provides exemptions where a depositary need not be appointed in case of:• A non-EU AIF managed by non-EU AIFM and is marketed in the EU via the national private placement regime• A non-EU AIF managed by an EU AIFM but not marketed in the EU

A non-EU AIF managed by an EU AIFM and is marketed in the EU via the national private placement regime is not required to appoint a depositary. An entity instead is to be appointed to be responsible only formonitoring the AIF’s cash flows16, safekeeping of theAIF’s assets17 and overseeing the sale, issue, repurchase, redemption and cancellation of units or shares of the AIF18 — the ‘depository lite’ regime.

The “depositary lite” regime shall also be applicable to AIFs which have no redemption rights for a period of five years from date of initial investment and does notinvest in assets that must be held with a depositary (e.g., private equity funds).

An AIFM is not to be appointed as depositary. A depositary is also not to be engaged as an external valuer or as prime broker (acting as counterparty to the AIF) unless certain conditions are met (see Section6.1).

A Malta-based AIF may appoint a depositary (an EU credit institution) based in another EU member state, at least until 22 July 2017.19 The depositary may however need to be established in Malta after this date. Still, alternative routes may be adopted after the end of the transitional period which may involve the extension of the derogation, beyond 2017.

11.1 Introduction

The AIFM directive requires that for each AIF a depositary to be appointed. EU AIFMs are to appoint a depositary for EU AIFs and non-EU AIFs marketed in the EU. A Non-EU AIFM is to appoint a depositary fornon-EU AIF once these marketed in the EU with a passport.

The depositary is to be appointed by a written contractwhich contractual particulars are set out in the AIFM directive. It shall safekeep the AIF’s assets, monitor its cash flows and perform other oversight duties. It may also delegate the safekeeping duties to third parties subject to certain conditions. The AIFM directive has also introduced a strict liability regime on the depositary and its delegates.

11.2 Eligible entities

The AIFM directive requires that an EU AIF and a non-EU AIF to appoint a depositary being either: • A licensed EU credit institution • A licensed EU MiFID firm authorised to provide the services of safe-keeping of assets Or• Any other entity permitted to act as depositary pursuant to UCITS IV directive

For a non-EU AIF, the depositary may be an entity equivalent to an EU credit institution or EU MiFID firm subject to effective prudential regulation and supervision that has the “same effect” as EU law.

The depositary for an EU AIF is to be established in theEU AIF’s Home member state. For non-EU AIF, the depositary must be established in the third country where the AIF is established (subject to additional

11 Depositary

18 Article 21(9) of directive 2011/61/EU19 MFSA negotiated the derogation to Article 61(5) of the AIFM directive


11.3 Duties of the depositary

A depositary serves the functions of:

• Safekeeping the AIF’s assets• Overseeing compliance with the AIF’s constitutional documents and its applicable regulations (the AIF applicable rules). An obligation on the depositary to monitor the AIF’s cashflow is also separately set out in AIFM Directive

11.3.1 Safekeeping

The safekeeping duties of the depositary shall entail:

• Holding in custody: • Financial instruments that can he held in custody in segregated accounts (i.e., separate from the depositary’s own assets) and maintained in the name of the AIF or the AIFM acting on behalf of the AIF • All financial instruments that can be physically delivered to the depositary • For the other assets which cannot be held in custody, the depositary shall keep record of the title of ownership in order to verify that the AIF is indeed entitled to such assets. The depositary shall rely on the information provided by the AIF (or AIFM on its behalf), and if available, from external parties for which the depositary deems appropriate. It must ensure that such ‘other assets’ cannot be transferred without its knowledge

11.3.2 Cash flow monitoring

The depositary is to monitor the AIF’s cash-flows apartfrom ensuring that payments from investors and all AIFcash are booked in cash accounts opened in the name of the AIF, or the AIFM or the depositary on behalf ofthe AIF. It is to certify that payments made by investors on the subscription of shares in the AIF havebeen received and that all cash belonging to the AIF is

booked correctly on the accounts opened. It will(ordinarily) need to perform daily reconciliations of allAIF cash-flows on an ex-post basis.

