By the Malta Financial Services Authority – Investment services regulation
The Investment Services Act (the “ISA”) provides for the authorisation of investment services providers and for collective investment schemes operating in or from Malta.
In considering an application for a licence, the MFSA will, amongst others, have regard to:
- investor protection and the protection of the general public
- the protection to the reputation of Malta taking into account Malta’s international commitments
- the promotion of competition and choice
- (in the case of a scheme) the reputation and suitability of the applicant and all other parties connected with the scheme
The ISA also provides for the recognition and supervision of persons who provide to licence holders in Malta (or to equivalent authorised persons and schemes overseas) administrative services which do not themselves constitute licensable activity under the ISA.
Once licensed, an entity is subject to ongoing supervision and operational requirements. Half-yearly and annual reports on the relevant fund/s must be submitted to the MFSA, together with any other information, returns and reports that the MFSA may request. The accounting information provided in the annual report must be audited by a qualified auditor approved by the MFSA and the report thereby drawn up by the auditor, including any qualifications therein, must be reproduced in full in the annual report. The half-yearly and annual reports must be published and submitted to the MFSA within two and four months respectively from the end of the financial period to which they relate.
An AIF is required to draw up an Offering Document in accordance with Appendix 4 of the AIF Rulebook.
Meanwhile, an AIF set up as a Professional Investor Fund targeting Experienced or Qualifying Investors is required to draw up an Offering Document containing the information listed in Appendix II to Part B of the Investment Services Rules for Professional Investor Funds (the “PIF Rulebook”) while a PIF targeting Extraordinary Investors may draw up either an Offering Document or a Marketing Document in accordance with Part A of the PIF Rulebook.
ii) Retail schemes
Retail schemes are required to draw up a Prospectus in accordance with the Investment Services Act (Prospectus of Collective Investment Schemes) Regulations, 2005 and Appendix I to Part B of the Investment Services Rules for Retail Collective Investment Schemes (the “CIS Rulebook”). With regards to Ucits, as of July 2012 these schemes have also been required to draw up a Key Investor Information Document (“KIID”). A KIID must incorporate information on the essential characteristics of the Ucits in such a way as to reasonably enable prospective investors to understand the nature and the risks of the scheme and to consequently take investment decisions on an informed basis.
Investor restrictions – type of investor
The authorisation of an AIF only allows it to be promoted to Professional Investors. In fact, in the event of active promotion of an AIF through mass media advertising, the relevant advertisements should clearly indicate that the AIF is not available for investment by the general public but is only available for Professional Investors satisfying the criteria set out in the AIF’s Offering Document.
However, an AIF may be promoted to retail investors where its manager on its behalf or the AIF itself has acquired specific authorisation to this effect granted by the MFSA. In the case of an AIF which is marketed to retail investors, the fund manager would have to comply with the additional Standards Licence Conditions contained in the ISP Rulebook as well as with the Investment Objectives and Restrictions prescribed in relation to the AIF.
AIFs authorised as PIFs are specifically targeted at investment institutions and high net worth individuals. These funds are further classified by the PIF Rulebook into three types: the Experienced Investor Fund, the Qualifying Investor Fund and the Extraordinary Investor Fund. Each type is characterised by the level of experience and sophistication of the end investor and the level of investor protection thereby required.
ii) Retail schemes
Ucits and Non-Ucits Retail Schemes are retail funds and as such are not subject to any investor restrictions.
Investor restrictions – minimum initial investment
There is no prescribed minimum investment threshold for AIFs in terms of the AIF Rulebook. However, given that these funds are promoted primarily to professional and institutional investors, one would expect the fund manager to set a minimum investment threshold and to disclose this in the Offering Document.
On the other hand, minimum entry levels are applicable to PIFs as follows:
Experienced Investor Fund 10,000
Qualifying Investor Fund 75,000
Extraordinary Investor Fund 750,000
Once the initial investment in a fund has been made, any additional investment in that fund may be of any amount. However, the total amount invested may not at any time fall below the relevant threshold unless as a result of a fall in the fund’s NAV.
In the case of joint holders, the minimum investment threshold remains set at that prescribed for an individual investor.
In the case of an umbrella fund comprising sub-funds all set up as PIFs, the minimum investment threshold may be made applicable on a per scheme basis rather than on a per sub-fund basis.
ii) Retail schemes
There are no minimum investment thresholds for retail schemes.
As a rule, collective investment schemes are required to apply the principle of risk spreading, as per the definition of “collective investment scheme” contained in Article 2 of the ISA. However, the same article provides for the validity of AIFs that are not promoted to retail investors and which do not apply the principle of risk-spreading.
An AIF is required to set a maximum level of leverage which it may employ as well as a limit on the extent to which it may reuse collateral or guarantees granted under a leveraging agreement. In carrying out this exercise, the fund must take into account such matters as its investment strategy, any interlinkage or relevant relationships with other financial services institutions which could pose systemic risk, the need to limit the exposure to any single counterparty, the fund’s asset-liability ratio and the scale, nature and extent of the activity of the fund on the markets concerned. The fund must also have regard to the relevant provisions of EU law on this matter1. Leveraged funds are subject to additional reporting obligations.
