This article was first published in the July/August 2014 issue of the Butterworths Journal of International Banking and Financial Law.
 7 JIBFL 465
THE ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE
AIFMD lays down rules for the authorisation, ongoing operation and transparency of the managers of alternative investment funds (AIFMs) which manage and/or market alternative investment funds (AIFs) in the European Union.
AIFMD came in force on 21 July 2013 and applies to:
(a) EU AIFMs, which manage one or more AIFs irrespective of whether such AIFs are EU AIFs or non-EU AIFs;
(b) Non-EU AIFMs, which manage one or more EU AIFs; and
(c) Non-EU AIFMs, which market one or more AIFs in the Union, irrespective of whether such AIFs are EU AIFs or non-EU AIFs.
Art 4(1)(a) of the AIFM Directive defines an “AIF” as:
“Collective investment undertakings, including investment compartments thereof, which:
(a) raise capital from a number of investors, with a view to investing it in accordance with a defi ned investment policy for the benefi t of investors; and
(b) do not require authorisation pursuant to the UCITS Directive.”1
Article 2 of AIFMD exempts certain entities and structures from the scope of the directive. Securitisation special purpose entities are among the entities that are excluded from the scope of the directive.
A “securitisation special purpose entity” is defi ned by reference to Art 1(2) of the European Central Bank (ECB) Regulation of Financial Vehicle Corporations2 where an “FVC” is defined as:
“An undertaking which is constituted pursuant to national or Community law under one of the following:
(i) contract law as a common fund managed by management companies:
(ii) trust law;
(iii) company law as a public or private limited company;
(iv) any other similar mechanism;
and whose principal activity meets both of the following criteria:
(a) it intends to carry out, or carries out, one or more securitisation transactions and is insulated from the risk of bankruptcy or any other default of the originator;
(b) it issues, or intends to issue, securities, securitisation fund units, other debt instruments and/or fi nancial derivatives and/or legally or economically owns, or may own, assets underlying the issue of securities, securitisation fund units, other debt instruments and/or financial derivatives that are off ered for sale to the public or sold on the basis of private placements.”
Th e term “securitisation” is defi ned as:
“A transaction or scheme whereby an asset or pool of assets is transferred to an entity that is separate from the originator and is created for or serves the purpose of the securitisation and/or the credit risk of an asset or pool of assets, or part thereof, is transferred to the investors in the securities, securitisation fund units, other debt instruments and/or financial derivatives issued by an entity that is separate from the originator and is created for or serves the purpose of the securitisation.”
The ECB provided further guidance on the interpretation of the term “FVC” in a Statistics Regulation Guidance Note, for the purpose of assisting national central banks, market participants and statistical reporting agents.
The interpretation of the ECB, as set out in the Statistics Regulation Guidance Note,3 appears to narrow the scope of the FVC definition to structured issues where: the securitisation activities of the vehicle can be determined ex ante, on the basis of the documentation establishing the entity and setting out the terms of the transaction; there is bankruptcy remoteness between the originator and the issuer; the structured note consists of instruments listed in the ECB FVC Regulation and/or the entity legally or economically owns assets underlying the issue of securities or other instruments.
Crucially, in the ECB’s view, the FVC’s principal activity is to consist of the acquisition of assets (which may consist of loans or other assets) and/or credit risk. Entities that off er synthetic exposure to non-credit related assets would appear to be excluded from the application of the ECB FVC Regulation.
The ECB’s interpretation appears to mean that for a vehicle to qualify as a FVC, the securitisation transaction must have underlying assets, being loans and other assets amounting to credit risk and nothing else.4
It would appear that ECB FVC Regulation therefore covers only asset securitisations. If the term “securitisation special purpose entity” in the AIFMD were to be applied so narrowly, then various securitisation transactions, including risk securitisations or possibly even whole business securitisations, would possibly fall within the scope of the AIFMD.5
This would be made clearer if domestic law addresses the issue, within the parameters of the AIFMD. Malta is one such jurisdiction where its legislation clearly states that securitisation vehicles, subject to certain classes of exceptions as may be determined by the competent regulator, are not collective investment schemes and by implication, not alternative investment funds.
POSITION UNDER MALTESE LAW
The Investment Services Act
The Investment Services Act6 transposes the provisions of AIFMD, the MIFID Directive7 and the UCITS Directive8 into Maltese law. Article 2(3) of the Investment Services Act provides that the provisions of the Investment Services Act and any regulations adopted thereunder shall be interpreted and applied according to the EU directives. Article 2(1) of the Investment Services Act defines an alternative investment fund as “a collective investment scheme, including sub-funds thereof, 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 UCITS Scheme in terms of the UCITS Directive”.