11.3.3 Oversight functions

The oversight duties refer to the depositary’s obligation to ensure that the AIF acts and its transactions are carried out in accordance to the AIF applicable rules, this includes ensuring that the issue and redemption of the AIF’s shares; the value of the AIF’s shares; any instructions carried out by the AIFM (or AIF if internally managed); and any of the AIF’s income is accounted for — in accordance to the AIF applicable rules.

11.4 Delegation of duties

The depositary may only delegate its safekeeping duties to third parties if it can demonstrate that:

• There is objective reason for delegation and not to avoid requirements of the AIFM directive• It has exercised due skill, care and diligence in selecting, appointing, periodically monitoring and reviewing the delegate

The same provisions shall apply to the delegate for segregating the AIF’s assets to limit the risk associated with the insolvency of the delegate.

Where financial instruments need to be held in custody by entities in third countries and no local entity satisfies the delegation requirements in the AIFM Directive, the depositary may still delegate its custodyfunction to such entity subject to the AIF’s investorsbeing informed, in advance, of the rationale of such delegation and the AIF or AIFM on its behalf instructsthe depositary to delegate to such local entity.


The depositary will remain responsible for the safekeeping of the AIF’s assets and its liability shall, in general, not be affected by delegation even though a loss may be caused by the delegate (see Section 11.4).

11.5 Liability

In general, a depositary shall be liable to an AIF or itsinvestors for any loss of financial instruments held in custody by the depositary itself or third-party delegated with the custody function.

A loss of a financial instrument held in custody is deemed to have taken place where:

• The ownership right is not valid because it either ceased to exist or never existed• The AIF has been deprived of its right of ownership over the financial instrument• The AIF is unable to directly or indirectly dispose of the financial instrument

In such cases, the depositary will be obliged to return a financial instrument of identical type or the corresponding value to the AIF. The depositary is also liable to the AIF or its investors for all other losses suffered by them as a result of negligence or intentional failure of the depositary in performing itsduties.

The depositary may be exempted from liability if it canprove that the loss was as a result of an external event beyond its reasonable control and having unavoidable consequences.

11.5.1 Liability in case of delegation

A depositary may contractually discharge liability whenthe loss has been caused by a delegate, if it can provethat:

• It has met all of the delegation requirements prescribed in the AIFM directive• The written contract between the depositary and the delegate expressly transfers the liability to the delegate and permits the AIF, or AIFM on its behalf, to claim against the delegate in case of the loss of financial instruments or for the depositary to make such a claim on their behalf • The depositary’s contract with the AIF, or AIFM on its behalf, expressly allows a discharge of the depositary’s liability and establishes the objective reason for this

The depositary is considered to have “objective reason” to discharging liability if it can demonstrate that it had no other option but to delegate its custody duties to athird-party. This shall be the case where:

• The law of a third country requires that certain financial instruments be held in custody by a local entity and local entities exist that satisfy the delegation requirements in the AIFM directive• The AIFM insists on maintaining an investment in a particular jurisdiction despite warnings by the depositary

See Section 11.5.2. for further details on liability discharge.

11.5.2 Liability discharge

The AIFM directive provides limited scope for a depositary to transfer the custody function and discharge liability. The MFSA has in this regard provided guidance on three possible models, with variations within each model to seek to balance theimpact of liability provisions and operational complexity.


AIF

Depositary

Prime Broker

Sub-custodian B Sub-custodian CSub-custodian A

Option A: Depositary retains liability

Option B: Depositary transfers liability to prime broker

Option C: Indemnityprovided by primebroker to depositary

AIF

Depositary(retains liability)

Prime broker

Prime broker appointsdepositary’s

sub-custodian networkor global sub-custodian

Model 1 - Prime broker appointed as sub-custodian and uses own sub-custody network

Model 2 - Prime broker appointed as sub-custodian and uses depositary’s own sub-custody network

Under this model, the depositary appoints the prime broker as its sub-custodian with the prime broker using its own sub-custody network. Liability risk may be mitigated by enhanced due diligence on the prime broker and its sub-custody network.

