Comparison Chart: Requirements under the AIFM Directive vs UCITS Directive for Asset Managers

AIFM Directive vs UCITS Directive

19 Feb 2016 Comparison Chart: Requirements under the AIFM Directive vs UCITS Directive for Asset Managers

Comparison between the two regulatory regimes, AIFM Directive vs UCITS Directive

 

Requirements Alternative Investment Fund Manager

(the “AIFM”)

Undertakings for Collective Investments in Transferable Securities

(the “UCITS Manager”)

Supervisory Authority Malta Financial Services Authority (“MFSA”) is the Supervisory Authority
Regulatory Regime (i) Directive 2011/61/EU on Alternative Investment Fund Managers;

(ii) Regulation 231/2013 supplementing Directive 2011/61;

(iii)  Investment Services rules for Investment Service Providers, Part BIII: Standard Licence Conditions Applicable to Investment Services Licence Holders which Qualify as AIFMs;

(iv) Subsidiary Legislation 370.22 –Investment Services Act (Alternative Investment Fund Manager) (Passport) Regulations; and

(v) Various MFSA Circulars on the matter issued on the MFSA website.

(i) Directive 2009/65/EC on the Undertakings for the Collective Investment of Transferable Securities;

(ii) Investment Services rules for Investment Service Providers, Part BIII: Standard Licence Conditions Applicable to UCITS Management Companies;

(iii)   Subsidiary Legislation 370.19 Investment Services Act (UCITS Mergers) Regulations;

(iv)   Subsidiary Legislation 370.20 Investment Services Act (UCITS Manager Passport) Regulations;

(v)   Various MFSA Circulars on the matter issued on the MFSA website.

Licensable Activities The AIFM can be licensed to provide the following:

· Investment management functions which the AIFM shall at least perform when managing an AIF:

(i)  Portfolio Management; and

(ii)  Risk Management.

(only one of the above may be outsourced)

Other functions that an AIFM may additionally perform are:

· Administration;

– legal and fund management accounting services;

– customer inquiries;

– valuation and pricing (including tax returns);

– regulatory compliance monitoring;

– maintenance of a unit-holder register;

– distribution of income;

– unit issues and redemptions;

– contract settlements (including certificate dispatch);

– record keeping.

· Marketing

· Activities related to the assets of the AIFs, namely services necessary to meet the fiduciary duties of the AIFM, facilities management, real estate administration activities, advice to undertakings on capital structure, industrial strategy and related matters.[1]

A UCITS Manager may be licensed to provide the following licensable activities:

· Investment Management;

· Administration;

– legal and fund management accounting services;

– customer inquiries;

– valuation and pricing (including tax returns);

– regulatory compliance monitoring;

– maintenance of a unit-holder register;

– distribution of income;

– unit issues and redemptions;

– contract settlements (including certificate dispatch);

– record keeping.

· Marketing.[2]

Without prejudice to the above, a UCITS Manager may be authorised to provide, in addition to the Management of UCITS, the following services:

· Management of portfolios of investments including those owned by pensions funds, in accordance with mandates given by investors on a discretionary, client-by-client basis, where such portfolios include one or more of the instruments listed in the Investment Services Act (the “Act”);

· As non-core services:

– Investment advice concerning one more of the instruments listed in the Act;

– Safekeeping and administration in relation to units of collective investment schemes.[3]

Share Capital and

Own Funds Requirement

One hundred and twenty-five thousand euro (EUR 125,000) and an additional amount to the own funds equal to 0.02% of the amount by which the value of the portfolios managed by the AIFM exceed EUR250 million. [4]

When the value of the portfolios of the management company exceeds two hundred and fifty-million euro (EUR 250,000,000), the management company must be required to provide an additional amount of own funds which is equal to  point two percent (0,02 %) of the amount by which the value of the portfolios of the management company exceeds two hundred and fifty million euro (EUR 250,000,000) but the required total of the initial capital and the additional amount must not, however, exceed ten million euro (EUR 10,000,000)[5].

The AIFM shall be required to hold own funds equivalent to one quarter of their preceding year’s fixed overheads. The MFSA may adjust that requirement in the event of a material change in the business since the preceding year. Where the AIFM has not completed a year’s business, starting from the day it starts up, the requirement shall be a quarter of the fixed overheads projected in its business plan, unless an adjustment to that plan is required by the competent authorities. [6]

Own funds, including any additional own funds, which are appropriate to cover potential liability risks arising from professional negligence shall be invested in liquid assets or assets readily convertible to cash in the short term and shall not include speculative positions[7].

The UCITS Manager shall have an initial capital of at least one hundred and twenty-five thousand euro (EUR 125,000), taking into account the following:

(i)when the value of the portfolios of the management company exceeds two hundred and fifty-million euro (EUR 250,000,000), the management company must be required to provide an additional amount of own funds which is equal to  point two percent (0,02 %) of the amount by which the value of the portfolios of the management company exceeds two hundred and fifty million euro (EUR 250,000,000) but the required total of the initial capital and the additional amount must not, however, exceed ten million euro (EUR 10,000,000).

(ii)  for the purposes of this paragraph, the following portfolios must be deemed to be the portfolios of the management company:

– common funds managed by the management company including portfolios for which it has delegated the management function but excluding portfolios that it is managing under delegation;

– investment companies for which the management company is the designated management company,

– other collective investment undertakings managed by the management company including portfolios for which it has delegated the management function but excluding portfolios that it is managing under delegation;

(iii) irrespective of the amount of those requirements, the own funds of the management company must at no time be less than the amount prescribed in Article  21 of Directive 2006/49/EC[8].

