Fri, 06/07/2012 - 13:23
By the Malta Financial Services Authority – Investment services regulation: The Investment Services Act provides for the authorisation of investment services licence holders and collective investment schemes operating in or from Malta.
When considering whether to grant or refuse a Licence, the MFSA will, in particular, have regard to:
a. the protection of investors and the general public;
b. the protection to the reputation of Malta taking into account Malta’s international commitments;
c. the promotion of competition and choice; and
d. (in the case of a scheme) the reputation and suitability of the applicant and all other parties connected with the Scheme.
The Act also provides for the recognition and supervision of persons who provide administrative services in or from Malta which do not themselves constitute licensable activity under the ISA to licence holders in Malta, or to equivalent authorised persons and schemes overseas.
Once licensed, an entity is subject to ongoing supervisory requirements. The Scheme shall submit half-yearly and annual reports to the MFSA and such other information, returns and reports as the MFSA may from time to time request. The accounting information provided in the annual report shall be audited by a qualified auditor approved by the MFSA. The auditor’s report, including any qualifications thereto shall be reproduced in full in the annual report. The half-yearly and annual reports shall be published and submitted to the MFSA within two and four months respectively of the end of the period concerned.
Prospectus/offering document/MoA requirements
Retail Collective Investment Schemes
All collective investment schemes are required to draw up a Prospectus which includes the prescribed information. These schemes are also required to comply with the requirements outlined in the Investment Services Act (Prospectus of Collective Investment Schemes) Regulations, 2005.
As from July 2012 Maltese UCITS will also be required to draw up a key investor information document (KIID). The KIID shall include appropriate information about the essential characteristics of the Maltese UCITS such as to reasonably enable the investors to understand the nature and the risks of the Scheme that is being offered to them and, consequently to take investment decisions on an informed basis.
Professional Investor Funds
A Professional Investor Fund promoted to Experienced or Qualifying Investors is required to draw up an Offering Document which should at least include the prescribed information. The Offering Document should be provided to prospective investors free of charge.
A Professional Investor Fund targeting Extraordinary Investors may either draw up an Offering Document or a Marketing Document which should at least include a list of Service Providers including the Directors, General Partner(s) or Trustee (as applicable), and their respective contact details; a definition of Extraordinary Investor; a risk warnings section describing in brief at least the principal risks associated with investing in the PIF; the investment objectives, policies and restrictions of the PIF or where applicable its sub-funds; details of the fee structure; details of the classes/ units on offer (whether these constitute a distinct sub-fund or not); an overview of the safekeeping arrangements (where a custodian/ prime broker is not appointed); a prescribed statement in the case where the PIF has issued “Voting Shares” to the promoters and “non Voting Shares” to prospective Investors; the Extraordinary Investor Declaration Form and the Subscription Form together with the text prescribed at law.
The Marketing Document should also include as an Annex, either the most recent version of the Constitutional Document of the PIF or a summary thereof. In the latter case, the Marketing Document should provide that a copy of the PIF’s Constitutional Document will be provided to prospective investors upon request. The Marketing Document or where applicable the Offering Document, should be provided to prospective investors free of charge.
Professional Investor Funds (PIFs) are alternative investment funds for high net worth individuals and institutions.
The Investment Services Rules for Professional Investor Funds classify these funds into three types, depending on the experience and sophistication of the end investor and the level of protection required. These are the:
“Experienced Investor” – being a person having the expertise, experience and knowledge to be in a position to make his own investment decisions and understand the risks involved. An experienced investor is requested to confirm certain qualities such as experience and track record in making investments and to provide other relevant information. Before an Experienced Investor Fund may accept any investment, it should obtain a completed “Experienced Investor Declaration Form” in which the investor confirms that he/she has read and understood the mandatory risk warnings and describes why he/she is an “Experienced Investor”.
“Qualifying Investor” – being an individual whose net worth or joint net worth with the investor’s spouse exceeds EUR 750,000. Prior to accepting any investment the PIF should be in receipt of a completed “Qualifying Investor Declaration Form” in which the investor confirms that he/she has read and understood the mandatory risk warnings and describes why he/she is a “Qualifying Investor”.
