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Regulatory update on the NAIF regime

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By Jean Farrugia & Robert Higgans, DF Advocates – One of the innovative fund structures available in Malta, the Notified Alternative Investment Fund (NAIF) Regime, which was launched by the Malta Financial Services Authority in April 2016, has come up for review by the Authority following its commitment to assess the said regime after one year of its introduction. 

The MFSA has, in this regard, recently issued a consultation document on 17 August 2017, on proposed amendments to the NAIF Regime and requested feedback from interested parties on certain proposed updates to the said regime. 

Following the publication of the regime regulating the NAIFs, the Authority has committed itself to review the said regime within 12 months of publication. This is to ensure that the framework for NAIFs continues to develop within the framework of the AIFMD.

By way of background, the NAIF Regime is a framework applicable solely for Alternative Investment Funds set up in Malta and managed by a full-scope Maltese or EU based Alternative Investment Fund Manager, authorised under the Alternative Investment Fund Managers Directive. 

Under the NAIF framework, such a manager undertakes responsibility itself for the Alternative Investment Fund and for the fulfilment of its obligations arising under the NAIF framework. The NAIF regime is particularly attractive from a time to market point of view and is one which is gaining increasing attention when it comes to the setting up of an Alternative Investment Fund structure. 

A number of fund managers have indeed already availed of the benefits available under this structure, which is in conformity with the AIFM Directive, by setting up their funds through the notification process applicable under this regime, but the NAIF regime has so far remained relatively untapped by the industry. The recent proposed changes, which are the subject of the consultation exercise, are aimed to widen the scope of the NAIF and thus increase its attractiveness whilst also clarifying certain aspects of the regime.

One key proposed change indicated by the MFSA in its consultation exercise relates to the possible extension of the regime to cover Alternative Investment Funds investing in immovable property or infrastructure. These types of funds are currently excluded from the scope of the NAIF framework. The MFSA’s current Property Funds Policy would, in this regard, no longer apply for Alternative Investment Funds but is proposed to continue to apply solely and exclusively to Professional Investor Funds, which is another innovative and successful framework for funds available exclusively in Malta.  

The MFSA is also seeking feedback on the possibility of extending the NAIF framework for funds investing in non-financial assets, which are also currently excluded from the said regime.

Some other updates proposed by the MFSA in its consultation exercise involved changes to a number of current rules applicable in respect of Notified AIFs, namely to:

  • Require relevant disclosure in case of non-compliance with the Corporate Governance Manual for Directors of Investment Companies and Collective Investment Schemes issued by the MFSA;
  • Require the submission by a Maltese AIFM of the updated Terms of Reference and Risk Management Policy and any relevant updates to the Valuation Policy and Procedures;
  • Clarify to whom the money laundering reporting function may be delegated;
  • Clarify that changes to the offering document shall not become effective until they are noted by the MFSA.

The MFSA has also indicated that it is reviewing the Continuation of Companies Regulations, to possible provide for the re-domiciliation and continuation of schemes into Malta as a NAIF, as well as the Investment Services Act (Prospectus of Collective Investment Schemes) Regulations and the Investment Services Act (Performance Fees) Regulations.

The recent consultation exercise on the NAIF regime may very well generate debate on possible further updates to other fund regimes. Whether certain changes being proposed, such as the disapplication of the existing MFSA’s Property Funds Policy, will eventually also spill over to the Professional Investor Fund regime, in light of the recent changes and streamlining also undertaken to this framework, remains to be seen. 

The MFSA has, over the past months, started to approve a number of NAIFs. With the changes being proposed, the regulator is hoping to make the NAIF regime much more attractive to full-scope AIFMs; either those authorised in Malta or other EU jurisdictions. Indeed, according to the latest statistics for Q2 2017 on the MFSA’s website, there were 11 NAIF notifications, compared to only two in 2016. With more promotion of the regime, we expect to see the number of NAIFs continue to grow. 

The outcome of the consultation exercise, which is expected to be announced shortly by the MFSA, and the developments that this would bring to the NAIF regime, will continue to be closely followed by the industry as the potential of such a regime becomes increasingly more evident to, and availed of by, fund practitioners. 

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