For the purposes of the above, the MFSA may authorise the UCITS Manager not to provide up to fifty percent (50%) of the additional amount of own funds referred to above if it benefits from a guarantee of the same amount given by a credit institution or an insurance undertaking. The credit institutions or insurance undertaking must have its registered office in Malta or in any other recognised jurisdiction where it is subject to prudential rules considered by the MFSA to be equivalent to those in force.[9].

Conduct of Business Requirements The AIFM shall shall be expected to comply with the following conduct of business rules:

(i)  act honestly, with due skill, care and diligence;[10]

(ii) act in the best interest of the AIF/investors of AIFs it manages;[11]

(iii) have and employ the resources and procedures that are necessary for the proper performance of the business;[12]

(iv)avoid conflicts of interest and when they cannot be avoided, identify, manage and monitor the conflict of interest;[13]

(v) comply with all regulatory requirements;[14]

(vi)treat all investors of AIFs fairly- no preferential treatment is allowed unless properly disclosed in the AIFs rules; [15]

(vii)have remuneration policies and practices in place. [16].

The UCITS Manager shall be expected to comply with the following conduct of business rules:

(i)  act honestly and fairly in conducting its business activities in the best interest of the UCITS it manages and the integrity of the market;

(ii) act with due skill, care and diligence, in the best interests of the UCITS it manages and the integrity of the market;

(iii) have and employ effectively the resources and procedures that are necessary for the proper performance of its business activities;

(iv)avoid conflict of interest and when they cannot be avoided, ensure that the UCITS manager are fairly treated;

(v) comply with all regulatory requirements applicable to the conduct of its business activities so as to promote the best interest of its investors and the integrity of the market.

In addition to the above, if the UICTS Management Company is providing the additional services of management of portfolio of investments and / or investment advice concerning one or more of the instruments listed in the Act, the UCITS Manager is also expected to take into account the Guidelines issued by the ESMA on certain aspects of the MiFID Suitability Requirements.[17]

Effective Management The AIFM shall be effectively directed or managed by at least (2) individuals in satisfaction of the “dual control” principle[18].

Moreover, the AIFM shall take reasonable steps to ensure continuity and regularity in the performance of Investment and Ancillary Services. To this end, the AIFM shall employ appropriate and proportionate systems, resources and procedures[19].

The UCITS Manager shall be effectively directed or managed by at least (2) individuals in satisfaction of the “dual control” principle[20].

When allocating function internally, the UCITS Manager shall ensure that senior management and the supervisory function, where appropriate, are responsible for the UCIT Management Company’s compliance with its obligations under the Act and any applicable regulations and Investment Service Rules.[21].

The UCITS Manager shall ensure that its senior management:

(i)is responsible for the implementation of the general investment policy for each managed UCITS, as defined, where relevant, in the prospectus, the memorandum and articles of association of the instruments of incorporation of the investment company;

(ii)  oversees the approval of the investment strategies for each managed UCITS;

(iii) is responsible for ensuring that the UCITS Manager has a permanent and effective compliance function, even where such function is performed by a third party;

(iv) ensures and verifies on a periodic basis, that the general investment policy, the investment strategies and the risk limits of each managed UCITS are properly and effectively implements and complied with, even if the risk management function is performed by third parties;

(v)  approves and reviews on a periodic basis the adequacy of the internal procedures for undertaking investment decisions for each managed UCITS, so as to ensure that such decisions are consistent with the approved investment strategies;

(vi) approves and reviews on a periodic basis the risk management policy , and arrangements, processes and techniques for implementing that policy.[22]

In addition to the above requirements, the UCITS Manager shall also ensure that its senior management and, where appropriate, its supervisory function shall:

(i)  assess and periodically review the effectiveness of the policies, arrangements and procedures implemented to comply with the provisions of the Act and any applicable regulates and the Investment Services Rules issued thereunder;

(ii) take appropriate measures to address any deficiencies. [23]

The senior management and, where applicable, the supervisory function, received on a frequent basis, at least annually, written reports on matters of compliance, internal audit and risk management (indicating an remedial actions taken in the event of deficiencies)[24] and the implementation of investment strategies and internal procedures of taking investment decisions[25].

Mandatory Appointments The AIFM is obliged to appoint a number of mandatory appointments as per the below:

(i) DirectorsNo less than three (3) directors. It may be advisable to have more than three (3) directors depending on the complexity and size of the fund and the aggregate skill set desired on the board. A boards with more than seven directors would likely lose efficiency. [26]

(ii) Company Secretary Every company is to have a company secretary. The company secretary should be an individual who appears to have the requisite knowledge and experience to discharge the functions of company secretary. [27]

(iii) Investment Committee Members – The Board of Directors shall establish an in-house Investment Committee made up of at least three (3) members, whose composition may include members of the Board of Directors.[28] The majority of Investment Committee meetings – the required frequency of which should depend on the nature of the AIF’s investment policy, but which should be at least quarterly – are to be physically held in Malta. Investment Committee meetings are deemed to be physically held in Malta if the minimum number of members that form a quorum necessary for a meeting are physically present in Malta.[29]

