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The Malta AlternativeInvestment FundsA technical guideJune 2016

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

Alternative Investment Funds are fast becoming one of Malta’s primary investment fund vehicle for all types of professional and sophisticated investors, which funds are a direct product of the AIFM directive. This directive aims to establish commonrequirements for the authorization and supervision of AIFs. It alsoprovides a harmonized regulatory framework for the activities within the EU of all AIFs.

A benefit of AIFs is the availability of marketing passportingprovisions introduced by the AIFM directive which substitutes theexisting EU member state’s national private placement regimeswhen marketing AIFs to professional investors within the EU. This directive has adopted a “one size fits all” approach under which a single set of rules shall govern AIFs which are not covered by the UCITS directive.

The local industry continues to enjoy the commitments of the localgovernment as well as the Malta Financial Services Authority which strive 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 AIF regime and how it fits withinthe scope of 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 wemay 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 Funds

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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 Altrnative investment funds

02 Requirements of an AIF

03Investment restrictions04Key service providers05Internally managed AIFs06Authorization07

Salient features of AIFs08Marketing under the AIFM directive09AIF structures10Transparency and reporting obligations11Admissibility for listing12Depositary13Valuation under the AIFM directive14

Setting up and running an AIF

4

6

8

14

18

22

30

32

34

38

42

46

48

54

Taxation15 56

How can we help you?16 58

Glossary17 60

Annex18 63

Malta’s key success factors 2

2 | The Malta Alternative Investment Funds

• 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 Funds | 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


1 Directive 2011/61/EC of the European parliament and of the council of 8 June 2011 on Alternative Investment Fund Managers and amending directive 2003/41/EC and 2009/65/EC and regulations (EC) No 1060/2009 and (EU) No 1095/2010.

1.2 An investment fund adopted to any type of investment fund project

AIFs include:

• Hedge funds• Real estate funds• Loan funds (see Section 10.4)• Thematic funds such as AIF: • Investing in specific segments, such as environment • Investing in collectibles, such as luxury goods • Investing in intangible assets, such as patents • Meeting specific criteria, such as responsible investment criteria• Multiple-asset class AIF: AIF with multiple of sub-funds or compartments investing in different asset classes, sometimes with interlinked sub-funds or compartments (see Section 3.2)• Funds of AIF

1.1 The Alternative investment funds regime in brief

An Alternative Investment Fund (AIF) is a pan-European regulated branded investment fund forprofessional and sophisticated investors.

Some key characteristics of the AIF regime:

• A regulated EU structure under the Alternative Investment Fund Managers directive (AIFM directive)1

• Suitable for all investment strategies — including traditional and alternative — and all asset classes• Five different classifications — retail, experienced, professional, qualifying and extraordinary — depending on the proposed target investors (see Section 3.3)• Light diversification and leverage rules depending on target investor (see Section 4.1)• Single fund or multi-fund structure, combining different investment strategies or asset classes in different sub-funds• Possibility of internally managed (self-managed) AIFs (see Section 6)• Availability of marketing passporting of AIFs to all EU member states (see Section 9)

EY supports asset managers and investmentfund houses through the choice of investmentfund vehicle, the analysis of target markets,the definition of an efficient operating model and distribution strategy, and the selection of service providers.

01 Alternative investment funds


policy for the benefit of those investors, and which does not qualify as a UCITS in terms of the UCITSdirective.4

Every licence for an AIF is subject to standard licence conditions which are set in full in the investmentservices rules for Alternative Investment Funds.

2.2 Implications under the AIFM directive

The AIFM directive is the outcome of the recent financial difficulties experienced which have been viewed as being amplified by the activities of Alternative Investment Fund Managers (AIFMs). Itaims to establish common requirements for theauthorization and supervision of AIFMs and AIFs. It also provides a harmonized regulatory framework forthe activities within the EU of all AIFs including AIFMs that are not registered in any EU or EEA member state (non-EU AIFMs).

Its regulations have been transposed in the Act and constituent rules and regulations, and provide a harmonized regulatory framework among the EU member states for the regulation and supervision ofinvestment funds (excluding UCITS). It specifies the core features of such type of investment funds andimposes stringent regulation on AIFs and AIFMs suchas remuneration provisions and the requirement to appoint additional service providers (e.g., a depositary)however it has also introduced marketing passporting provisions for AIFMs to market AIFs to professional investors within the EU jurisdiction, which will eventually replace the current national private placement regime. This directive has adopted a “one size fits all” approach under which a single set of rulesshall govern AIFMs of AIFs which are not covered by the UCITS directive.

2.1 Investment services act

The Maltese Investment Services Act (the Act) provides the statutory basis for regulating investmentfunds constituted in or from Malta.2

AIFs are a special class of investment funds which fall within the provisions of the Act.3 The primary objective of an AIF must be the collective investment of capital acquired by means of an offer of units for subscription, sale or exchange and which has the following characteristics:

• The investment fund or arrangement operates according to the principle of risk spreading and either• The contributions of the participants and the profits or income out of which payments are to be made to them are pooled Or• At the request of the holders, units are or are to be re-purchased or redeemed out of the assets of the investment fund or arrangement, continuously or in blocks at short intervals Or• Units are, or have been, or will be issued continuously or in blocks at short intervals

An AIF that is not sold to retail investors may not havethe characteristic listed in paragraph (a) and shall onlybe deemed to be an investment fund if the AIF, in specific circumstances as established by regulationsunder the Act, is exempted from such requirement and satisfies any other conditions that may be prescribed.

The Act also classifies AIFs as investment funds whichraises capital from a number of investors, with a viewto investing it in line with a pre-defined investment

2 Investment Services Act, 19943 An investment fund, whether of the unit trust or open-ended investment company variety, falling within the scope of and authorised in terms of the UCITS directive.4 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) and includes any implementing measures that have been or may be issued thereunder.

02 Requirements of an AIF


In terms of the AIFM directive, the following undertakings shall not be considered as AIFs:

• A holding company• An institution for occupational retirement provision which is covered by directive 2003/41/EC• Employee participation schemes or employee savings schemes• Securitization special purpose vehicles (SPV)• Insurance contracts and joint ventures• Supranational institutions• National central banks• National, regional and local governments and bodies or institutions which manage funds supporting social security and pension systems

2.3 The investment services rules for AIFs

Every license for an AIF is subject to standard license conditions which are set out in full in the investment services rules for Alternative Investment Funds issued by the MFSA. The investment services rules (the rules) describe the basic principles to which license holders must adhere in the provision of investment services or in the operation of an investment fund. In certain circumstances, the standard requirements can be tailored to meet specific circumstances. The rules also include the necessary forms to be completed by applicants for an investmentfund license.


articles of association; no more than 15% of theincome derived from securities are retained by thecompany.

SICAVs and INVCOs can operate as a multi-fundstructure, whereby the share capital may be divided into different classes of shares, with each class ofshares representing a distinct sub-fund of the AIF.

3.1.2 Contractual funds

Contractual funds are governed by the Act established by means of a deed of constitution entered into for such purpose by the manager and the custodian of such an AIF. They are not deemed to be a separate legal entity since they are established through a contractual obligation and can be licensed as a multi-fund or multi-class AIF. A contractual fund may set up one or more special purpose vehicle, which would be a company and through which the AIF maygain access to double taxation treaties.

3.1 AIFs structures

An AIF can be structured as an investment company (SICAV or INVCO), a contractual fund, unit trust or as a limited partnership.

3.1.1 Investment company

AIFs may be set up as limited liability companies andmay be established as open-ended investmentcompanies (SICAVs) or closed-ended investment companies (INVCOs).