“Extraordinary Investor” – being an investor whose net worth must exceed EUR 7.5 million. Prior to accepting any investment the PIF should be in receipt of a completed “Extraordinary Investor Declaration Form” in which the investor confirms that he/she has read and understood the mandatory risk warnings and describes why he/she is an “Extraordinary Investor”.
Proformas of the aforementioned forms are available on the MFSA website.
In the case of retail collective investment schemes, the Rules do not provide for any investor restrictions.
Minimum initial investment
In the case of Professional Investor Funds promoted to Experienced Investors, the Rules provide that the minimum investment threshold must amount to EUR 10,000 and that the total amount invested may not fall below this threshold unless this is the result of a fall in the net asset value of the PIF. The minimum investment threshold applies to each individual “Experienced Investor”.
In the case of Professional Investor Funds promoted to Qualifying Investors the minimum initial investment must amount to EUR 75,000 and the total amount invested may not fall below this threshold unless this is the result of a fall in the net asset value. As long as the minimum threshold is satisfied, additional investments – of any size – may be made. The minimum investment threshold applies to each individual “Qualifying Investor”.
In the case of Professional Investor Funds promoted to Extraordinary Investors, the minimum initial investment must amount to EUR 750,000. The total amount invested may not fall below this threshold unless this is the result of a fall in the net asset value. Provided that the minimum threshold is satisfied, additional investments – of any size – may be made.
In the case of joint holders, the abovementioned minimum investment limit remains that set for each investor. In the case of an umbrella fund comprising of sub-funds each of which is set up as a Professional Investor Fund, the minimum investment threshold may be applicable on a per scheme basis rather than on a per sub-fund basis.
In the case of retail collective investment schemes, the Rules do not provide for any minimum initial investment thresholds.
All schemes have to follow the risk spreading principle as specified under the Investment Services Act. Article 2 of the ISA however permits the licensing of Schemes that are not restricted by the risk spreading requirement subject to certain conditions prescribed therein. Professional Investor Funds promoted to “Qualifying” or “Extraordinary” investors are not subject to risk diversification requirements.
In the case of Professional Investor Funds promoted to Experienced Investors borrowing for investment purposes or leverage via the use of derivatives is restricted to 100% of NAV.
Professional Investor Funds promoted to Qualifying Investors are not subject to any investment or borrowing (including leverage) restrictions other than those which may be specified in their Offering Document.
Professional Investor Funds promoted to Extraordinary Investors are not subject to any investment or borrowing (including leverage) restrictions other than those which may be specified in their Offering Document/ Marketing Document.
Service provider regulation
The Investment Services Act prescribes that any person wishing to carry out an investment service in Malta needs a licence in terms of the Act. The Authority expects all services providers to be ‘fit and proper’ that is to be able to show high degrees of competence, integrity and solvency. Service Providers of collective investment schemes generally include, amongst others, a Manager, a Custodian, an Administrator and an Investment Adviser.
Professional Investor Funds may have either Maltese or Foreign Services Providers. Foreign Service Providers, when accepted by the MFSA as Service Providers of a collective investment scheme should be established and regulated in a Recognised Jurisdiction. Recognised Jurisdictions include EU and EEA Members and other countries, to be approved on a case by case basis, that are considered as having EU equivalent rules.
The MFSA may, in the following scenarios, also accept Service Providers which may not be established and regulated in a Recognised Jurisdiction:
i. where the Service Provider is the subsidiary of a firm that is regulated in a Recognised Jurisdiction, that retains control of its subsidiary and undertakes to provide all the necessary information to the MFSA; or
ii. where the MFSA considers that the Service Provider is subject to regulation to an equal or comparable level in the jurisdiction concerned.
Where one or more of the proposed Service Providers is not based in a Recognised Jurisdiction or does not fall under (i) above, it is recommended that prior to the submission of an Application for a PIF Licence, the promoters submit an application for preliminary indication of acceptability of a PIF.