(iv) Portfolio Manager (depending on whether function is outsourced or otherwise) –the AIFM might decide to appoint a portfolio manager responsible for the day-to-day trading activity of the AIFs managed by the AIFM. The Portfolio Manager is to report to the Investment Committee as often as necessary, but at least on each meeting of the Investment Committee;

(v) Risk Manager (depending on whether function is outsourced or otherwise)–The function of the Risk Manager is to be functionally and hierarchically separate from the operating units including the functions of the Portfolio Manager. [30]

(vi) Money Laundering Reporting Officer – The Prevention of Money Laundering Regulations and the Funding of Terrorism Regulations requires that an Investment Services Licence Holder appoints a Money Laundering Reporting Officer. The role of the MLRO is an onerous one and should only be accepted by individuals who fully understand the extent of responsibilities attached to the role. [31] The person appointed to fulfil the role of the MLRO may also act as a Compliance Officer. (further details on role below)

(vii) Compliance Officer – The role of a Compliance Officer is onerous – not least because of the extent of responsibility and the possibility of censure by the MFSA if problems arise. No individual should accept this responsibility lightly – and certainly not without due consideration of the information that follows. Compliance Officers are advised to ensure they are clear about the extent of responsibilities. [32] The person appointed to fulfil the role of the Compliance Officer may also act as an MLRO. (further details on role below)

(viii) Auditor –The AIFM shall appoint an auditor approved by the MFSA. An auditor cannot be appointed if he is:

– a director, partner, qualifying shareholder, officer, representative or employee of the AIFM;

– a partner of or in employment of any person mentioned above;

– a spouse, civil partner, parent, step-parent, child, step-child or other close relative of any person mentioned above;

– a person who is no independent from the AIFM; and

– a person disqualified by the MFSA from acing as an auditor of the AIFM.[33]

(further details on role below)

The UCTS Manager is obliged to appoint a number of mandatory appointments as per the below:

(i) DirectorsNo less than three (3) directors. It may be advisable to have more than three (3) directors depending on the complexity and size of the fund and the aggregate skill set desired on the board. A boards with more than seven directors would likely lose efficiency. [34]

(ii) Company Secretary Every company is to have a company secretary. The company secretary should be an individual who appears to have the requisite knowledge and experience to discharge the functions of company secretary. [35]

(iii) Investment Committee Members – The Board of Directors shall establish an in-house Investment Committee made up of at least three (3) members, whose composition may include members of the Board of Directors. The majority of Investment Committee meetings – the required frequency of which should depend on the nature of the UCITS’s investment policy, but which should be at least quarterly – are to be physically held in Malta. Investment Committee meetings are deemed to be physically held in Malta if the minimum number of members that form a quorum necessary for a meeting are physically present in Malta.

(iv) Portfolio Manager  –the AIFM might decide to appoint a portfolio manager responsible for the day-to-day trading activity of the UCITS managed by the UCITS Manager. The Portfolio Manager is to report to the Investment Committee as often as necessary, but at least on each meeting of the Investment Committee;

(v) Risk Manager –The function of the Risk Manager is to be functionally and hierarchically separate from the operating units including the functions of the Portfolio Manager. [36]

(vi) Money Laundering Reporting Officer – The Prevention of Money Laundering Regulations and the Funding of Terrorism Regulations requires that an Investment Services Licence Holder appoints a Money Laundering Reporting Officer. The role of the MLRO is an onerous one and should only be accepted by individuals who fully understand the extent of responsibilities attached to the role. [37]The person appointed to fulfil the role of the MLRO may also act as a Compliance Officer. (further details on role below)

(vii) Compliance Officer – The role of a Compliance Officer is onerous – not least because of the extent of responsibility and the possibility of censure by the MFSA if problems arise. No individual should accept this responsibility lightly – and certainly not without due consideration of the information that follows. Compliance Officers are advised to ensure they are clear about the extent of responsibilities. [38] The person appointed to fulfil the role of the Compliance Officer may also act as an MLRO. (further details on role below)

(viii)    Auditor –The AIFM shall appoint an auditor approved by the MFSA. An auditor cannot be appointed if he is:

– a director, partner, qualifying shareholder, officer, representative or employee of the AIFM;

– a partner of or in employment of any person mentioned above;

– a spouse, civil partner, parent, step-parent, child, step-child or other close relative of any person mentioned above;

– a person who is no independent from the AIFM; and

– a person disqualified by the MFSA from acing as an auditor of the AIFM.[39]

 

(further details on role below)

Compliance Officer The AIFM shall establish, implement and maintain adequate policies and procedures designed to detect any risk of failure to comply with its regulator obligations. This requirement shall apply depending on the nature, scale and complexity of the AIFM’s business and the nature and range of services and activities undertaken in the course of that business[40].