A collective investment scheme is defined as:
“Any scheme or arrangement which has as its object or as one of its objects the collective investment of capital acquired by means of an offer of units for subscription, sale or exchange and which has the following characteristics:
(a) the scheme or arrangement operates according to the principle of risk spreading; and either
(b) the contributions of the participants and the profits or income out of which payments are to be made to them are pooled; or
(c) at the request of the holders, units are or are to be re-purchased or redeemed out of the assets of the scheme or arrangement, continuously or in blocks at short intervals; or
(d) units are, or have been, or will be issued continuously or in blocks at short intervals:
Provided that an alternative investment fund that is not promoted to retail investors and that does not have the characteristic listed in para (a) hereof shall only be deemed to be a collective investment scheme if the scheme, in specific circumstances as established by regulations under [the] Act, is exempt from such a requirement and satisfies any conditions that may be prescribed.”
Maltese securitisation law
Malta has legislation in place governing the establishment and use of securitisation vehicles for securitisation transactions.
To date, the following legislation has been enacted:
- Securitisation Act;9
- Reinsurance Special Purpose Vehicles Regulations10 made under the Insurance Business Act;11
In terms of Art 3 of the Securitisation Act, a securitisation vehicle is:
“(a) a company, including an investment company;
(b) a commercial partnership;
(c) a trust created by a written instrument; or
(d) any other legal structure which the competent authority may, by notice, permit to be used for a securitisation transaction,
established under the laws of Malta or those of a jurisdiction recognised by the competent authority.”
A securitisation vehicle is established for the purposes of a securitisation transaction. Article 2 of the Securitisation Act defines a securitisation as:
“A transaction or an arrangement whereby a securitisation vehicle, directly or indirectly:
(a) acquires securitisation assets from an originator by any means, or
(b) assumes any risks from an originator by any means, or
(c) grants [a] secured loan or other secured facility or facilities to an originator,
and fi nances any or all of the above, directly or indirectly, in whole or in part, through the issue of financial instruments, and includes any preparatory acts carried out in connection with the above.”
The term “financial instrument”, referred to in the definition of securitisation,is defined by reference to all instruments in Annex I Section C of MiFID.
Crucially, Art 6 of the Securitisation Act provides that a securitisation vehicle shall not be considered to be a collective investment scheme as defined in the Investment Services Act. This is subject to the proviso that the Malta Financial Services Authority, in its capacity as competent authority for securitisation transactions, may designate by notice that certain categories of securitisation vehicles shall be collective investment schemes and in such a case, the competent authority may determine the extent to which the provisions of the Investment Services Act, shall apply to the said categories of securitisation vehicles. To date, no such notice has been issued by the Malta Financial Services Authority.
Article 6 of the Securitisation Act also applies to reinsurance special purpose vehicles.12
Securitisation vehicles are therefore not collective investment schemes and so cannot be alternative investment funds either.
HOW TO INTERPRET THE EXEMPTION
Any securitisation vehicle established under the Securitisation Act or the Reinsurance Special Purpose Vehicles Regulations would therefore be exempt from being considered a collective investment scheme, including in the form of an alternative investment fund, unless notice to the contrary is published by the Malta Financial Services Authority, and then only with reference to specific types of structures or transactions. To date, no such notice has been issued.
1 Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the co-ordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (recast).
2 Regulation (EC) No 24/2009 of the European Central Bank of 19 December 2008 concerning statistics on the assets and liabilities of financial vehicle corporations engaged in securitisation transactions.
3 ECB Guidance Note of 8 February 2012 on the definitions of “Financial Vehicle Corporation” and “securitisation” under Regulation ECB/2008/30 of 19 December 2008 concerning statistics on the assets and liabilities of financial vehicle corporations engaged in securitisation transactions.
4 This interpretation appears to be supported by the contents of a letter of the Joint Associations Committee addressed to the ESMA in response to its consultation paper for guidelines on key concepts in the AIFMD.
5 In a letter addressed to ESMA, the Joint Associations Committee said that uncertainty surrounding the interpretation of the AIFMD securitisation special purpose entity exemption “would adversely affect the market for structured issues”.
6 Chapter 370 of the Laws of Malta.
7 Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/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.
8 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).
9 Chapter 484 of the Laws of Malta.
10 Subsidiary Legislation 403.19.
11 Chapter 403 of the Laws of Malta.
12 Regulation 16(1) of the Reinsurance Special Purpose Vehicles Regulations which provides that certain articles of the Securitisation Act, including At 6, shall apply to authorised reinsurance special purpose vehicles.