A SICAV may be formed as a public or private company with variable share capital and is governedby the Companies Act.5, 6 A private company is restricted to the extent to which it can transfer sharesand is prohibited from issuing any invitation to the public to subscribe to any of the shares or debenturesof the company whilst a public company may offer itsshares or debentures to the public. SICAVs allow forthe introduction of additional investors without havingto wait for the liquidation of an existing investor. In anopen-ended AIF, the value of a share reflects the Net Asset Value of the AIF. SICAVs can be formed as Incorporated Cell Companies, in terms of the Companies Act having each incorporated cellwithin an incorporated cell company as a limited liability company endowed with its own legalpersonality.7

INVCOs are governed by the Companies Act and are public companies with a fixed share capital and its business is restricted to the investment of their fundsmainly in securities, or operating as a retirement fund.8

The activities of an INVCO are further restricted by the following requirements: the company’s holdings in any other company not being an investment companywith fixed share capital, does not exceed 15% by value of its investments; the distribution of the company’scapital profits is prohibited by its memorandum and

5 Investment Companies with Variable Share Capital6 Companies Act (Chapter 386 of the Laws of Malta)7 Companies Act (SICAV Incorporated Cell Companies) Regulations, 20108 Investment Companies with Fixed Share Capital

EY supports asset managers and investmentfund houses through the creation of an investment fund structure that meets the regulatory requirements and tax specifications.

03 Setting up and running an AIF

3.1.3 Unit trusts

AIFs can also be constituted by a trust deed between amanagement company and a trustee. They are governed by the Trusts and Trustees Act which Act enables both residents and non-residents to set up various trust structures such as constructive trusts,discretionary trusts, fixed interests trust and purpose trust.9 Trustees operating in Malta must be approved by the MFSA whilst trusts established in foreign jurisdictions may be recognized in Malta and it is therefore possible to set up an investment fund as a foreign law trust.

3.1.4 Limited partnerships

Limited Partnerships benefit from a similar legislative framework to the one offered to SICAVs and may be constituted as multi-class partnerships or as multi-fundpartnerships and the capital of the partnership can be divided into shares. Partnerships must have a registered office in Malta where they keep the personal information of all limited partners. In addition, a limited partnership requires general partners who are fully liable and both partners can be limited liability companies formed in any jurisdiction. Limited partnerships are governed by the Companies Act.

3.2 Multi-fund UCITS and unit classes

Multi-fund AIFs (otherwise known as umbrella funds) are single legal entities comprising two or more sub-funds or compartments, each with differentfeatures such as different investment policies and objectives, different asset class investments and different target clients.

Multi-fund AIFs may be created provided the constitutional documents expressly permit it and the offering documentation specifies the investment policy,

objectives and restrictions specific to each sub-fund. The multi-fund AIF may also elect, subject to relevant disclosure in its constitutional documents, to have the assets and liabilities of each sub-fund comprised in the AIF treated for all intents and purposes of law as a patrimony separate from the assets and liabilities ofeach other sub-fund of the AIF.

Investors may purchase shares or units in sub-funds which have different investment policies, objectives and restrictions, segregated assets and accounting records. Investors may, if permitted by the constitutional document or offering document, “switch”all or part of their investment from one compartmentto another, in principle without incurring significant charges. Promoters may consequently retain in the same AIF those investors who wish to change their investment strategy.

Multiple share or unit classes may be created within anAIF or, in the case of a multi-fund AIF, within a sub-fund.

While the investment objectives, policies and restrictions are defined at the level of the AIF or the sub-fund, share or unit classes permit the implementation of features, generally customized to one or more specific needs or preferences, such as a specific fee structure, currency of denomination, hedging policy, dividend policy, investor type or country of distribution.

Identification numbers (such as International SecurityIdentification Number (ISIN)) are attributed at the level of the share or unit class.

The graphic design featured on the following pageillustrates the flexibility of a multi-fund AIF.

9 Trust and Trustees Act (Chapter 331 of the Laws of Malta)



Figure 1: Schematic of a possible multi-fund, multiple share or unit class structure10

US equity UK equity Europe bonds Eurolong/short

Fee structure(combination ofentry, exit and

ongoing)

Currency (e.g.,€,US$, JPY) or hedged

Dividend policy(distribution orcapitalization)

Investor type (e.g.,retail, professional

etc.)

Sub-funds, each with specificfeatures

Share or unit classes, each withspecific features

AIF Multi-fund AIF

Europe equity

10 This graphic is designed to illustrate a multi-fund compartment, multiple shares or unit class structure and it is not designed to represent a typical structure.

Retail investor

Professional investor

Experienced investor

Type of AIF Conditions

3.3 Eligibility of investors

Investors in AIFs must satisfy one of the following conditions depending on the type of investor being targeted by the AIF:

• Person not classified as a professional investor

• Person having the experience, knowledge and expertise to make own investment decisions and properly asses the risks involved• Entities authorised or regulated to operate in the financial markets• Large undertakings satisfying at least two of the following criteria: balance sheet total €20m; net turnover €40m; own funds €20m• National and regional governments, public bodies that manage public debts, Central Banks, international and supranational institutions (e.g., World Bank)

• Person having at least one year of relevant work experience in a professional position in the financial sector or a person who has been active in such types of investments• Reasonable experience in the acquisition or disposal of funds or instruments with similar risk profiles to that of the proposed AIF• Having carried out investment transactions of a significant size at a certain frequency• Any other appropriate justification• Other institutions whose main activity is to invest in financial instruments including entities involved in securitization of assets or financing transactions


Qualifying investor

Extraordinary investor

Type of AIF Conditions

• Person (or entity) must have net assets in excess of €750,000. If the AIF is established as a trust, this condition applies to the net value of the trust’s assets. Individuals must meet this threshold either on their own, or jointly with their spouse. This is a mandatory condition• Reasonable experience in investment decisions on funds with a similar risk profile and in instruments of the proposed AIF• A senior employee or director of service providers to the AIF• A body corporate or partnership wholly owned by persons or entities satisfying any of these criteria that is used as an investment vehicle by such persons or entities• An entity with at least €3.75m under discretionary management investing on its own account• The investor is a AIF promoted to qualifying or extraordinary investors

• Person (or entity) must have net assets in excess of €7.5m. If the AIF is established as a trust, this condition applies to the net value of the trust’s assets. Individuals must meet this threshold either on their own, or jointly with their spouse. This is a mandatory condition• The investor is a AIF promoted to extraordinary investors• A senior employee or director of service providers to the AIF• A body corporate or partnership wholly owned by persons or entities satisfying any of these criteria that is used as an investment vehicle by such persons or entity

3.4 Regulatory characteristics and requirements

The following table presents a summary of other regulatory characteristics and requirements of AIFs

AIFs targetingexperienced investors

AIFs targetingqualifying investors

AIFs targetingextraordinary investors

Regulator

Authorization/ licensing procedure

Structures available

Eligible investors

Maximum number ofshareholders

Minimum number of shareholders

Minimum investment

MFSA

Prior to setup

• Investment companies• Limited partnerships• Unit trust• Contractual fund(Refer to Section 3.1)

Refer to Section 3.3

No limit

No minimum

€10,000/ $10,000 orequivalent

MFSA

Prior to setup



No limit

No minimum

€75,000/ $75,000 or equivalent

MFSA

Prior to setup



No limit

No minimum

€750,000/ $750,000 or equivalent

AIFs targetingexperienced investors

AIFs targetingqualifying investors

AIFs targetingextraordinary investors


Use of sub-funds

Multi share classes

Investment restrictions

Leverage restrictions

Cross Sub-Investments

Fees/expenses including performance and advisoryfees

Transferability of shares orunits

Information to investors

Regulator due diligencechecks

Listing possible

NAV calculation

Subscription and redemption price

Yes

Yes

Specific investmentrestriction (refer to Section 4.1)