The AIFM shall establish and maintain a permanent and effective compliance function which operates independents and which has the following responsibilities:

(i)  To monitor and, on a regular basis, to assess the adequacy and effectiveness of the measures, policies and procedures implemented and the action taken to address and deficiencies in the AIFM’s compliance with its obligations;

(ii) To advise and assist the relevant persons responsible for carrying out services and activities to comply with the AIFM’s obligations under the Act and any applicable regulations and Investment Services Rules issued thereunder.[41]

In order to enable the compliance function to discharge its responsibilities properly and independently, the AIFM shall ensure that the following conditions are satisfied:

(i)  The compliance function shall have the necessary authority, resources, expertise and access to all relevant information;

(ii) A compliance officer, duly approved by the MFSA, shall be appointed and shall be responsible for the compliance function and for any reporting on a frequent basis, and at least annually, to the senior management on matters of compliance, indicating in particular whether the appropriate remedial measures have been taken in the event of any deficiencies;

(iii) The relevant person involved in the compliance function must not be involved in the performance of services or activities they monitor;

(iv)The method of determining the remuneration of the relevant persons involved in the compliance function must not compromise their objectivity and must be likely to do so[42].

The UCITS Manager shall establish, implement and maintain adequate policies and procedures designed to detect any risk of failure to comply with its regulator obligations. This requirement shall apply depending on the nature, scale and complexity of the UCITS Manager’s business and the nature and range of services and activities undertaken in the course of that business[43].

The UCITS Manager shall establish and maintain a permanent and effective compliance function which operates independents and which has the following responsibilities:

(i)  To monitor and, on a regular basis, to assess the adequacy and effectiveness of the measures, policies and procedures implemented and the action taken to address and deficiencies in the UCITS Manager’s compliance with its obligations;

(ii) To advise and assist the relevant persons responsible for carrying out services and activities to comply with the UCITS Manager’s obligations under the Act and any applicable regulations and Investment Services Rules issued thereunder.[44]

In order to enable the compliance function to discharge its responsibilities properly and independently, the UCITS Manager shall ensure that the following conditions are satisfied:

(i)  The compliance function shall have the necessary authority, resources, expertise and access to all relevant information;

(ii) A compliance officer, duly approved by the MFSA, shall be appointed and shall be responsible for the compliance function and for any reporting on a frequent basis, and at least annually, to the senior management on matters of compliance, indicating in particular whether the appropriate remedial measures have been taken in the event of any deficiencies;

(iii) The relevant person involved in the compliance function must not be involved in the performance of services or activities they monitor;

(iv)The method of determining the remuneration of the relevant persons involved in the compliance function must not compromise their objectivity and must be likely to do so[45].

Money Laundering Reporting Officer

(the “MLRO”)

The AIFM shall appoint an MLRO to ensure compliance with its Prevention of Money Laundering obligations. Such MRLO shall be duly approved by the MFSA, and may be the same person appointed to fulfil the role of the Compliance Officer[46]. The UCITS Manager shall appoint an MLRO to ensure compliance with its Prevention of Money Laundering obligations. Such MRLO shall be duly approved by the MFSA, and may be the same person appointed to fulfil the role of the Compliance Officer.[47]
Audit Internal Audit

Where appropriate and proportionate in view of the nature, scale and complexity of its business and the nature and range of investments services and activities undertaken in the course of its business, the AIFM shall establish and maintain an internal audit function which is separate and independent from the other functions and activities.

The internal audit function shall have the following responsibilities:

(i)To establish, implement and maintain an audit plan to examine and evaluate the adequacy and effectiveness of the AIFM’s system, internal control mechanisms and arrangements;

(ii) To issue recommendations based on the result of work carried out in accordance with the above;

(iii) To verify compliance with the recommendation; and

(iv)To report in relation to internal audit matters[48].

 

External Audit

The AIFM shall appoint an external auditor to undertake the company’s audit and provision of financial statements.

Internal Audit

Where appropriate and proportionate in view of the nature, scale and complexity of its business and the nature and range of collective portfolio management activities undertaken in the course of that business, the UCITS Manager shall establish and maintain an internal audit function which is separate and independent from its other functions and activities[49].

The internal audit function shall have the following responsibilities:

(i)  To establish, implement and maintain an audit plan to examine and evaluate the adequacy and effectiveness of the UCITS Manager’s system, internal control mechanisms and arrangements;

(ii) To issue recommendations based on the result of work carried out in accordance with the above;

(iii) To verify compliance with the recommendation; and

(iv)To report in relation to internal audit matters[50].

External Audit

The UCITS Manager shall appoint an external auditor to undertake the company’s audit and provision of financial statements.

Risk Management The Risk Management Function should be hierarchically separate from the operating units including the portfolio management function.[51]

The AIFM shall implement adequate risk management in order to identify, measure, manage and monitor appropriately all risks relevant to each AIF strategy –to be reviewed at least once a year.[52]

The AIFM shall set a maximum level of leverage which it may employ on behalf of the AIF it manages, taking into account the below:

(i)  the type of AIF;

(ii) the investment strategy of the AIF;

(iii) the sources of leverage;

(iv)any other relationship with any other financial institutions;

(v) the need to limit the exposure to any single counterparty;

(vi)the extent to which the leverage is collateralised;

(vii)the asset-liability ration; and

(viii) the scale, nature and extent of the activity of the AIFM.[53]

An appropriate liquidity management system needs to be adopted by the AIFM in the case where the AIF being managed is not an unleveraged closed-ended AIF.[54]

Liquidity Risk Management

Stress tests should regularly be conducted under normal and exceptional liquidity conditions to be able to monitor the liquidity of the AIFs accordingly. [55]

The AIFM shall make sure that for each AIF managed. The investment strategy, liquidity profile and redemption policy are consistent[56].