To address the liability issue, variations to this model require that either the depositary retains liability for the loss of financial instruments held in custody (Option A), the depositary discharges the liability to theprime broker, who in turn may trasfer the liability to its sub-custodians (Option B), or the depositary retains theliability but receives a contractual indemnity from theprime broker for any loss arising directly out of the actions of the prime broker of sub-custodians within itsnetwork (Option C).

In this model, the depositary retains liability on the condition that the prime broker uses the depositary’s own sub-custodian network. The AIF’s assets will be held within the depositary’s own sub-custody networkand can be monitored by the depositary but are settled and cleared by the prime broker. The prime broker will however need to establish multiple new sub-custody networks in addition to its’ own sub-custody network.

A variation of this model would be that the prime broker appoints the depositary’s affiliate global sub-custodian, which in turn would manage the sub-custodian network. The benefit is that the primebroker would have only one contractual agreement with the global sub-custodian. However, this may create some additional timing and settlement inefficiencies due to the additional of the global sub-custodian.

This model allows for the prime broker to act as counterparty to the AIF, with the depositary performing the custody function. The prime broker will need to move all of the AIF’s assets that are in custody to the depositary at the end of each day through collateral derivatives, also referred to as “the UCITS model.” The depositary shall retain control on the AIF’sassets and therefore can retain liability.

Prime broker

Depositaryholds assets

AIF

Model 3 - Depositary holds all assets and passes collateral to and from the prime broker

11.6 Depositary contract

The appointment of a depositary is to be evidenced bya written agreement. The AIFM directive sets out the contractual particulars by which the depositary is to beappointed which will regulate the flow of information deemed necessary to allow the depositary to perform its functions.

Content of a depositary contract

• Description of the services to be provided by the depositary and the procedures adopted in respect of each asset type the AIF may invest in and the regions in which the AIF intends to invest• Description of how the safekeeping and oversight functions shall be performed and the escalation procedure related to any risk identified• Period of validity, amendment and termination of contract and its procedure• Means, procedures for transfer of information between depositary, AIF or AIFM on its behalf and any third party• Description of delegation of services including a statement that the depositary liability shall not be affected by any delegation of its custody functions unless it has discharged itself of such liability


11.7 Prime broker

AIFMs may make use of prime brokers being either a credit institution, a regulated investment firm or another entity subject to prudential regulation and ongoing supervision that:

• Offers to professional investors services related to finance or execute transactions in financial instruments as counterparty• May also provide other services such as clearing and settlement of trades, custodial services, securities lending, customized technology and operational support facilities

A depositary is to be notified of the contract with theprime broker being appointed. The possibility of transfer and reuse of the AIF’s assets shall also be provided for in such contract and shall comply with the AIF applicable rules. The prime broker shall also be required to report to the depositary.

A depositary may act as prime broker, being counterparty to the AIF, only if it has functionally andhierarchically separated the performance of its depositary function from its tasks as prime broker and any potential conflicts of interest are properly identified, managed, monitored and disclosed to the AIF’s investors.


The calculation shall at least be carried out annually with any breach to the said threshold, temporary or not, to be notified to the competent authority. Breaches to exceed three months are not considered to be of a temporary nature.

12.2 Licensing regime

The MFSA has adopted a licensing regime for which De minimis AIFMs licensed in Malta would need to satisfy and in general relates to the requirements indicated on page 47.

12.1 General conditions

Smaller AIFMs may be exempted from the full-scope ofthe AIFM directive, denoted as De minimis AIFMs provided that the investment management company, based in the EU or EEA, either manages:

• A portfolio of (leveraged) AIFs having a value not exceeding €100m Or• A portfolio of (unleveraged) AIFs having no redemption rights for a period of 5 years from initial investment and have a value not exceeding €500m

The AIFM directive details the minimum conditions andreporting obligations applicable to De minimis AIFMsand will also be subject to licensing requirements imposed by the MFSA. The licensing requirements relate to general, operational, conduct of business andfinancial and reporting provisions.

Investment management companies may be allowed to be treated as AIFMs, at their discretion, if otherwisethey would have been classified as De minimis AIFMs.