Up to 100%

No

No restrictions given thatthey are duly disclosed inoffering document

• Generally freely transferable• Subject to informed investor qualifications

Offering documentation and financial statements

• Directors• Shareholders• Service Providers

Yes

NAV required

Subscription andredemption conditions laid down in the constitutionaldocuments

Yes

Yes

No restrictions – subject togeneral diversification requirements (refer to Section 4.1)

No

Yes• Allowed to invest up to 50% of its assets into any sub-fund within the same AIF• The target sub-fund/s may not themselves invest in the sub-fund which is to invest in the target sub-fund/s • When applicable avoid duplication of fees

No restrictions given that they are duly disclosed inoffering document


Offering documentation andfinancial statements


Yes

NAV required

Subscription and redemption conditions laiddown in the constitutional documents

Yes

Yes

No restrictions – subject togeneral diversification requirements (refer to Section 4.1)

No

Yes• Allowed to invest up to 50% of its assets into any sub-fund within the same AIF• The target sub-fund/s may not themselves invest in the sub-fund which is to invest in the target sub-fund/s • When applicable avoid duplication of fees

No restrictions given that they are duly disclosed inoffering document


Offering documentation andfinancial statements


Yes

NAV required

Subscription and redemption conditions laiddown in the constitutional documents

4.1 Investment restrictions

The MFSA’s rules for AIFs provides relevantinformation and clarifications on the investmentrestrictions that must be adhered to by AIFs depending on the type of investor being targeted.

Retail investors

The restrictions are to be complied with by each sub-fund in a multi-fund AIF structure.

The following is a summary of the investment restrictions applicable to AIFs targeting the differenttypes of investor:

Restriction

• The AIF may hold ancillary liquid assets irrespective of its investment objective and policy

• Up to 10% of its assets in securities which are not traded in or dealt on a market which: the depositary and the AIFM have agreed upon; is listed in the AIF’s offering documentation; is regulated, operates, recognized and open to public; has adequate liquidity and adequate transmission of income and capital and is not subject to MFSA restrictions• Up to 10% of its assets in securities issued by the same body. Derogation may be obtained to raise the limit to 35% or 100% subject to certain conditions• Up to 10% of any class of security issued by a single issuer• Up to 5% of the value of the AIF in nil paid or partly paid shares and subscribe for placing or underwriting provided certain restrictions are adhered to• The AIF is not to acquire sufficient instruments that give it the right to exercise control over 20% or more of the share capital or votes of a company or to enable it to exercise significant influence over the management of the issuer

• Up to 10% of the assets kept on deposit with any one body. This may be increased to 30% in case of money deposited with an EU credit institution or any other credit institution approved by the MFSA. Derogation may be obtained to raise the limit to 35% subject to certain conditions

Instrument

Ancillary liquid cash

Securities

Deposits with credit institutions


EY supports asset managers and investment houses through the structure and choice ofthe optimum investment fund structure coherent with the relevant investment objectives, policies and restrictions requirements.

04 Investment restrictions


Retail investors

Restriction

• May invest up to 20% of assets in any single investment fund• The AIFM shall waive all charges which it is entitled to charge for its own account in relation to subscription and redemption of units in the circumstances were the AIF invests in other investment funds managed by the same AIFM • Any commission received by the AIFM by virtue of an investment in Units of other investment funds on behalf of the AIF shall be paid into the AIF

• The AIF shall only hold FDIs or OTC-derivative instruments for the purposes of efficient portfolio management • Maximum potential loss to one counterparty in an OTC-derivative transaction is limited to 5% of the value of the AIF. This can be increased to 10% in case of the counterparty being a credit institution. Derogation may be obtained to raise the limit to 35% subject to certain conditions• Netting of the mark-to-market value of the OTC-derivative positions with the same counterparty is allowed only if the AIF has a contractual netting agreement with the counterparty• Derivatives performed on an exchange have a clearing house shall be deemed to be free of counterparty risk• The AIF is to hold the underlying instrument as cover in case where it holds an FDI which requires cash or physical settlement on maturity or exercise

• The AIF may not carry out uncovered sale of securities or other financial instruments

• The AIF may borrow up to 10% of its assets on a temporary basis subject to risk exposure not exceeding 110% of its assets

• The AIF cannot enter into cross sub-fund investments (if case the AIF is established as a multi-fund)

Instrument

Units in other investment funds

Financial derivative instruments

Uncovered sales

Borrowing

Others


Experienced investor

Restriction

• The AIF may hold ancillary liquid assets irrespective of its investment objective and policy

• Up to 20% of assets in securities issued by the same body. Limit may be increased to 35%/ 100% in the case where the money market instrument is issued or guaranteed by authorities in OECD or EU/EEA member states/EEA credit institutions• Limit may be increased to 35% in case of transferable securities traded or dealt on a regulated market

• Up to 30% of assets in money market instruments issued by the same body. Limit may increase to 35%/ 100% in case where the money market instrument is issued or guaranteed by authorities in OECD or EU/EEA member states/ EEA credit institutions

• Up to 35% of assets in deposits held with a single body

• No restriction applicable with respect to investment in a single investment funds provided it qualifies as a UCITS or other open-ended investment funds subject to the equivalent risk spreading requirements applicable to the AIF• Up to 30% of assets in any single investment not qualifying as UCITS or as other investment funds defined in the preceding point• The AIF is to invest in at least five hedge funds in case the AIF is a fund of hedge funds

• Exposure to a single counterparty limited to 20% of total assets; such exposure may be reduced if acceptable collateral is provided by the relevant counterparty • Netting of the mark-to-market value of the OTC-derivative positions with the same counterparty is allowed only if the AIF has a contractual netting agreement with the counterparty

• The Master AIF shall satisfy the leverage restrictions of the AIF in case it is setup as a Feeder Fund

• Up to 25% of assets – directly or indirectly (through an SPV) – in any one single immovable property• The AIF is to invest in at least five different properties in case it invest solely in immovable property • The AIF may invest up to 100% of total assets in any single property fund or SPV provided such fund or SPV complies with the investment, borrowing and leverage conditions applicable to AIFs targeting Experienced investors

• Allowed only if considered to be appropriate and in the best interest of investors and entails and acceptable levels of risk and investment is made in accordance with good market practice and involves the provision of adequate collateral

• Direct borrowing for investment purpose/ leverage via the use of derivatives is limited to 100% of the value of the AIF

• Aggregate maximum exposure to a single issuer/counterparty (through securities, money market instruments, deposits and OTC-derivatives) is limited to 40% of total assets• The AIF cannot enter into cross sub-fund investments (in case the AIF is established as a multi-fund)

Instrument

Ancillary cash

Securities

Money market instrument

Deposits

Units in investment funds

Financial derivative instruments

Feeder fund

Immovable property

Repurchase/reverse repurchase and stocklending or borrowing arrangements

Leverage

General


Professional investor/qualifying investor/extraordinary investor

Restriction

• The AIF may invest in units of one or more sub-funds within the same AIF subject to this being permitted in the constitutional documents and the Offering Memorandum of the said AIF• A sub-fund is allowed to invest up to 50% of its assets in another sub-fund within the same AIF• The target sub-fund may not itself invest in the sub-fund which is to invest in the target sub-fund• Where the AIFM of the sub-fund and the AIFM of the target sub-fund is the same (or in case affiliated), only one set of management (excl. performance fees), subscription and redemption fees shall be applicable

Instrument

Cross subfund investment

5.1 Typical organization of an AIF

This section outlines the typical organization of an AIF, summarizes the roles of the main service providers and outlines the factors impacting the choice

An AIF which has appointed an external assetmanager


of organizational model. As part of the formationprocedures of an AIF, several service providers mustbe appointed. The following diagrams show illustrative examples (however other models may be possible) of the organization of an AIF.

An AIF which has not appointed an external asset manager11

EY supports asset managers and investment fund houses with the selection of service providers having consideration to the target assets and organizational model of the investment fund.