Where appropriate and proportionate in view of the nature, scale and complexity of its business[57], the UCITS Manager shall employ a risk management process which enables it to monitor at any time the risk of the positions and their contribution to the overall risk profile of the portfolio.[58] The Risk Management function shall be permanent and shall be hierarchically and functionally independent from the operating units[59].

The UCITS Manager shall employ a process for accurate and independent assessment of the value of the OTC Derivatives[60].

The UCITS Manager shall regularly report to the MFSA on the types of derivative instruments, the underlying risks, the quantitative limits and the methods which are chosen in order to estimate the risks associated with transactions in derivative instruments regarding each managed UCITS[61].

The permanent risk management function shall:

(i)Implement the risk management policy and procedures;

(ii)  Ensure compliance with the UCITS risk limit system[62];

(iii) Provide advice to the board of directors as regards the identification of the risk profile of each managed UCITS;

(iv) Provide regular reports to the board of directors and, where possible, the supervisory function, on:

The consistency between the current levels of risk incurred by each managed UCITS and the risk profile agreed for that UCITS;

The compliance of each managed UCITS with relevant risk limit systems;

The adequacy and effectiveness of the risk management process, indicating in particular whether appropriate remedial measures have been taken in the event of any deficiencies;

Provide regular reports to the senior management outlining the current level of risk incurred by each managed UCITS and any actual or foreseeable breaches to their limits, so as to ensure that prompt and appropriate action can be taken

Review and support where appropriate, the arrangement and procedures for the valuation of OTC derivatives[63].

Recordkeeping The AIFM shall retain its records for a period of at least five (5) years. In exceptional circumstances, the MFSA may require the AIFM to retain any or all of these records for a longer period, determined by the nature of the instrument or portfolio transaction, where it is necessary to enable the competent authority to exercise its regulatory and supervisory functions under the Act and any applicable regulations or Investment Services Rules issued thereunder[64].

The records shall be retained in a medium that allows the storage of information in a way accessible for future reference by the MFSA, and in such form and manner that the following conditions are met:

(i)The MFSA must be able to access them readily and to reconstituted each key stage of the processing of each portfolio transaction;

(ii)  It must be possible for any corrections or other amendments, and the contents of the records prior to such corrections or amendments, to be easily ascertained;

(iii) It must be possible for the records to be otherwise manipulated or altered.[65]

The UCITS Manager shall retain its records for a period of at least five (5) years. In exceptional circumstances, the MFSA may require the UCITS Manager to retain any or all of these records for a longer period, determined by the nature of the instrument or portfolio transaction, where it is necessary to enable the competent authority to exercise its regulatory and supervisory functions under the Act and any applicable regulations or Investment Services Rules issued thereunder[66].

The records shall be retained in a medium that allows the storage of information in a way accessible for future reference by the MFSA, and in such form and manner that the following conditions are met:

(i)  The MFSA must be able to access them readily and to reconstituted each key stage of the processing of each portfolio transaction;

(ii)  It must be possible for any corrections or other amendments, and the contents of the records prior to such corrections or amendments, to be easily ascertained;

(iii) It must be possible for the records to be otherwise manipulated or altered.[67]

Identification of Conflicts of Interest The AIFM shall take all reasonable steps to identify conflicts of interest that arise in the course of managing AIFs between:

(i)the AIFM, including its managers, employees or any person directly or indirectly linked to the AIFM by control, and the AIF managed by the AIFM or the investors in that AIF;

(ii)  the AIF or the investors in that AIF, and another AIF or the investors in that AIF;

(iii) the AIF or the investors in that AIF and another client of the AIFM;

(iv) the AIF or the investors in that AIF, and a UCITS Scheme managed by the AIFM or the investors in that UCITS Scheme; or

(v)  two (2) clients of the AIFM[68].

The AIFM shall maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps designed to identify, prevent, manage and monitor conflicts of interest in order to prevent them from adversely affecting the interests of the AIFs and their investors[69].

The AIFM shall segregate within its operating environment, tasks and responsibilities which may be regarded as incompatible with each other or which may potentially generate systematic conflicts of interest.[70]

The AIFM shall assess whether its operating conditions may involve any other material conflicts of interest and disclose them to the investors of the AIFs.[71]

For the purpose of identifying the types of conflict of interest that arise in the course of providing services and activities and whose existence may damage the interest of a UCITS, the UCITS Manager shall take into account, by way of minimum criteria, the questions of whether it, or a relevant person, or a person directly or indirectly linked by way of control to the UCITS Manager, is in any of the following situations:

(i)The UCITS Manager or that person is likely to make a financial gain or avoid a financial loss at the expense of the UCITS;

(ii)  The UCITS Manager, or that person has an interest in the outcome of a service or activity provided to the UCITS or another client or of a transaction carried out on behalf of the UCITS or another client, which is distinct from the UCITS interest in that outcome;

(iii) The UCITS Manager or that person has a financial or other incentive to favour the interest of another client or group of clients over the interests of the UCITS;

(iv) The UCITS Manager, or that person carries on the same activities for the UCITS for another client or clients which are not UCITS;

(v)  The UCITS Manager or that person receives or will receive form a person other than the UCITS, an inducement in relation to collective portfolio management activities provided to the UCITS, in the form of monies, goods or services other than the standard commission or fee for that service[72].

When identifying the types of conflict of interest, the UCITS Manager shall take into account:

(i)  The interests of the UCITS Manager, including those deriving from its belonging to a group or from the performance of services and activities, the interest of the clients and the duty of the UCITS Manager towards the UCITS;

(ii) The interests of two (2) or more managed UCITS[73].