12.1.1 Calculation of total value of assets under management

The Level 2 Regulation outlines the method to calculate the assets under management (AuM) for a De minimis AIFM to qualify for the exemption. The AuM is calculated by identifying the portfolio of assetsheld in each AIF managed by the De minimis AIFMwith any derivative position being converted into its equivalent position and not at the mark-to-market value. The absolute value of that equivalent position shall be used for the calculation of the AuM. Any cross-investment between AIFs being managed by thesame De minimis AIFM shall be excluded for this purpose.


EY supports asset managers houses with setting up an application for authorisation,as well as restructuring apart from by defining an efficient operating model, formation of internal policies and proceduresand assisting in the selection of service providers.

12 De minimis AIFM regime


Requirements Description

• A De minimis AIFM is to obtain the consent of the MFSA prior to: • Any changes to the share capital or rights attached• Acquiring 10% or more of (voting) share capital in another entity • Agreeing to sell or merge whole or any part of its undertakings • Appointing Senior Personnel (i.e., Director, compliance officer, MLRO and/or persons engaged in the provision of the investment services) • Maintain records to demonstrate compliance with licensing conditions • Retain records in a medium that allows the storage of information to be easily accessible by the MFSA • Notify the MFSA of any breaches to the licensing conditions

• Establish a place of business in Malta and shall: • Implement and maintain decision-making procedures• Establish adequate systems & internal control mechanism to secure compliance with decisions and procedures• Employ personal with the necessary skills for the discharge of responsibilities assigned to them• Establish effective internal reporting procedures• Maintain orderly records of its business • Implement and maintain business continuity policies and accounting procedures• Be independent from the Depositary of any investment fund managed• Monitor and evaluate the effectiveness of its systems & internal control mechanism on a regular basis• Maintain policies to detect any failures against anti-money laundering legislation• Oversee the performance of any functions being delegated

• Act honestly and professionally in the best interest of clients• Provide accurate information in a comprehensible form to clients• Maintain and operate effective arrangements to mitigate conflicts of interest • Shall not deal as principal with clients unless transactions are dealt on an arm’s length basis

• Initial capital of €125,000 to be maintained on an on-going basis• Submit the audited financial statements, annual audited financial return and auditor’s management letter to the MFSA on an annual basis

General

Organization

Conduct of business

Financial resources & reporting


12.3 Activities of a De minimis AIFM

The activities of a De minimis AIFM are ordinarilylimited to the management of investment funds not classified as AIFs or UCITS. De minimis AIFMs domiciledin Malta are to manage PIFs. A De minimis AIFM based in Malta may also manage UCITS if authorised to act asa UCITS management company in terms of the UCITSdirective. It may also be allowed to provide otherancillary services (i.e., Investment advice and discretionary portfolio management) to retail clients,professional clients and/or eligible counterparties.

12.4 Operational requirements

The operational set-up of a De minimis AIFM is set forth in the figure on page 49.

12.5 Authorization process

The authorization process applicable to De minimisAIFMs is similar to AIFMs (see Section 9).


Figure 3 - Operational set-up of a De minimis AIFM

Investmentcommittee

• Responsible for the overall management

• Monitor activities with licensing requirements

• Monitor compliance with anti-money laundering regulations

• Responsible for the investment management function• Monitoring the activities delegated to portfolio/investment manager

• Delegated with the day-to-day portfolio management

• Portfolio manager — At least one individual ideally to be based locally Or

• Investment manager – Regulated entity authorised to provide investment management services (e.g., MiFID company)

De minimis AIFMboard of directors

MLRO

Third-partyinvestment

manager

Portfoliomanager

Complianceofficer

Or

Com

plia

nce

Inve

stm

ent

man

agem

ent


13.1 Introduction

The corporate tax regime in Malta makes the countrythe ideal location from investment management companies and other service providers to base theiroperations apart from the Maltese tax system for AIFs is highly beneficial for both investment fund andinvestors.