11 Kindly refer to Section 6.0 for detailed information on internally managed/ self-managed AIFs.

Depositary

Prime broker

Auditor

Fund administrator,registrar, transfer

agent

Investment committee

Portfolio managersor

investment company

Depositary

Prime broker

Auditor

Fund administrator,resgistrar, transfer

agent

Third-partyinvestment manager

Investment advisors

Investment fund(board of directors)

Investment advisors

Valuer Asset manager

ValuerInternally managed

AIFboard of directors

05 Key service providers


The principle duties of the service providers are as follows:

5.2 Asset manager

An AIF may only appoint an AIFM, it terms of the AIFMdirective, as its asset manager to be responsible for the management and investment of its assets. TheAIFM is a delegate of the AIF and must be duly authorised to provide such services.

Management services of an AIFM include, in general, investment management, administration and marketing. In practice, many AIFMs delegate some ofthese functions. It shall however remain responsible for overseeing and supervising all delegated functions.

An AIFM may delegate, in part or full, the investmentmanagement function to a third-party investment company provided it is authorised to undertake such activity (e.g., an EU MiFID asset manager). The administrative function is ordinarily also delegated toan Administrator (see section 5.5)

The AIFM need not be domiciled and regulated where the AIF is domiciled. Not all AIFs are required to appoint an external asset manager (see Section 6).

5.3 Investment advisor

The investment advisor advices the AIF’s asset manager respect of transactions relating to financial instruments. The investment advisor will not have anydiscretion with respect to the investment and re-investment of the assets of the AIF.

AIFs ordinarily do not appoint an investment advisor. Furthermore, the investment advisor need not be based in the same jurisdiction as the AIF, but shall

have sufficient financial resources and liquidity at its disposal to enable it to conduct its business.

5.4 Depositary

The AIFM must appoint a single depositary for each AIF it manages. The depositary shall either be:

• 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 directive

The depositary need not to be domiciled in thejurisdiction of the AIF, at least until 22 July 2017.12

It must be independent from the asset manager and shall not be engaged as the valuer. The depositary may also act as prime broker, acting as counterparty to the AIF, subject to certain conditions being met.

While safekeeping of assets in which the AIF invests is the core function of the depositary, this party is also responsible for overseeing the AIFM compliance with the AIF’s constitutional documents and rules and to monitor the AIF’s cash flows.

The safe-keeping task is the only task that a depositary may delegate.

12 MFSA negotiated the derogation to Article 61(5) of the AIFM directive

5.5 Administrator

Administrative services in relation to an AIF may be carried out by an administrator. The administrator’s role ordinarily covers, amongst other things:

• Liaison with shareholders• Calculation of the net asset value• Reconciliations• Pricing the investment portfolio• Payment of bills• Preparation of financial statements• Fund accounting• Performance reporting• Compliance reporting• Preparation of contract notes

The administrator ordinarily also provides registrar and transfer agency services.

The role of the administrator may be carried out either by the AIFM or alternatively may be delegated to a separate entity which provides fund administrative services to investment funds.

5.6 Prime broker and counterparties

The AIF or the AIFM on behalf of the AIF may appointone or more prime brokers or counterparties. Before entering into relevant agreement with a prime broker or counterparty, the AIF or the AIFM on behalf of the AIF shall exercise due skill, care and diligence on an on-going basis.

The depositary may be appointed as prime broker provided that it must separate the custody activities from its brokerage activities.

5.7 Valuer

The AIFM or the AIF, if internally managed, shall be responsible for the valuation of the assets of the AIF it manages.

Such valuation task may either be performed by:

• An external valuer being independent from the AIFM or AIF and any other persons with close links to the AIF or the AIFMOr• The AIFM itself provided that safeguards are implemented by the AIFM to ensure that the task is independent from the portfolio management and the remuneration policy

5.7 Auditor

The AIF shall appoint an auditor approved by theMFSA. The AIF shall obtain a signed letter of engagement from its auditor outlining the extent of the auditor’s responsibilities and the terms of appointment.



As such, the AIF may consider either of the following options:

• To integrate a fully fledged investment management function Or• To delegate either the investment management or risk management function to a third-party while retaining the other function

6.1 Introduction

An AIF may opt not to appoint an AIFM and thus the AIF will be carrying out internally the investment management function. In this regard, the AIF shall at least perform the portfolio management and risk management functions.

For the purpose of this section the term “AIF” shall be understood to refer to “internally managed AIF”. The term “investment management” shall refer to the “portfolio management and risk management functions”.

6.1 Operational arrangements

An AIF is to organise and control its affairs in a responsible manner and is to have adequate operational, administrative and financial procedures and controls to ensure compliance with all regulatoryrequirements.

The AIF would also need to have adequate and appropriate human and technical resources that arenecessary for the proper management and to effectively perform its activities.

6.1.1 Investment management

The AIF’s board of directors would be responsible forthe investment management function. In undertaking its activities, the AIF is to functionally separate thefunctions of portfolio management and riskmanagement. In that persons ordinarily engaged in either of the said functions are not to be supervisedby those responsible for the other operating units norare they to be engaged in other operating activities. Compensation to such persons should also be related solely to the performance of the function involved in.

EY supports asset managers and investmentfund houses with the organizational modeling,internal structuring and policies as well as anydelegation arrangements for internally managed investment funds.

06 Internally managed AIFs


Model 1: Integrated investment management function under this model, the AIF carries out both functions internally.

IM report

Investmentmanagement

function

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 managers are 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 portfolio management/risk monitoring report

External parties providing support to the risk management function

Responsible for the portfolio management and risk management function

How is the principle of “proportionality” applied?

The “proportionality” principle may be invoked in relation to the application of certain provisions.13 In general this means that the MFSA shall take into account the nature, scale and complexity of the activities of the AIF when considering whether the AIF, despite any derogation, is able to comply with certain requirements.

13 We have, in general, indicated throughout the technical guide where the proportionality principle applies


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

In this model, the AIF undertakes the risk management function through its own staff and delegates the portfolio management to a third-party, for example an EU-based MiFID compliant investment company.

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 reports

AIF EU MiFID entitiesor authorized delegate

The AIF is to establish procedures for the effective transfer of information to and from the delegate in line with the delegation provisions. External parties may also be appointed to provide support to the AIF risk management function. The board would still be responsible for both portfolio management and risk management functions. A variant to this model would be for the delegation of the risk management function instead of the investment management function.

RM reports

6.1.1.1 Portfolio management

The roles and duties pertaining to the portfolio management function are as follows:

6.1.1.2 Risk management

An AIF must also operate within a robust risk management framework to adequately manage riskalong its investment objectives and strategies. The AIF is to establish and maintain a permanent risk management function which proceedings are to be governed by a dedicated risk management policy. Therisk management function shall be functionally and hierarchically separated from operating units includingthe portfolio management, or, at least, specificsafeguards against conflicts of interest shall beimplemented to allow an independent performance of risk management activities.

The MFSA shall adopt a risk-metric approach proportional to the AIF’s size, internal organization and complexity of its activities in case the risk management function is not hierarchically and functionally independent from other units.

When is the risk management function “functionallyand hierarchically separated”?

• Individuals engaged in the risk management function are not supervised by those responsible for the operating units nor involved in such other units of the AIF. • Compensation of individuals involved the risk management function is related solely to such function. • The separation is ensured up to the board of directors of the AIF.