Delegation /

Outsourcing

Should notify the MFSA of any delegation arrangement and should comply with a number of requirements.[74]

No delegation of portfolio management or risk management shall be conferred on:

(i)The custodian/delegate of the custodian;

(ii)  Any other entity who may have a conflict of interest with the AIFM or the investors of the AIFs managed by the AIFM.[75]

The liability of the AIFM shall not be affected by the delegation.[76]

In the case of Sub-Delegation the following conditions for sub-delegation should be adhered to:

(i)the AIFM should consent to the sub-delegation;

(ii) the AIFM should notify the MFSA before the sub-delegation arrangements become effective;

(iii) all conditions of delegation apply to sub-delegation.[77]

No sub-delegation of portfolio management or risk management shall be conferred on the custodian/delegate of the custodian or any other entity who may have a conflict of interest with the AIFM or the investors of the AIFs managed by the AIFM.

Where the UCITS Manager delegates to third parties, for the purpose of a more efficient conduct of its business, the carrying out on its behalf of one or more of its functions, the UCITS Manager shall comply with the following requirements:

(i)  The UCITS Manager shall submit to the MFSA the details of such delegation in an appropriate manner and shall obtain the MFSA’s prior written consent;

(ii) Such delegation shall not prevent the effectiveness of supervision over the UCITS Manager and in particular shall not prevent the UCITS Manager from acting, or the UCITS from being managed in the best interests of the investors;

(iii) The UCITS Manager shall have measures in place that enable the persons who conduct its business to monitor effectively, at any time, the activities of the undertaking to which functions are delegated;

(iv)Such delegation shall not prevent the persons who conduct the business of the UCITS Manager from giving further instructions to the undertaking to which functions are delegated at any time or from withdrawing such delegation with immediate effect when this is in the interest of investors;

(v) The undertaking to which functions are delegated shall be qualified and capable of undertaking the functions being delegated;

(vi)The UCTIS’ prospectus shall list the functions being delegated in the form and manner specified in the Investment Services Rules for Retail Collective Investment Schemes[78].

Where a delegation in accordance with the above is made in respect of the function of investment management, such delegation shall only be given to undertakings authorised or licenced to provide asset management services and subject to prudential supervision. Such delegation shall be in accordance with investment-allocation criteria periodically laid down by the UCITS Manager[79].

A delegation of the core functions of the investment manager shall not be made to the custodian or to any other undertaking whose interests may conflict with those of the UCITS Manager or of the unit-holders[80].

Where delegation is made with respect to the UCITS Manager’s investment management function to an undertaking licensed in a third-country, co-operation between the competent authority and the supervisory authority of such third country shall be ensured[81].

The liability of the UCITS Manager shall not be affected by delegation of any functions to third parties. The UCITS Manager shall not delegate its functions to the extent that it becomes a letter-box entity[82].

Professional Indemnity Insurance To cover professional liability risks resulting from activities carried out by the AIFM, the AIFM should either have additional own funds appropriate to cover the risk or hold a professional indemnity insurance against liability arising from professional negligence.[83]

If the AIFM decides to opt for a professional indemnity insurance, then it is to be purchased from an EU or a non-EU undertaking authorised to provide the same in accordance with EU Laws or Maltese Law.[84]

The UCITS Manager shall take out and maintain a Professional Indemnity Insurance Cover as its considers appropriate and shall maintain such insurance policies of such classes and types to provide at least the minimum level of protection required[85].

Upon request by the MFSA the UCITS Manager must submit a copy of the renewal cover note or such other written evidence as the MFSA may require to establish compliance with this rule[86].

Best Execution Procedures The AIFM shall take all reasonable steps to obtain, when executing orders, the best possible result for its clients taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order. Nevertheless, whenever there is a specific instruction from the client, the AIFM shall execute the order following the specific instruction[87]. The UCITS Manager shall act in the best interests of the UCITS it manages when executing decisions to deal on behalf of the managed UCITS in the context of the management of its portfolios[88].
Passporting This is possible under Subsidiary Legislation 370.22 on Investment Services Act (Alternative Investment Fund Manager) (Passport) Regulations.

The Regulation provides for the below possibilities:

(i)  Freedom to provide services and freedom of establishment by Maltese AIFMs  whereby a Maltese AIFM can manage a European AIF directly provided the Maltese AIFM is authorised to manage that type of AIF[89];

(ii) Freedom to provide services and freedom of establishment by European AIFMs where a European AIFM may manage a Maltese AIF directly in Malta provided the European AIFM is authorised to manage that type of AIF.[90]

This can be done through a notification procedure with the MFSA duly notifying the MFSA of its intention to provide services in specific jurisdictions throughout the European Union[91]

A UCITS Manager may passport its services freely thoughout the European Union through the freedom to provide services by establishing a branch or having the freedom to provide services.[92]. This can be done through a notification procedure with the MFSA duly notifying the MFSA of its intention to provide services in specific jurisdictions throughout the European Union[93].

As a result, the UCITS may be managed by a UCITS Manager authorised and supervised in a member state other than its home member state.