13.2 Taxation on AIFs

Companies incorporated in Malta are considered to be ordinarily resident and domiciled in Malta and are subject to income tax on their worldwide income. Companies not registered in Malta but whose management and control is exercised in or from Maltaare considered to be resident (but not domiciled) in Malta and are taxable on income arising in Malta andon foreign income which is remitted to Malta. The standard rate of Maltese corporate income tax is 35%.There is however, a refundable tax credit system in place, whereby, subject to a number of conditions being satisfied, the recipient of a dividend from a company registered in Malta, can claim a refund of six sevenths of the tax paid by that Maltese company where the dividend is paid out of its Maltese taxable profits. Local tax legislation also provides for a refundof two thirds and fife sevenths depending on the nature of the income being distributed by the company.

Malta also retains the full imputation system wherebythe tax paid by the company will essentially remain a pre-paid tax on behalf of the shareholders’ tax liability.In addition, the Maltese participation exemption exempts any income and/ or capital gains from a “participating holding” from Maltese corporate incometax. The effective Malta tax rate would be of approximately 0% to 5%.

13.3 Taxation on individuals

The incidence of tax will depend on the type of transferwhether the fund is prescribed or non-prescribed, and the tax residence of the investor. Since the withholdingtax on prescribed funds is charged at fund level, anycapital gains made by investors from the redemption, cancellation or liquidation of securities in listed funds are not subject to further tax in the hands of the investor.

In the case of non-prescribed funds, since most of theincome is exempt from tax, distributions are taxed atthe rate of 15% only when made to resident individuals.Other distributions are not taxed in Malta.

13.4 Tax treatment from highly-qualified professionals

Malta has introduced a new tax incentive scheme in 2011 targeting highly-qualified foreign executives. Individuals having their domicile outside of Malta and who are employed in senior positions with a company that is licensed or recognized by the MFSA to conductfinancial business in or from Malta, can benefit from aflat personal income tax rate of 15% on income up to €5m. Any income over €5m will be tax-free.

In order to qualify for this tax incentive, the employeemust earn a minimum of €75,000 per year (adjusted annually in line with the Retail Price Index), amongst other criteria. The highly-qualified persons rules, 2011, provides relevant information on the executivepositions that may benefit from such incentive. EU nationals can benefit for a maximum period of ten years from the reduced tax rate, whereas EEA and Swiss nationals for a period of five consecutive years.

13 Taxation



14.1 Who we are

In Malta, we combine our European and global capability with our local knowledge to deliver a fullrange of services to meet our clients’ business needs.

Our global asset management network encompasses key financial centers in EMEIA (Europe, Middle East,India and Africa), the Americas, Asia-Pacific, and Japan, comprising 13,500 professionals including over 1,000 partners. For several years, the Maltese firm has been investing heavily in staff development, office modernization and information technology. Theprofessionalism of our teams combine to offer ourever-increasing portfolio of clients a seamless servicefocused mainly on the provision of value.

Our combination of talent and resources gives us theability to anticipate and adapt to the rapid and accelerating changes to today’s global economy.

14.2 How we support our clients

Being the most globally connected of the Big Four organizations, operating in four integrated regions — the Americas, EMEIA, Asia-Pacific, and Japan — enables our Malta Asset Management Advisory practice to work effectively on a cross-border basis:

• Moving swiftly to bring together the best teams to serve our clients, working together on key issues, and leveraging our strengths, capabilities, and knowledge irrespective of geographies• Providing seamless, consistent, high-quality services to our financial services clients across EMEIA and globally• Responding quickly and effectively to market developments that impact our clients

• Providing our clients access to our perspective on current and emerging trends, industry issues, and regulation• Providing our clients access to our perspective on current and emerging trends, industry issues, and regulation

14.3 Our services

Our asset management advisory services include regulatory services, audit, financial accounting, and tax covering the complete lifecycle of an investmentfund from concept, through launch, to business as usual, and beyond.

We tailor our approach to the unique needs of each client of the investment fund, asset management andfund service providers industry, serving as a businessadvisor to management while providing the objectivitydemanded by regulators, boards, counterparties, and investors. Our multi-disciplinary approachencompassing regulatory, tax, reporting, and other operational aspects allow us to provide a holistic answer to our clients’ needs.