There is no mandatory requirement to have a promoter though this role may be fulfilled either by the service provider or the administrator introducing the fund in Malta.
The role of the investment advisor is that of providing financial advice to the scheme/fund or its Manager with regards to the investment and re-investment of the assets of the Scheme/Fund. The Investment Advisor will not have any discretion with respect to the investment and re-investment of the assets of the Scheme/Fund.
Retail Collective Investment Schemes:
Maltese UCITS Schemes and Maltese Non-UCITS Schemes are generally not required to appoint an Investment Adviser and where appointed, the proposed Investment Adviser need not be established and regulated in Malta.
Where the Investment Adviser is appointed by the Manager, rather than by the Scheme, such Investment Adviser is subject to MFSA’s approval. Where the proposal includes the appointment of an Investment Adviser that is established in Malta, the Adviser should be in possession of a Category 1A, 1B, 2 or 3 Investment Services Licence issued in terms of Article 6 of the Investment Services Act, 1994 and should be duly authorised by the MFSA to provide investment advice to collective investment schemes.
Professional Investor Funds:
Professional Investor Funds are generally not required to appoint a third party Investment Adviser. Moreover, the proposed Investment Adviser need not be established and regulated in Malta.
Where the Investment Adviser is appointed directly by the Manager, rather than by the PIF such Investment Adviser is not subject to MFSA’s approval and no eligibility criteria apply.
Where the proposal includes the appointment – directly by the PIF – of a third party Investment Adviser, and the proposed Investment Adviser is established in Malta, the
Adviser should be in possession of a Category 1A, 1B, 2 or 3 Investment Services Licence issued in terms of Article 6 of the Act and should be duly licensed and authorised by the MFSA to provide investment advice to collective investment schemes.
Retail Collective Investment Schemes
A Maltese UCITS Scheme which is not self-managed shall appoint a Maltese or European management company.
A Maltese management company appointed by a Maltese UCITS Scheme must fulfil three criteria namely:
1) the fund manager should be established in Malta;
2) the fund manager must hold a Category 2 Investment Services Licence issued in terms of Article 6 of the Investment Services Act, 1994 and
3) must qualify as a Maltese Management Company in terms of the UCITS Regulations.
The UCITS IV Directive offers UCITS Fund Managers the opportunity to exercise a management passport. The UCITS IV management company passport permits the remote establishment and cross border management of UCITS funds within the EU.
A European management company may be appointed as long as it complies with Regulations 9 and 10 of the Investment Services Act (UCITS Management Company Passport) Regulations, 2011 and Part CII of the Investment Services Rules for Investment Services Providers.
Where a Maltese Non-UCITS Scheme proposes to appoint a third party Manager and the proposed Manager is established in Malta, it should be in possession of a Category 2 Investment Services Licence issued in terms of Article 6 of the Investment Services Act, 1994 and authorised to provide fund management services.
Professional Investor Funds
In the case of Professional Investor Funds, where a third party Manager is to be appointed and the proposed Manager is established in Malta, the Manager should be in possession of a Category 2 Investment Services Licence issued in terms of Article 6 of the Act and should be duly licensed and authorised by the MFSA to provide management services to collective investment schemes.
The MFSA expects the Manager to exercise care and diligence in the selection of a Sub-Manager and to assume responsibility for the acts of the Sub-Manager
The main role of the custodian is that of safe-keeping of the assets of the scheme and ensuring that the fund manager is acting within the powers granted through the prospectus or marketing document and in accordance with the Standards Licence Conditions and the Constitutional Document.
