On 18 September, 2013 the Malta Financial Services Authority (MFSA) issued a consultation note regarding the introduction of a limited depositary licence or the so called “depositary-lite” regime (see “What is the depositary-lite regime?” below) contemplated by the Alternative Investment Fund Managers Directive (AIFMD).
The consultation period runs until 2 October, 2013.
A copy of the MFSA’s consultation note and the draft amended AIFM Rulebook (Part BIII) and Custodian Rulebook (Part BIV) can be obtained here.
The MFSA’s proposals will introduce a new category of entity that can provide depositary services, the depositary-lite. Although full Category 4 custodians will also be able to provide the depositary-lite services, the proposals will permit:
- fund administrators, or
- Category 2 MiFID firms (other than fund managers),
to apply for authorisation to provide the depositary-lite services.
The same categories of entities will also be eligible to provide depositary services to closed-ended private equity / real estate AIFs being those without redemption rights during the first 5 years and which do not generally invest in assets that must be held in custody (see exception 2 below).
What is the depositary-lite regime?
Under AIFMD all EU Alternative Investor Funds (AIFs) managed by full EU AIFMs (AIFMs) are required to appoint a single depositary in the AIF’s EU domicile or (in the case of Malta who exercised the Art. 61(5) derogation) in another EU member state with responsibility for:
- safe-keeping all assets of the AIF,
- monitoring the AIF’s cash-flows, and
- overseeing the operation of the AIF (mainly subscriptions and redemptions, NAV per Share calculation and application of income)
(the “Core Depositary Functions”). Such depositaries are, in addition, subject to strict liability and detailed rules on delegation and conflicts of interest. With the introduction of the non-EU AIF marketing passport sometime in 2015 the single depositary requirement will also be extended to non-EU AIFs.
There are 3 exceptions here:
where the non-EU AIF will not be marketed in the EU, the depositary provisions do not apply altogether;
where the AIF has no redemption rights during the period of 5 years from the date of initial investment and which generally does not invest in assets that must be held in custody (e.g. private equity or real estate), EU member states may permit the AIF to appoint a single depositary which is an entity that carries out depositary functions as part of its professional or business activities in respect of which it is subject to mandatory professional registration or rules on professional conduct and which can provide sufficient financial and professional guarantees; and
where the non-EU AIF will be marketed in the EU by using the national private placement regimes under Article 36, the AIF is not required to appoint a single depositary but must appoint one or more entities to provide the Core Depositary Services.
As the latter type of entity is not subject to the detailed rules on delegation, strict liability, domicile, type of entity and conflicts of interest set out in Article 21 it has been dubbed the “depositary-lite”. The depositary-lite regime was constructed in order to permit hedge funds that qualify to continue to use their Prime Brokers to safe-keep their assets whilst appointing one or more other entities to perform the cash-monitoring and oversight functions.