We can assist you with a wide range of services including:

Asset management advisory services

Assisting fund promoters, asset managers and fund service providers in:

• The conception, design and authorization of your AIFM as well with the application for authorization, restructuring and liquidation• The selection of the relevant service providers• The definition of a market positioning strategy related to the concept and strategy of external distribution channels• The registration of your AIFM with local regulatory authorities

14 How can we help?

Audit services

Our audit service adopts a thorough examination of your organization’s needs to assist you with:

• Ongoing external audit including audit of the regulatory returns• Accounting and financial reporting• Financial accounting advisory• Service organization control reporting

Tax services

Supporting implementation and review of compliance with current and future tax requirements, including:

• Corporate tax advice and reporting• European fund tax reporting services• Tax compliance, including periodic submission of tax returns and tax computations • VAT compliance and advisory services• Local and international tax compliance, reporting and planning

Listing services

• Feasibility analysis and determination of the listing process and requirements • Support with the selection of a local listing agent, calculation agent, and any other service providers Valuation and business modeling services

• Valuation support services in the context of the AIFM directive• Valuation services including model review and OTC derivative valuation• External opinion as external valuer• Select valuation services (e.g., selected parameters)• Impairment testing• Model building• Model validation and review



Definition

Directive 2011/61/EC of the European parliament and of the council of 8 June 2011 on Alternative Investment Fund Managers Including the commission delegated regulation (EU) No 231/2013, commissionimplementing regulation (EU) No 447/2013 and commission implementing regulation (EU) No 448/2013

A collective investment scheme, including sub-fundsthereof, 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 UCITSscheme in terms of the UCITS directive

A legal person whose regular business in managing ofAIFs in terms of the AIFM directive

A fund manager which: (i) either directly or indirectly manages AIFs whose assets under management, including any assets acquired through use of leverage,in total do not exceed a threshold of €100m; or (ii) either directly or indirectly manages AIFs whoseassets under management in total do not exceed a threshold of €500m when the portfolios of AIFsconsist of AIFs that are unleveraged and have noredemption rights exercisable during a period of 5 years following the date of initial investment in eachAIF

A member state of the EU including Iceland, Liechtenstein and Norway

A member state of the EU, being each of Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania,Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom

Term

AIFM directive

Alternative Investor Fund or AIF

Alternative Investment Fund Manager or AIFM

De minimis AIFM

EEA member state

EU member state

15 Glossary

Definition

A person/ entity to undertake the valuation task being independent from the AIFM or AIF and any other persons with close links to the AIF or the AIFM

Those categories of staff, including seniormanagement, risk takers, control functions and any employee receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers, whose professional activities have a material impact on the AIFM’s risk profile or the risk profiles of the AIFs it manages

Investment Services Act, 1994

Investment services rules for alternative investment funds issued by the MFSA

Commission Delegated Regulation (EU) No 231/2013of 19 December 2012 supplementing directive 2011/61/EU

Directive 2004/39/EC of the European Parliamentand of the council of the 21st April 2004 on markets in financial instruments amending council directive 85/511/EEC and 93/6/EEC and directive 2000/12/EC of the European parliament and of the council and repealing council directive 93/22/EEC

Malta Financial Services Authority

An investor who possesses the experience, knowledge and expertise to make its own investment decisions and properly assess the risks that it incurs including:Entities authorized or regulated to operate in thefinancial markets; large undertakings satisfying atleast two of the following criteria: Balance sheet total€20m; net turnover €40m; own funds €20m; and/ornational and regional governments, public bodies thatmanage public debts, central banks, international and supranational institutions (e.g., World bank)

Term

External valuer

Identified staff

Investment services act/Act

Investment services rules

Level 2 regulation

MiFID

MFSA

Professional investor


Definition

An investor who is not a professional investor

Units in an investment company, units in a unit trust, or any other form of representation of the rights and interests of participants in a CIS.

A legal entity set up for a specific purpose by another entity (i.e., the originator)

An investment fund, including sub-funds thereof,falling within the scope of and authorised in terms of the UCITS directive.