Retail Collective Investment Schemes
The Rules provide as follows:
a. The Custodian should be based in Malta and in possession of a Category 4 Investment Services Licence issued by the MFSA. The custodian can be either a credit institution licensed under the laws of Malta, or such other body corporate, unincorporated body or association acceptable to the MFSA, providing the services of a Custodian.
b. The Custodian shall have sufficient financial resources and liquidity at its disposal to enable it to conduct its business effectively and to meet its liabilities. The Custodian shall also have the business organisation, systems, experience and expertise deemed necessary by the MFSA for it to act as Custodian. The Scheme shall be required to satisfy the MFSA that the proposed Custodian meets the above requirements.
c. The MFSA shall be entitled to be satisfied, on a continuing basis that the Custodian has the appropriate expertise and experience to carry out its functions.
d. The appointment and/or the replacement of any party who is to be the Custodian of the Scheme, the terms of that appointment, and the contents of the agreement to which the appointment is subject, shall be agreed in advance with the MFSA. The MFSA shall have the right to require the replacement of the Custodian of the Scheme.
e. The Custodian shall be separate and independent from the Manager and shall act independently and solely in the interests of the unit holders. Any facts, relationships, arrangements, or circumstances which may at any stage bring that independence into question shall be declared to the MFSA as soon as the Scheme becomes aware of any such matter.
• Professional Investor Funds
Where the PIF wishes to appoint a Custodian established in Malta, the Custodian should be in possession of a Category 4 Investment Services Licence issued in terms of Article 6 of the Act.
A Professional Investor Fund promoted to Extraordinary Investors is required to appoint a third party Custodian responsible for the safe keeping of the assets of the PIF and for undertaking monitoring duties over the PIF’s Manager as more fully detailed in the relevant standard licence conditions. The Custodian shall be:
i. an entity providing the services of Custodian in Malta in terms of a Category 4 Investment Services Licence issued under the Investment Services Act, 1994; or
ii. an entity constituted in a Member State or EEA State and operating from a Member State or EEA State other than Malta, providing the services of Custodian to collective investment schemes; or
iii. an entity constituted outside Malta and operating from outside Malta providing the services of a Custodian to collective investment schemes where the MFSA is satisfied that such entity is of sufficient standing and repute and having the business organisation, systems, experience and expertise deemed necessary for it to act as Custodian.
The Scheme shall obtain the written consent of the MFSA before the appointment or replacement of any party to act in the capacity of Custodian to the Scheme. The MFSA reserves the right to object to the proposed replacement or appointment and to require such additional information it considers appropriate.
The Custodian shall be separate and independent from the Manager and shall act independently and solely in the interests of the unit holders. Any facts, relationships, arrangements, or circumstances which may at any stage bring that independence into question shall be declared to the MFSA as soon as the Scheme becomes aware of any such matter.
The Scheme shall notify the MFSA before the appointment or replacement of any party to act in the capacity of Custodian or Prime Broker to the Scheme at least ten business days in advance of the appointment or replacement. Such notification shall be accompanied by a confirmation from the Board of Directors/ General Partner(s)/ Manager as the case may be that the proposed Custodian or Prime Broker is authorised to provide these services by its home state regulator; and evidence of the authorisation of the Custodian or Prime Broker.
Where no Custodian is appointed, responsibility for the establishment of proper arrangements for the safe keeping of the PIF’s assets remains with the Directors/ General Partner(s)/ Trustee and officers of the PIF. The applicant will be required to outline – as part of the application process – the arrangements that will be put in place to ensure adequate safekeeping of the assets of the PIF.
Category 4 deals with licence holders authorised to act as trustees or custodians of Collective Investment Schemes. The law provides that their Minimum Initial Capital Requirement amounts to EUR 125,000.
Start-up PIFS – ICs of RICCs with common service providers
A Recognised Incorporated Cell Company (RICC) may provide administrative services under a standardised set-up to one or more start-up funds formed as incorporated cells (ICs). Each IC can be either third party managed or self-managed. In the case where an IC is third-party managed, it will be required to appoint an investment manager, approved by the RICC. An IC should, unless otherwise authorised in writing by the MFSA, appoint the service providers selected for it by its RICC. RICCs and their ICs are regulated by the Companies Act (Recognised Incorporated Cell Companies) Regulations, 2012 and supplementing investment services rules.