Board of directors

Portfoliomanager

EU MiFIDinvestmentcompany

Or

Investmentcommittee

The investment committee shall:• Monitor and review the investment policy of the AIF• Establish and review guidelines for the investment by the AIF• Issue rules and asset selection criteria• Setting up portfolio structure and allocation parameters• Make recommendations to the board of directors

Responsible for the overall management of the assets of the AIF

• Delegated the day-to-day portfolio management• Undertake the day-to-day portfolio management in line with the investment guidelines set by the investment committee and in accordance with the AIFs offering documents



The AIF may also elect to contractually delegate the risk management function to third parties (not being the depositary or a delegate of the depositary) for the purpose of a more efficient conduct of business provided that the AIF is able to demonstrate that: the third-party has the professional ability and capacity to perform such duties, is duly authorised or registered to perform such duties and its appointment is acceptable to the MFSA.

In doing so, the AIF must establish methods for ongoing assessment of the standard of performance of the third-party.

6.1.1.3 Delegation

The Portfolio manager(s) may either be individual(s) ora licensed manager which is authorized or registered to perform such function and accordingly it may not necessarily be authorized as an AIFM (e.g., an EU MiFID investment company) and acceptable to the MFSA.The AIF may confer the portfolio management function to managers licensed in third countriesprovided that a cooperation agreement is in placebetween the MFSA and the supervisory authorities of the manager’s third country. Portfolio managementactivities may not be delegated to the depositary.

6.1.2 Valuation

AIFs must have in place appropriate valuation procedures to ensure the proper valuation of its assets. The valuation function must be either performed by:

• The AIF 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.

EY supports asset managers and investmentfund houses in defining or reviewing the risk management process and the formation of internal policies and procedures.

• An external valuer subject to mandatory professional registration recognized by law or legal or regulatory provisions or rules of professional conduct, independent from the AIF and any other persons with close links to the AIF.

The depositary shall not be appointed as external valuer unless it has functionally and hierarchically separated the performance of its depositary functions from its tasks as 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 of the 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 obtainedfrom the valuer

6.2 Remuneration

6.2.1 Principles or remuneration

An AIF must adopt a remuneration policy which governs all of the payments made by it to certain members of its staff in exchange for the services rendered, which activities have a material impact onits risk profile. It should broadly promote sound and effective risk management and does not encouragerisk taking which is inconsistent with its risk profile. The policy is to be reviewed by the AIF’s board of directors on a periodic basis, at least annually.

The Annex II principles

• The remuneration policy must include measures to avoid conflicts of interest.• The management body of the AIF 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 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).• AIFs 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 AIF.


6.2.2 Applicability of remuneration provisions

In general, an AIF shall have remuneration policies and practices for those categories of staff — referred to as “identified staff” — whose professional activities have a material impact on its risk profile.14 These Identified Staff shall be subject to the remunerationprovisions unless the AIF 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 AIF, including carried interest• Any transfer of units or shares of the AIF, in exchange for professional services rendered by the AIF’s identified staff

AIFs may also set up a remuneration committee that would be responsible for the implementation andadaptation of the remuneration policy and, if established, must operate independently and at leastbe composed by a majority of members who do not perform any executive function within the AIF.

6.2.3 Application of the proportionality principle

AIFs 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. 15

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, AIFs 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 AIF is to consider all of the three factors cumulatively. By way of example, an AIF 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 AIF 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.

14 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 function15 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 or above which the MFSA’s guidelines and the correspondingprinciples may be applied or disapplied.

6.2.4 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 risk management is being delegated will not be subject tothe remuneration requirements applicable to the AIF.16

6.3 Capital requirements

The AIF is to have sufficient financial resources at itsdisposal to enable it to conduct its business effectively,to meet its liabilities and to be prepared to cope withthe risks to which it is exposed. It is to maintain an“initial capital” of €300,000 and that the net asset value of the AIF is expected to exceed this amount on an ongoing basis.

In addition if the portfolio of the AIF exceeds a value of €250m, it is required to maintain “own funds” equal to the highest of:

• 0.02% of the AIF’s portfolio in excess of €250m capped at €10m

16 ESMA guidelines on sound remuneration policies under the AIFMD (ESMA/2013/232)17 Within the meaning of Article 21 of the capital requirements directive (Directive 2006/49/EC)

Value of portfolio ofthe AIF

Do the rules on the“pay-out process” apply?

Does the AIF need to establish a remuneration committee?

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




Type of AIF

Or• One quarter of the preceding year’s fixed overheads that may therefore exceed the cap of €10m specified in the AIFM directive.17

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

7.1 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 authorization of an AIF.

7.2 Authorization process and requirements

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

Phase 1 — Preparatory phase

• AIF promoters or managers 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

• AIF promoters 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 AIF and a decision will be made regarding which SLCs should apply. These represent ongoing requirements which need to be satisfied.

EY supports asset managers and investment fund houses with the investment fund setupand application for authorization, as well as restructuring and liquidation.

The authorization process can be summarised as follows:


07 Authorization

• Personal questionnaire and competency form of the compliance officer and money laundering reporting officer

In the case of internally managed AIFs (see Secion 6), the following additional documents must also be submitted:

• Information including personal questionnaire and competency forms on the investment committee members• Investment committee terms of reference • Confirmations from the portfolio manager and investment committee• Portfolio and risk delegation agreements (as applicable)• Risk management policy document; • Business plan• Copy of the cover note to the insurance policy if the AIF intends to cover potential professional liability risks by way of professional indemnity insurance

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 license. Following this, AIF promoters must: • Finalize any outstanding matters • Submit signed final application documents.• A license will be issued once all pre-licensing issues are resolved.

Phase 3 — Post-licensing/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 submission shouldinclude:

• Application form• Application fee• A near final draft offering document/ marketing document• A near final draft of the memorandum and articles of association/partnership deed/ trust deed/ fund rules (as applicable)• Resolution from the board of directors/ General partners/management company;• Information including personal questionnaire forms on the directors/general partners of the AIF• Information on the qualifying founder shareholders (holding 10% or more of the voting rights) including Personal questionnaire forms • Personal questionnaire forms, competency forms and CVs of the individuals responsible for the investment management and risk management decisions of the AIF


8.1 Special purpose vehicles

An SPV is a legal entity which is set up for a specific limited purpose by another entity (i.e., the originator), in that the SPV has no purpose other than the transaction for which it has been created. An AIF (or the AIFM acting on behalf of the AIF) will establish anSPV in order to facilitate investments in certain assetssuch as benefiting from a regulatory and tax perspective by incorporating the SPV in a more attractive jurisdiction or to finance a new venture without increasing the debt burden of the AIF.

From a regulatory perspective, the MFSA defines an SPV as being setup by the AIF as part of its investment strategy for the purpose of achieving itsinvestment objectives, being (directly or indirectly)owned and controlled via majority of voting shares and having the majority of the SPV’s directors in common with the AIF. For a Malta-based AIF using an SPV for investment purposes, it must ensure that theSPV is established in a jurisdiction which is not a FATF blacklisted country, it maintains at all time the majority of directorship and it must ensure that theinvestments effected through any SPV are inaccordance with the investment objectives, policiesand restrictions of the AIF.

8.2 Re-domiciliation of AIFs

Maltese legislation allows for the re-domiciliation of corporate entities, which means that an investmentfund established as an investment company in another jurisdiction may continue to exist in Malta under certain conditions. The continuation allows forthe transfer of the corporate entity seat ofincorporation from one jurisdiction to Malta thus allowing the continuing corporate existence of the re-domiciled corporate entity.

EY supports asset managers and investmentfund houses in the regulatory assessment and implementation of bespoke features for investment funds.


For an investment fund to be re-domiciled to Malta, it must be, formed and registered in an Approved Jurisdiction, able to adopt a similar corporate structure proposed to the AIF (e.g., as an investment company), allowed to re-domicile by the laws of the approved jurisdiction and not be in the process of dissolution or winding up.

The process is seamless given that the AIF regime allows service providers to be based in other jurisdictions. Also, there is no transfer of assets and the status of investors does not change.