Directive 2009/65/EC of the European parliamentand of the council of 13 July 2009 on the coordination of laws, regulations and administrativeprovisions relating to undertakings for collectiveinvestment in transferable securities (UCITS) (recast)

Term

Retail investor

Units

Special purpose vehicle or SPV

UCITS

UCITS directive


• Albanian Financial Supervisory Authority • Alberta Securities Commission, Canada • Australian Securities and Investments Commission • Autorité des marchés financiers, Québec • Bermuda Monetary Authority • Board of Governors of the Federal Reserve System, United States of America • British Columbia Securities Commission, Canada • British Virgin Islands Financial Services Commission • Capital Markets and Securities Authority of Tanzania • Capital Markets Authority of Kenya • Cayman Islands Monetary Authority • Comissão de Valores Mobiliários, Brazil • Commodity Futures Trading Commission, United States of America • Conseil Déontologique des Valeurs Mobilières, Morocco • Dubai Financial Services Authority • Financial Services Agency of Japan • Financial Services Commission of Mauritius • Financial Supervision Commission of the Isle of Man • Guernsey Financial Services Commission • Hong Kong Securities and Futures Commission • Israel Securities Authority • Jersey Financial Services Commission • Labuan Financial Services Authority • Ministry of Agriculture, Forestry and Fisheries of Japan • Ministry of Economy, Trade and Industry of Japan • Monetary Authority of Hong Kong • Monetary Authority of Singapore • National Banking and Securities Commission of the United Mexican States • Office of the Comptroller of the Currency, United States of America • Office of the Superintendent of Financial Institutions, Canada • Ontario Securities Commission, Canada • Republic of Srpska Securities Commission • Securities and Commodities Authority of the United Arab Emirates • Securities and Exchange Board of India • Securities and Exchange Commission, United States of America • Securities and Exchange Commission of Pakistan • Securities and Exchange Commission of the Republic of Macedonia, Former Yugoslav Republic of Macedonia • Securities and Exchange Commission of Thailand • Securities Commission of Malaysia • Securities Commission of the Bahamas • Securities Commission of the Republic of Montenegro • Swiss Financial Market Supervisory Authority (FINMA)

Annex 1 - Cooperation agreements for the purpose of the AIFM directive

16 Annex


Cont

acts Asset Management

Ronald Attard [email protected]

Karl Mercieca [email protected]

Assurance

Anthony Doublet [email protected]

Christopher Portelli [email protected]

Tax

Christopher Naudi [email protected]

Robert Attard [email protected]

Valuation and Business Modeling

Chris Meilak [email protected]

Ernst & Young LimitedRegional Business Centre Achille Ferris Street Msida MSD 1751 Malta

Tel: +356 2134 2134 Fax: +356 2133 0280 Email: [email protected]

Furt

her r

efer

enceFor further information, we recommend our technical fund

guide entitled “The Malta Professional Investor Funds — A technical guide.” The guide provides an introduction to one of Malta’s primary investment fund structure, how it fits within the scope of the Alternative Investment Fund Managers directive and a summary of the regulations to the formation and operation of such investment funds in Malta.

For further information, we recommend our technical fund guide entitled “The Malta Alternative Investment Funds — A technical guide.” The guide provides an introduction to Malta as a center for investment funds structured as an Alternative Investment Fund, how it fits within the scope of the Alternative Investment Fund Managers directive and a summary of the regulations to the formation and operation of such investment funds in Malta.

For further information, we recommend our technical fund guide entitled “The Malta UCITS Funds — A technical guide.” The guide provides an introduction of the UCITS brand and how it fits within the scope of the UCITS directive. It also provides an overview to Malta as a center for these types of investment funds, a summary of the regulations to the formation and operation of UCITS brand investment funds in Malta.

The Malta UCITSFund

A technical guide

November 2015

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The Malta ProfessionalInvestor Funds

A technical guide

January 2016

© 2

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The Malta AlternativeInvestment Fund

A technical guide

November 2015

© 2

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EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisoryservices. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to allof our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, ofthe member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limitedby guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

© 2016 EYGM Limited. All Rights Reserved.

ED None

This material has been prepared for general information purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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The Malta Alternative Investment Fund Manager - EY · PDF fileThe local industry continues to enjoy the commitments of ... safekeeping and administration in relation to shares