Reporting Requirements -Annual Financial Return – To be drafted each year and submitted with the MFSA within 1 month of the Accounting Reference Date. [94]

Interim Financial Return – To be submitted as at three (3), six (6) and nine (9) months after the Accounting Reference Date. [95]

Reporting on the principle markets and instruments in which the AIFM trades –It shall provide information on the main instruments in which it is trading, on markets of which it is a member or where it actively trades, and on the principal exposures and most important concentrations of each AIF it manages.[96]

-Reporting on the EU AIFs it manages or markets in the EU – the AIFMD lists down a list of information to be provided to the MFSA in this case. [97]

-Reporting on leverage employed by the EU AIFs – An AIFM managing AIFs employing leverage on a substantial basis shall make available information about the overall level of leverage employed by each AIF it manages. [98]

The Company shall notify the MFSA immediately in the case of any breaches to its reporting obligations.[99]

Transparency Provisions

-Annual Report – To be drafted by the AIFM for each AIF it manages. It is to be available for each financial year, not later than 6 months following the year end.it shall be provided to investors on request and to competent authorities of the AIFM and of the AIF, where applicable. [100] The AIFM lists down the minimum contents which are to be included in the annual report and amongst others, these include a balance sheet or a statement of assets and liabilities, an income and expenditure account for the financial year and a report on the activities of the financial year.[101]

Disclosure to Investors – The AIFM shall disclose to investors information on the AIF managed by the AIFM on the percentage of the AIFs assets which are subject to special arrangements arising from their illiquid nature, any new arrangements for managing the liquidity of the AIF, the current risk profile, information on the main categories of assets in which the AIF invests and any result arising from stress test conducted.[102]

Reporting to the MFSA –The AIFM shall regularly report to the MFSA on the principal markets and instruments in which it trades on behalf of the AIFs it manages, on the AIFs it manages or markets in the EU and on AIFs employing leverage. [103]

– Annual Financial Return – The UCITS Manager shall in each year prepare an Annual Financial Return signed by at least two 92) directors or partners or any other person authorised by way of a board resolution[104]. Such Annual Financial Return shall be submitted to the MFSA within one (1) month of the Accounting Reference Date. In addition, the annual Audited Financial Return shall be submitted to the MFSA within four (4) months of the accounting reference date[105].

– Interim Financial Return- The UCITS Manager shall prepare an Interim Financial Return at dates three (3), six (6) and nine (9) months after the Accounting Reference Date[106].

Investor Compensation Scheme The AIFM shall be subject, with regards to its services offered/ to the Investor Compensation Scheme Regulations[107].

The Investor Compensation Scheme is a rescue fund for customers of failed investment firms which are licensed by the MFSA.[108].

The UCITS Manager shall be subject, with regards to its services offered/ to the Investor Compensation Scheme Regulations[109].

The Investor Compensation Scheme is a rescue fund for customers of failed investment firms which are licensed by the MFSA.[110].

Internal Directives The required internal directives for an AIFM shall be the following:

a.Risk Management Policy[111];

b.Conflicts of Interest Policy[112];

c.Remuneration Policy[113];

d.Valuation Policy[114];

e.Anti-Money Laundering Directive[115];

f.Compliance Manual; and

g.Organizational Rules and By-Laws.

The required internal directives for a UCITS Manager shall be the following:

a.  Risk Management Policy[116];

b.Conflicts of Interest Policy[117];

c.Remuneration Policy (requirement coming into effect on 18 March 2016 due to the transposition of the UCITS V into Maltese Legislation);

d.Anti-Money Laundering Directive[118];

e.Compliance Manual; and

f.Organizational Rules and By-Laws.

Forthcoming Amendments The MFSA continuously issues circulars regulating the AIFM regime and these are available on the MFSA website. Please note that the upcoming UCITS V Directive will be fuly transposed into Maltese law on 18 March 2016.

All requirements laid down for UCITS Managers under the UCITS V Directive have been included herein.

The MFSA continuously issues circulars regulating the UCITS Managers and these are available on the MFSA website.

 

[2] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies, Part BII, SLC 1.01

[1] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 1.03.

[3] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies, Part BII, SLC 1.02

[4] Directive 2011/61/EU on Alternative Investment Fund Managers: Article 9

[5] Directive 2011/61/EU on Alternative Investment Fund Managers: Article 9

[6] Directive 2011/61/EU on Alternative Investment Fund Managers: Article 9 and Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions (recast); Article 21.

[7] Directive 2011/61/EU on Alternative Investment Fund Managers: Article 9 and Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions (recast); Article 9(8).

[8] Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), Article 7

[9] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies Part BII, SLC 5.03

[10] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 3.01 (a)

[11] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 3.01(b)

[12] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 3.01 (c)

[13] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 3.07-3.13

[14] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 3.01 (e)

[15] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII SLC 3.03.

[16] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 3.05.

[17] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies, Part BII, SLC 3.01

[18] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMs: Part BIII, SLC 1.16

[19] ibid

[20] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies: Part BII, SLC 1.08

[21] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies: Part BII, SLC 2.11

[22] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies : Part BII, SLC 2.12

[23] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 5.13

[24] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 5.14

[25] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 5.15

[26] Corporate Governance Manual for Directors of Investment Companies and Collective Investment Schemes: Section 4

[34] Corporate Governance Manual for Directors of Investment Companies and Collective Investment Schemes: Section 4

[27] Chapter 386 of the laws of Malta, the Companies Act Article 138.