8.3 Side pocket

Where an AIF invests in illiquid assets, some or all of these assets may, under certain circumstances, be transferred to a side pocket. The purpose of side pockets is to mitigate risks arising from certain assetsbecoming illiquid, thus the AIF would not realise such asset to meet its redemption obligations, or turns outto be hard-to-value and as a result the price of shares for subscription and redemption will not accurately reflect the fair value of the assets as it cannot bevalued accurately.

08 Salient features of AIFs

• Any side letter issued must be retained at the registered office of the AIF and is to be available for inspection by the MFSA during compliance visits.

8.5 Draw downs

AIFs (established as SICAVs) targeting qualifying or extraordinary investors may enter into written agreements with investors to effect draw downs oncommitted funds thus allowing investor funds to be drawn down by the AIF or its asset manager as investment opportunities arises.

Any AIF to provide such arrangement is to comply with the following conditions:

• Request on committed funds shall be effected pro-rata amongst all relevant investors in the AIF.• Any fresh call for further commitments shall be made once all outstanding commitments from existing investors have been requested.• Any shares to be issued at a “discount” to existing investors on committed funds, the nature of which to be disclosed in the AIF’s constitutional documents, shall be applicable only to any outstanding commitment provided that shares are issued at a price not below the NAV at the time the investor first subscribed to the shares.18

• Copies of the written agreements are to be held at the AIF’s registered office and are to be available for inspection by MFSA officials during compliance visits.• Specific risk warnings to be included in the offering document noting that investors will be issued shares at a “discount” if the NAV of the share prevailing at the time of the draw down exceeds the pre-agreed price otherwise the investor would, in effect, be paying a premium for such shares.

The assets in the side pocket would be separated fromthe main pool of assets allowing the AIF to continue inthe issue and redemption of shares in the liquid pool of assets.

On the date of the creation of the side pocket, the assets are allocated to the new share class – the side pocket. The investors of the existing share class will receive shares in the side pocket on a pro-rata basis according to their holding in the existing share class.

The side pocket is closed to any new subscriptions andsuspended from redemptions.

The AIFM is required to manage the assets in the sidepocket with the objective of realising them in the bestinterest of, and if warranted, distributing the proceedsto, investors. Shares in the side pocket are to beredeemed upon the sale of the asset or when the asset is transferred to the main liquid portfolio ofassets.

The MFSA permits the use of side pockets provided that statutory information is disclosed in the AIF’s constitutional documents and that certain conditions are satisfied.

8.4 Side letters

The use of side letters allows for greater flexibility to the AIF or its asset manager to enter into tailored arrangements with specific investors without the requirement to amend the conditions disclosed in the AIF’s constitutional documents.

To create a side letter, the following conditions are to be met:

• The side letter must be approved by the AIF’s board of directors prior to being issued.


18 Companies Act (investment companies with variable share capital) regulations (Legal notice 241 of 2006, as amended)

9.1 Introduction

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 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 units or shares of an AIF it manages to or with investorsdomiciled or with a registered office in the EU”. Thismeans that the marketing provisions of the AIFMdirective do not apply to “reverse solicitation” or “passive marketing” (i.e., marketing which is not at thedirect or indirect initiative of the AIFM). 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 thepassporting provisions under the AIFM directive orthe National Private Placement Regulations.

9.2 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 or authorized as an internally managed AIF. In summary, a Full AIFM regime AIF can be marketed to:

• Professional investors in the EU/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/EEA.

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

Or• Retail investors in the EU/EEA under stricter national rules: Each EU/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.

9.2.1 EU AIFMs and non-EU AIFMs

EU AIFM

The marketing regime for EU/non-EU domiciled AIFsby, or on behalf of, EU AIFMs is summarized in the table on page 35.

Non-EU AIFM

The AIFM directive applies to non-EU AIFMs that manage EU AIFs or market AIFs (EU or non-EU) to EU investors. The marketing regime for EU/non-EU domiciled AIFs by, or on behalf of, non-EU AIFMs issummarized in the table on page 35. The risk profile of a UCITS may be defined as the measure of risk aversion relative to the investment strategy (i.e. risk-reward trade-off)


09 Marketing under the AIFM directive


DomicilesAIFM AIF

Marketedin the EU?

Is AIFMdirectiveapplicable?

AIFMmarketingregime

Requirementsapplicable to theAIFM and AIF

Requirementsapplicable to third-countrydomiciles

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.

DomicilesAIFM AIF

Marketedin the EU?

Is AIFMdirectiveapplicable?

AIFMmarketingregime

Requirementsapplicable to theAIFM and AIF

Requirementsapplicable to third-countrydomiciles

(1) Annual report, disclosure to investors and reporting to competent authorities. (2) Cooperation agreement between the competent authorities of each member state where the AIF is marketed, the AIF’s home 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. See Annex 1 for the list of cooperation arrangements signed by the MFSA. (3) The AIFM third country is not listed as a NCCT by the Financial Action Task Force (FATF).(4) 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.

Yes

Yes

Yes

No

Yes

No

Yes

No

EU

EU

Non-EU

Non-EU

Non-EU

Non-EU

Non-EU

Non-EU

EU AIFM

Non-EU AIFM

Provisions on transparency(1), and major holdings andcontrol (if applicable) Full directive; “member state of reference” authorization (4) to manage EU AIFs or market AIFs in EU

(expected from 2017)Full directive; “member stateof reference” authorization tomanage EU AIFs Provisions on transparency (1),and major holdings and control(if applicable) (expected from 2017) Full directive; “member state of reference” authorization tomarket non-EU AIFs in EUNone

Cooperation agreements (2) AML requirements (3)

Cooperation agreements (2) AML requirements (3)Tax agreement (4)


Cooperation agreements (2) AML requirements (3)


NPPRs (until 2018)

Passport (expected after 2016)

None

NPPRs (until 2018)

Passport

None

9.3 Internally managed AIFs — a passporting alternative

As a practical matter, an EU AIFM which markets anEU AIF, or an internally managed EU AIF, will have an advantage over any EU or non-EU AIFM which markets a non-EU AIF, as the EU AIF has the benefit of the marketing regime. The AIFM directive provides that where the legal form of the AIF allows for internal management and that the AIF chooses not to appoint an external AIFM, the AIF may itself be authorised as an AIFM. The Maltese regulatory framework already allows for an AIF to be internallymanaged. Non-EU asset managers can therefore avail themselves of the marketing provisions by establishing an internally managed AIF to be marketed as an authorised AIFM, which in turn coulddelegate the investment management function to thenon-EU asset manager.

9.4 The notification procedure

Before EU AIFMs (or “internally managed” EU AIFs) or non-EU AIFMs benefit from the passporting provisions(once it is phased in for third-countries) to markettheir AIFs to “professional investors” in a EU member state, they must notify the competent authority in their respective home member state or member stateof reference for each AIF.

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 offering document 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 is established, if the AIF is a feeder AIF• 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 “internally” managed AIFs, the notification letter shall also include a programme of its operations.19

For cross-border marketing (marketing in member states other than the AIFM’s home member state) thecompetent authority shall, within 20 days, transmit the complete notification file to the competent authorities of each EU member state which it intendsto 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 theAIF in the host member state(s) as from the date of such notification. In so far the AIF shall be marketedto “retail investors” in host member state (if allowed) shall be subject to law and restrictions of the host member state.

19 The programme operations generally includes details on the licensable activities, operational arrangements, liquidity management policy, risk management policy, valuation policy, remuneration policy, conduct of business and conflicts of interest policy of the “internally managed” AIF.

10.1 Introduction

A major benefit of AIFs is that the AIFM directive doesnot impose restriction on the type of eligible assets an AIF may invest in other than general investment restrictions pertaining to the diversification of risk in relation to AIFs targeting experienced investors – whoare more akin to retail investors.

