- AIFMD Q&A - Question No. 3
- August 6, 2013
- Law Firm: CSB Advocates - Swatar Office
We are a custodian bank based outside the EU currently considering establishing a presence in Malta with a view towards servicing Malta-licensed alternative investment funds. When should we expect Malta-based funds to be required to engage the services of a Malta-based depositary in conformity with the new AIFMD requirements? Are there any exceptions that apply, permitting other non-Maltese depositaries to service Malta-licensed funds? What are the salient AIFMD rules pertaining to a custodian’s responsibilities and liability that we should be aware of before undertaking the licensing process?
Prior to the transposition of the AIFMD, all hedge funds licensed in Malta were free to appoint a custodian/depositary (“depositary”) situated in any reputable jurisdiction. The AIFMD has restricted this freedom to some extent in that the depositary is generally required to be situated in the jurisdiction where the Alternative Investment Fund (“AIF”) is established. It is important to highlight, however, that Malta has successfully negotiated a temporary derogation from this AIMFD requirement. Thus, in terms of Maltese law, depositaries of AIFs licenced in Malta (“Maltese AIFs”) need not be domiciled in Malta, but can be located in another EU Member State.
This derogation is applicable until 22nd July 2017 and thus, until such date, Maltese AIFs may have appointed as their depositaries:
- holders of a Category 4 Investment Services Licence issued by the MFSA; or
- a credit institutions having their registered office in the EU and authorised in accordance with Directive 2006/48/EC.
After the 22nd July 2017, all depositaries for Maltese AIFs must be duly licenced depositaries domiciled in Malta.
It must also be noted that, with the approval of the MFSA, certain Maltese AIFs may benefit from what has been termed the ‘depositary light regime’. By virtue of this regime Maltese AIFs would not be required to appoint a licenced depositary but could seek approval for the appointment of an entity which carries out depositary functions as part of its professional or business activities, which we understand would include law firms, notaries and fund administrators amongst others.
Whilst the MFSA is expected to issue further guidance/rules with respect to the specifics of this regime, it will be applicable to Maltese AIFs which:
- have no redemption rights exercisable during the period of 5 years from the date of the initial investments; and
- in terms of their core investment policy, do not invest in assets that must be held in custody, or generally invest in issuers or non- listed companies in order to potentially acquire control over such companies.
In terms of the depositary’s responsibilities, it can be said that the depositary is generally responsible for safekeeping the assets of the AIF and ensuring the proper monitoring of the AIF’s cash flows, ensuring in particular that all payments made by or on behalf of investors upon the subscription of units or shares of an AIF have been received and, in general, the safe-keeping of the assets of the AIF. The depositary shall have further other duties such as ensuring that the sale, issue, re-purchase, redemption and cancellation of units or shares of the AIF are carried out in accordance with the provisions of the law and the fund rules or instruments of incorporation.
Insofar as the depositary’s liability towards the AIF or its investors is concerned, one must certainly take note of the following:
- the depositary is liable for the loss by the depositary (or a third party to whom the custody has been delegated) of the financial instruments held in custody. In this scenario the depositary would be liable to return a financial instrument of an identical type or the corresponding amount to the AIF or the AIFM acting on behalf of the AIF without undue delay. However, the depositary may discharge itself from liability if it manages to prove that the said loss had arisen as a result of an external, unavoidable and uncontrollable event.
- the depositary is liable for all other losses suffered by the AIF/its investors as a result of the depositary’s negligent or intentional failure to properly fulfil its legal obligations.
In principle, the delegation by a depositary of the functions of safe-keeping to a third party would not discharge the depositary from the liability referred to above. However, (i) if the delegation has been effected in strict compliance with the applicable laws and (ii) the agreements entered into by the depositary with the AIF and with the third party delegate specifically provide for the discharge, the depositary could effectively be discharged from liability.
As a point of interest, you may wish to note that the MFSA has retained the Professional Investor Fund (“PIF”) regime for duly licenced collective investment schemes managed by de minimis or non-EU managers and which do not intend to market the units of such funds throughout the EU. PIFs are not required to comply with the requirements of the AIFMD in relation to depositaries and thus may appoint a depositary situated in any reputable jurisdiction.
The MFSA is actively encouraging more depositaries to set up in Malta. If you are seeking a licence to perform the functions of a depositary in Malta, the appropriate licence would be a Category 4 Investment Services licence. Applying for a full banking licence is a somewhat more laborious process and is restricted to institutions based in the EU or in countries signatory to the Basle Concordat.
Should you wish to receive any guidance, please send your question/s and observations to [email protected] for our feedback.