[28] Investment Services Rules for Alternative Investment Funds Part B, SLC 8.23.

[29] Investment Services Rules for Alternative Investment Funds Part B, SLC 8.24.

[35] Chapter 386 of the laws of Malta, the Companies Act Article 138.

[30] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 2.04 – 2.10.

[31] The Prevention of Money Laundering Regulations and the Funding of Terrorism Regulations requires that an Investment Services Licence Holder appoints a Money Laundering Reporting Officer: Regulation 15.

[32] Investment Services Rules for Investment Services Providers Part A: The Application Process SLC 5.1 and Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 1.26- 1.28.

[36] Investment Services Rules for Investment Services Providers Part BII: Standard Licence Conditions applicable to UCITS Management Companies SLC 2.29

[37] Investment Services Rules for Investment Services Providers Part BII: Standard Licence Conditions applicable to UCITS Management Companies SLC1.10

[38] Investment Services Rules for Investment Services Providers Part A: The Application Process SLC 5.1 and Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 1.26- 1.28.

[33] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 6.25-6.34

[39] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 6.25-6.34.

[40] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMs Part BIII: Standard Licence Conditions applicable to Investment Services Licence Holders which qualify as AIFMs SLC 1.26

[41] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMs Part BIII: Standard Licence Conditions applicable to Investment Services Licence Holders which qualify as AIFMs SLC 1.27

[43] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 2.17

[44] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 2.18

[42] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMs Part BIII, SLC 1.28

[45] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 2.19

[46] Investment Services Rules for Investment Services Providers Part BI: Standard Licence Conditions applicable to Investment Services Licence Holders (Excluding UCITS Management Companies) SLC 1.22

[47] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 2.21

[48] Investment Services Rules for Investment Services Providers Part BI, SLC 1.28

[49] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 2.23

[50] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 2.24

[51] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII SLC 2.04.

[57] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 2.31

[52] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII SLC 2.06.

[53] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII SLC 2.09

[58] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 2.25

[59] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 2.29

[60] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 2.26

[61] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 2.27

[62] including statutory limits concerning global exposure and counterparty risk

[54] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII SLC 2.11.

[55] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 2.12.

[56] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII SLC 2.14.

[63] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 2.32

[64] Investment Services Rules for Investment Services Providers Part BI: Standard Licence Conditions applicable to Investment Services Licence Holders (Excluding UCITS Management Companies) SLC 2.84

[65] Investment Services Rules for Investment Services Providers Part BI: Standard Licence Conditions applicable to Investment Services Licence Holders (Excluding UCITS Management Companies) SLC 2.85

[66] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 2.49

[67] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 2.35

[72] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 3.02

[71] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMs Part BIII, SLC 3.10

[73] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 3.03

[74] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, Section 4

[75] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII SLC 4.03

[76] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII SLC 4.04

[77] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII SLC 4.05.

[78] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 4.01

[79] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 4.02

[80] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 4.03

[81] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 4.04

[82] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 4.05

[83] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 6.10- 6.16.

[84] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 6.11.

[85] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 5.07

[86] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 5.07

[87] Investment Services Rules for Investment Services Providers Part BI: Standard Licence Conditions applicable to Investment Services Licence Holders (Excluding UCITS Management Companies) SLC 2.54

[88] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 3.30A

[89] Subsidiary Legislation 370.22 on Investment Services Act (Alternative Investment Fund Manager) (Passport) Regulations, Article 3

[90] Subsidiary Legislation 370.22 on Investment Services Act (Alternative Investment Fund Manager) (Passport) Regulations, 6

[91] Subsidiary Legislation 370.22 on Investment Services Act (Alternative Investment Fund Manager) (Passport) Regulations, Article 3 and 6

[92] Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), Article 16

[93] SL 370.10, European Passport Rights For Investment Firms, Article 10

[94] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 6.18

[95] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 6.20.

[96] Directive 2011/61 on Alternative Investment Fund Managers : Article 24 (1).

[97] Directive 2011/61 on Alternative Investment Fund Managers : Article 24 (2).

[98] Directive 2011/61 on Alternative Investment Fund Managers : Article 24 (4).

[104] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 5.08

[105] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 5.09

[106] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 5.11

[99] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 6.17- 6.25

[100] Directive 2011/61 on Alternative Investment Fund Managers : Article 22 (1).

[101] Directive 2011/61 on Alternative Investment Fund Managers : Article 22 (2).

[102] Directive 2011/61 on Alternative Investment Fund Managers : Article 23.

[103] Directive 2011/61 on Alternative Investment Fund Managers : Article 24 and Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, Section 7

[107] Investment Services Rules for Investment Services Providers Part BI: Standard Licence Conditions applicable to Investment Services Licence Holders (Excluding UCITS Management Companies) SLC 7.36

[108] http://www.compensationschemes.org.mt/pages/default.aspx

[109] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 2.02

[110] http://www.compensationschemes.org.mt/pages/default.aspx

[111] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 2.06

[112] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 3.08

[113] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 2.06

[114] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 3.05

[116] Investment Services Rules for Investment Services Licence Holders which qualify as AIFMS: Part BIII, SLC 1.26

[117] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 2.34

[118] Investment Services Rules for Investment Services Licence Holders which qualify as UCITS Management Companies :Part BII, SLC 3.01

[119] In line with FIAU Implementing Procedures and applicable legislation