PIFs – Preliminary indication of acceptability
The promoter of a Professional Investor Fund may apply for a preliminary indication of acceptability on the basis of the proposed structure of the PIF and service providers. This application must be submitted in respect of a prospective PIF having one or more of its Service Providers is not the subsidiary of a firm that is regulated in a Recognised Jurisdiction, which retains control of its subsidiary and undertakes to provide all the necessary information to the MFSA. If any of the external service-providers to be appointed by the PIF operate from a country that is not a “Recognised Jurisdiction” or are not subsidiaries of a company involved in financial services and regulated in a Recognised Jurisdiction, it is recommended that at an early stage, applicants request a preliminary indication of acceptability of the PIF.
In such a case, the MFSA will review the proposed structure of the PIF and its prospective Service Providers and will inform the applicant whether the proposed structure of the PIF and its Service Providers are acceptable to the MFSA.
The MFSA will ordinarily communicate the acceptability or otherwise of the proposed structure of the PIF within seven business days of receipt of the application for preliminary indication of acceptability of a PIF. However, this does not substitute the application for a PIF Licence.
Applications for a Collective Investment Schemes Licence/ Professional Investor Fund Licence
When submitting an application for a licence under the Investment Services Act, the promoter should ensure that the appropriate Application Form is completed. The application process can be divided into three phases as follows:
Phase One – Preparatory
In all cases, the MFSA recommends that the promoters meet up with the regulatory authority to describe their proposal. This meeting should take place prior to the actual submission of the application. Although guidance will be given on the relevant regulatory requirements and on the completion of the Application documents, responsibility for the formulation of the proposal and the completion of the Application documents will remain with the Applicant. It is essential that the Applicant provides a comprehensive description of the proposed activity at the beginning of Phase One.
After preliminary discussions, the promoters should submit a draft Application Form, together with the supporting documents specified in the Application Form itself. The Application Form and the supporting documentation will be reviewed and comments provided to the Applicant. The MFSA may ask for more information and may make such further enquiries as it considers necessary. The ‘fit and proper’ checks – which entail following up the information which has been provided in the Application documents – begin at this stage.
The MFSA will consider the nature of the proposed Scheme/Fund and a decision will be made regarding which “Standard Licence Conditions” (SLCs) should apply. Some of these conditions may be disapplied or amended (where the circumstances justify such treatment, as long as investors are adequately protected) and supplementary conditions (if any) may be applied. The licence conditions are very important since they represent the ongoing requirements to which the Applicant will be subject, if and when licensed.
Phase Two – Pre-Licensing
Once the review of the draft Application and supporting documents has been completed, the Authority will issue its ‘in principle’ approval for the issue of a licence. At this stage, the Applicant will be required to finalise any outstanding matters. Submission of signed copies of the revised Application form together with supporting documents in their final format, and any other issues raised during the Application process, should be resolved as part of this phase. A licence will be issued as soon as all pre-licensing issues are resolved.
Phase Three – Post-Licensing/Pre-Commencement of Business
The Applicant may be required to satisfy a number of post-licensing matters prior to formal commencement of business.
Regulatory approval time:
The MFSA is used to working within agreed timeframes and deadlines. These may vary according to circumstances such as the prompt submission of information and feedback required from the fund promoter and the nature and complexity of the funds and the verification process. However the following are indicative timelines:
Collective Investment Schemes: The general rule is that MFSA will review the draft application form and the supporting documentation and will provide feedback within three weeks from submission of the application documents.
Third party managed Professional Investor Funds promoted to Experienced or Qualifying Investors: The MFSA will review the Application Form and supporting documents and provide the Applicant with comments thereon within seven business days from receipt of the application documents.
Third party managed Professional Investor Funds promoted to Extraordinary Investors: The MFSA will review the Application Form and the supporting documents and will provide the Applicant with comments thereto within three business days. This time-frame only applies when the PIF appoints a third party Manager and where all service-providers are based and regulated in Recognised Jurisdictions.
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