The MFSA has issued guidance notes on differenttypes of structures an AIF may be established as. Thissection provides a brief outline of the requirementsrelating to AIFs being structured as a money marketfund or as a loan fund.

10.2 Alternative AIFs structure — recognized cell company

The MFSA has introduced the “cellular concept” as a new vehicle for setting up investment funds in Malta which caters in particular to fund platforms. Investment funds would be established as incorporatedcells within the platform of a recognized cell company (RICC).20

Similar to a multi-fund, the RICC platform provides forthe separation of the assets and liabilities between theRICC and each incorporated cell. The difference is that in a RICC structure liability is limited through theseparate legal identity of each incorporated cell (as each cell has its separate legal personality), whereas in multi-fund AIF, limitation of liability is achievedthrough the option of segregation of assets and liabilities of each sub-fund stipulated by virtue of the memorandum of association of the AIF. The benefit of the RICC structure is that it allows for several types of licensed investment funds to coexist under one platform while retaining separate features and separate legal patrimonies while each incorporated cell may benefit from certain cost savings through the centralization and standardization of contractual agreements.

EY supports asset managers and investmentfund houses in the regulatory assessment and formation of bespoke of investment funds.

20 Companies Act (Recognized incorporated cell companies) regulations


10.3 Money market funds

The MFSA had issued supplementary conditions for AIFs setup as a Money Market Fund (MMF) having adopted a two-tiered approach for a definition of money market funds:

• Short-term money market fund• Money market fund

Both short-term MMFs and MMFs must comply with general guidelines and also have to comply with specific guidelines relating to their category.

A money market fund must indicate in its offering documents whether it is a short term MMF or a MMFand should provide sufficient information to investors on the risk and reward profile of the AIF and identify specific risks linked to the investment strategy of the AIF.

10 AIF structures


Requirements applicable to MMF

Objective

Valuation method

Type of NAV

Dealings

Eligible assets

Short-term MMF MMF

Having the primary investment objective of maintaining the principal of the AIF and aim to provide a return in line with money market rates

Constant net asset value (NAV) or variable NAV Variable NAV

Marking-to-market or amortised cost Marking-to-market

Daily subscription and redemption (unless marketed solely as an employee savings scheme)

• Money market instruments which comply with the criteria for money market instruments as set out in the rules (requirements outlined hereunder)• Deposits with credit institutions• Derivatives used in line with money market investment strategy of the fund. Derivatives which give exposure to foreign exchange may only be used for hedging purposes. Investment in non-base currency securities is allowed provided the currency exposure is fully hedged.

• Other investment funds that comply with the definition • Other investment funds that comply of a short-term MMF with the definitions of a short-term MMF or a MMF

21 The term “financial undertaking” shall be defined as: (a) a credit institution as defined in point (1) of article 4(1) of regulation (EU) 575/2013; (b) an investment firm as defined in point (1) of article 4(1) of directive 2004/39/EC; (c) an insurance undertaking as defined in point (1) of article 13 of directive 2009/138/EC; (d) a financial holding as defined in point (20) of article 4(1) of Regulation (EU) 575/2013; and (e) a mixed-activity holding company as defined in point (22) of article 4(1) of Regulation (EU) 575/201322 The term “foreign currency lending” means lending in any currency other than the legal tender of the country in which the borrower is domiciled.


10.4 Loan funds

An AIF is allowed to “invest through loans” provided that it constitutes either:

• The direct origination of loans by the AIF Or• The acquisition by the AIF of a portfolio of loans or a direct interest in loans which gives rise to a direct legal relationship between the AIF (as lender) and the borrower

Conditions and restrictions

• The PIF may only issue loans to unlisted companies and SMEs provided the entity receiving the loan is prohibited from transferring such loan to a third-party nor it qualifies as a “financial undertaking”21 • Households and individuals are not eligible to receive any financing from the AIF• The PIF is to be structured as a “closed ended” fund• (In case of multi-fund AIFs) all sub-funds are to be licensed as “loan funds”

• Professional clients as defined in Section I of Annex II of MiFID • An investor elected to be treated as a “professional client” and commits to invest a minimum of €100,000 • Qualifying investors (as defined in Section 3.3)• Extraordinary investor (as defined in Section 3.3)

• Short selling, leverage and reuse of collateral is not permitted• May invest up to 30% of its assets in liquid assets • Up to 10% of its capital may be issued as loans to a single “eligible entity” (the said restriction shall also apply in case the PIF is to invest in a “portfolio of loans”) • May invest up to 10% of its capital in units of other “loan funds”• The aggregate value of the units in other “loan funds” shall not exceed 20%• The PIF may acquire up to 25% of the units of a single “loan fund”• Borrowing is permitted subject to certain restrictions• Cross sub-fund investment is allowed subject to certain restrictions (Refer to Section 4.1)• May engage in “foreign currency lending” subject to the high level principles in MFSA rule 1 of 2012 on foreign currency lending22

• May be performed either by an “external valuer,” being independent from the investment manager and PIF, or by the investment manager provided that such task is functionally independent from the portfolio management function and the credit granting function; and other measures ensure that conflicts of interest are mitigated and that undue influence upon the internal valuers is prevented.

General requirements

Eligible investors and minimum entry levels

Investment restrictions

Valuation

The requirements for AIFs structured as “loan funds” are summarized below.

11.1 Introduction

The AIFM directive has introduced new transparency and regulatory reporting obligations for AIFMs (and“internally managed” AIFs) in respect of each EU AIF itmanages and for each of the AIFs marketed in the EU.In this regard, AIFMs and “internally managed” AIFs are to provide a multitude of information to bothcompetent authorities and investors, on a periodicbasis.

11.2 Annual reports

AIFs are to produce an annual report, including audited financial statements which is to be provided to investors on request and to be made available to the MFSA within six months of the end of the AIF’s accounting period.

11.3 Disclosure to investors

AIFs must have an offering document for which the AIF and/or the AIFM are responsible for. The offering document must have sufficient information to enableinvestors to make an informed decision on investing in the AIF, in particular the risks attached thereto as prescribed in the MFSA’s rules. The AIFM directive also requires that AIFMs shall, in respect of each of the EU AIFs it manages and for each of the AIFs marketed in the EU, make available to investors thefollowing information both prior to their initialinvestment and at material changes thereto:

• Investment strategy, objective and details of how any changes may be implemented • Information on where any master AIF is established and in the case of fund of fund

EY supports managers and investment fund houses with the drafting of the investmentfunds’ documents including offering documentation and other investor information, preparation of financial reportsand periodic reporting to the supervisory authority.


structures where the underlying funds are established• 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, together with 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• Liquidity management procedures, including how subscriptions and redemptions are processed

Ordinarily, the said information would be included in theAIF’s offering document, however, the AIFM (orinternally managed AIF) may resolve to include such information in a separate fact sheet or internet-baseddocument especially in cases where such information(or part thereof) is likely to change over time.

11 Transparency and reporting obligations

• The markets in 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:

• The percentage of its 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

The table on page 44 provides a summary of the reporting frequency applicable to AIFMs and specific types of AIFs.

11.4 Ongoing disclosure requirements

An AIFM (or internally managed AIF) is required toprovide, 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 of such disclosure will vary depending on on-going changes under each of the categories outlined above.

11.5 Reporting obligations to competent authorities

Information by the AIFM An AIFM is required to submit the following information to the EU competent authorities, whereby in the case of EU AIFMs (and “internally managed” AIFs) will be the competent authorities of the AIFM’s home member state and for non-EU AIFMs will be in each member state in which it markets the AIFs units:

• 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 investment focus



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

• At least one director of the AIF is independent from the AIFM or any investment advisor or of any affiliated entity• Corporate directors are generally not allowed other from the AIFM• The AIF must comply with the rules and regulations issued by the listing authority• Directors are precluded from dealing in units of the AIF if they are in possession of price-sensitive information

12.1 Introduction

An AIF that is not private may apply for admissibility on the Malta Stock Exchange (MSE). Listing on a stock exchange has its benefits of enhancing the AIF’s profileand marketability. In certain cases, investors, in particular institutional investors (e.g., pension funds), may only invest in shares which are listed on a recognized exchange.

12.2 Application for authorization and admissibility for listing on MSE

A formal application should be lodged with the Listing Authority in terms of the listing rules. Such application must be completed and signed by a duly authorized representative of the AIF. A Maltese AIF isto submit:

• A formal application• Copy of the offering document (marked in the margin to indicate where the provisions in the listing rules have been satisfied) • Any other documents or information which the listing authority shall require

The listing authority shall communicate its decision toaccept or refuse an application before the end of the period of 20 days beginning with the date on which theapplication is received.

12.3 General rules and conditions for admission on the MSE

An AIF is required to meet certain requirements for its units to be admitted to listing on the MSE. Theseinclude:

• Units must be “freely transferable”

EY Listing services:

• Feasibility analysis and determination of listing process and requirements• Support with preparation and submission of listing application• Support with selection of listing service providers• Support with changes of fund listing


12 Admissibility for listing

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 Or• 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 flows23, safekeeping of theAIF’s assets24 and overseeing the sale, issue, repurchase, redemption and cancellation of units or shares of the AIF25 – 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 Section13.7).

A Malta-based AIF may appoint a depositary (an EU credit institution) based in another EU member state, at least until 22 July 2017.26 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.

13.1 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 which contractual particulars are set out in the directive. It shall safekeep the AIF’s assets, monitor its cash flowsand perform other oversight duties. It may also delegate the safekeeping duties to third parties subjectto certain conditions. The AIFM directive has alsointroduced a strict liability regime on the depositary and its delegates.

13.2 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, thedepositary must be established in the third country where the AIF is established (subject to additional


23 Article 21(7) of directive 2011/61/EU24 Article 21(8) of directive 2011/61/EU25 Article 21(9) of directive 2011/61/EU26 MFSA negotiated the derogation to Article 61(5) of the AIFM directive


13.3 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.

13.3.1 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) • 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 or), 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

13.3.2 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 have been

been 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.

13.3.3 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.

13.4 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 itscustody function to such entity subject to the AIF’s investors being informed, in advance, of the rationaleof such delegation and the AIF or AIFM on its behalfinstructs the 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 13.4).

13.5 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 Or• 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.

13.5.1 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 13.5.2 for further details on liability discharge.

13.5.2 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

13.6 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


13.7 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.

14.1 Implementation of valuation policies and procedures

For the purpose of this section any reference to AIFMsshall also refer to internally managed AIFs.

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 NAV of each AIF managed.

In its technical advice, ESMA identifies the general principles to be adopted by AIFMs in developing and implementing the policies and procedures related tothe valuation function.27 In addition to the valuationmethodologies that will be used for each type of assetin which the AIF may invest, an AIFM shall not investin 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, role and duties of all parties involved in the valuation process. The policies should outline how a change tothe valuation policy, including methodology, may be effected. Where the valuation is carried out by the AIFM 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 between the AIFM and external valuer.

If a model is used to value the assets, it must be explained in the policies and procedures. Any model tobe implemented must be validated by a person not involved in the building process of the model, with the validation 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 and investment fund houses in defining or reviewing the valuation process and the formation of internal policies and procedures.

27 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 should have a clear understanding of the valuation methodologies used by the AIFM or the external valuer to value the AIF’s assets. The frequency of such checksshould be consistent with the frequency of the AIF’s asset valuation. Also, the depositary should take all necessary steps to ensure that appropriate valuationpolicies and procedures for the assets of the AIF are effectively implemented.

14.2 Valuation function

The valuation function must be performed either 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.

14 Valuation under the AIFM directive

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.

14.3 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.

14.4 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.


15.1 Introduction

The Maltese tax system for AIFs is highly beneficial for both investment fund and investor, while Malta’scorporate tax regime makes the country the ideal location for management companies and other service providers to base operations.

15.2 Taxation on AIFs

The tax treatment of AIFs depends on the classification of the fund. Maltese law distinguishes between prescribed and non-prescribed funds, whichdistinction, is important to establish whether and howtax is to be charged on investment income, capital gains and dividend contributions.

Prescribed Funds – are investment funds established inMalta and have over 85% of assets which are situated in Malta. Such AIFs are subject to a withholding tax of 10% which is imposed in interest, discounts or premiums earned on Maltese government stocks or bonds, and bonds issued by listed companies as well as investment income payable by corporate entities.Bank interest is taxed at 15% whilst income from immovable property situated in Malta is subject to tax at the normal rate of 35%.

Non-Prescribed Funds – are any investment fund whichdoes not qualify as a prescribed fund which has more than 15% of assets situated outside Malta. Income and gains derived from such funds are exempt fromincome tax (except for profits and capital gains relating to immovable property situated in Malta which is taxed at the normal rate of 35%).

Subject to certain conditions, capital gains realized ontransfers or redemption of units by non-resident investors,irrespective of whether the funds are prescribed or not, are exempt from Maltese tax. Dividends distributed by a fund whether these are reinvested or otherwise, to non-resident subject to tax in Malta.

An exemption from stamp duty applies in respect oftransfers of securities by licensed funds and in respect of transfers by investors of the units of a licensed fund.

15.3 Taxation on individuals

The incidence of tax will depend on the type of transfer whether the fund is prescribed or non-prescribed, and the tax residence of the investor.Since the withholding tax on prescribed funds is charged at fund level, any capital gains made by investors from the redemption, cancellation or liquidation of securities in listed funds are not subjectto 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 at the rate of 15% only when made to resident individuals.Other distributions are not taxed in Malta.

15.4 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 andwho are employed in senior positions with a companythat is licensed or recognized by the MFSA to conduct financial business in or from Malta, can benefit from a flat 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 (adjustedannually 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.


15 Taxation

EU nationals can benefit for a maximum period of tenyears from the reduced tax rate wheras EEA andSwiss nationals for a period of five consecutive years.


16.1 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.

16.2 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

16.3 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 approach encompassing 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 investment funds 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 investment fund with local regulatory authorities


16 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

An AIF which is not an open-ended AIF

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 ofAIFs consist 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 person/entity to undertake the valuation task beingindependent from the AIFM or AIF and any other persons with close links to the AIF or the AIFM

An AIF which invests at least 85% of its assets in one AIF

Term

AIFM directive

Alternative Investor Fund or AIF

Alternative Investment Fund Manager or AIFM

Closed-ended AIF

De minimis AIFM

External valuer

Feeder AIF


17 Glossary

Definition

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

An AIF not appointing an AIFM but carrying out internally the investment management function, for which it shall at least perform the portfolio management and risk management tasks apart fromother additional functions that it may perform in the course of the collective management

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

An AIF which allows the right to redeem interest at least once a year with redemption at a price whichdoes not vary significantly from the net asset value per share of the AIF.

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 authorised 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/or National and regional governments, public bodies thatmanage public debts, central banks, international andsupranational institutions (e.g., World Bank)

An investor who is not a professional investor

Term

Identified staff

Internally managed AIFs

MiFID

Open-ended AIF

Professional investor

Retail investor


Definition

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

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

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)

Term

Shares or units

Special Purpose Vehicle/ SPV

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

18 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]

The Malta Professional Investor Funds | 43

The Malta AlternativeInvestment Fund

A technical guide

November 2015

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Manager

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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 Fund Manager – A technical guide.” The guide provides an overview of the Malta asset manager regime, how it is impacted by the Alternative Investment Fund Managers directive and a summary of the regulations to the formation and operation of such asset managers 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

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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.

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