With regards to PIFs, Experienced Investor PIFs may only engage in direct borrowing for investment purposes and may only be leveraged via the use of derivatives where this is restricted to 100% of NAV. There are no leverage restrictions in the case of Qualifying or Extraordinary Investor PIFs other than any that may be contained in the given fund’s Offering or Marketing Document.
ii) Retail schemes
As a general rule, retail scheme set up as investment companies may not engage in borrowing. However, an exception to the rule is allowed where the proposed borrowing is on a temporary basis and is limited to the value of 10% of either the fund’s assets (where the fund is set up as an investment company or as a limited partnership) or the value of the scheme (where it is set up as a unit trust or as a contractual fund). Borrowing is also allowed where it is directed towards the acquisition of immovable property essential to the direct pursuit of the scheme’s business and where it represents (in the case of an investment company) no more than 10% of the scheme’s assets. A back-to-back loan for the acquisition of foreign currency is also permissible.
Service providers regulation
The ISA prescribes that any person intending to carry out investment services in Malta must be in possession of a valid investment services licence. The Service Providers of a fund would generally include a Manager, a Custodian, an Administrator and an Investment Advisor, amongst others. There is no mandatory requirement for any type of fund to appoint a Promoter, though this role may be fulfilled by the service provider introducing the fund in Malta or by the Administrator.
The MFSA requires all Service Providers to be “fit and proper”. This generally means that the Service Provider must be able to show high levels of competence, integrity and solvency.
The Service Providers that are established in Malta are required to be licensed and regulated by the MFSA. Meanwhile, Service Providers that benefit from the EU passport are allowed to provide services to Malta-based funds following notification under the applicable passporting rules. Furthermore, where permitted by EU law, other foreign entities may be allowed to provide services to Maltese schemes provided that they are established and regulated in a Recognised Jurisdiction i.e. an EU or EEA Member State or any other State that is approved by the MFSA on the basis of its being considered to have rules equivalent to those pertaining in the EU.
The fund manager
The AIFMD has led to the introduction of a number of specific requirements relative to fund managers of AIFs (“AIFMs”) responsible for portfolio and risk management. Apart from the “full AIFM” regime, a lighter (de minimis) regime is made available for AIFMs which, whether directly or indirectly, manage portfolios of AIFs whose assets under management collectively do not exceed the following amounts:
- 100m; or
- 500m in the case of AIFMs that manage only unleveraged AIFs that do not have redemption rights exercisable during the period of 5 years following the date of the initial investment in each AIF concerned.
The frameworks applicable to full AIFMs and to de minimis AIFMs respectively are as follows.
Where an AIF appoints an external Manager which exceeds the thresholds prescribed in the AIFMD for de minimis fund managers, the AIFM would be subject to all the requirements prescribed by the AIFMD as transposed into Maltese law.
Where the AIFM is established in Malta, it would be required to be in possession of a Category 2 Investment Services Licence and would be subject to the Standard Licence Conditions prescribed in Part BIII of the ISP Rulebook.
By virtue of the AIFMD, AIFMs may make use of the EU passport i.e. the right of establishment and cross-border management of AIFs within the EU. This enables both the management and/or marketing of a Maltese AIF by an AIFM established in another EU State and the management and/or marketing of an AIF established in another EU State by a Maltese AIFM. In any such case, the AIFM would be required to comply with the Investment Services Act (Alternative Investment Fund Manager Passport) Regulations, 2013. Specific rules also apply in the context of non-EU AIFMs, as contained in the Investment Services Act (Alternative Investment Fund Manager Third Country) Regulations.
Any delegation of management duties to a sub-manager would have to be notified to the MFSA and would have to be in accordance with a number of conditions, as contained in Section 4 of Part BIII of the ISP Rulebook. The liability of the AIFM will in no case be affected by delegation of any its functions to third parties.
An AIF which does not appoint an external Manager and is therefore a self-managed AIF and which has assets under management exceeding the de minimis thresholds would itself be required to be licensed as a self-managed AIF. In such case, the AIF would also be required to adhere to all the Standard Licence Conditions prescribed in Part BIII of the ISP Rulebook.
De Minimis AIFMs
Where the Manager of an AIF does not exceed the thresholds prescribed in Article 3(2) AIFMD and is therefore a de minimis AIFM, such AIFM would be required to comply with Section 1 of Part BIII of the ISP Rulebook relating to de minimis fund managers. Where the de minimis AIFM is established in Malta, it would be required to be in possession of a de minimis Category 2 Investment Services Licence. The MFSA has opted to apply a minimum licencing regime rather than registration to de minimis AIFMs as it considers that it is in the best interest of fund managers to be licensed, particularly when dealing with potential investors. It is the policy of the MFSA that only persons who are “fit and proper” should be allowed to establish a financial activity and operate on an on-going basis in and from Malta.
Where an AIF is a self-managed PIF whose assets under management do not exceed the de minimis thresholds, the self-managed de minimis AIF would be required to comply with the Supplementary Licence Conditions applicable to self-managed schemes prescribed in the PIF Rulebook.
Notwithstanding all of the above, an external Manager or an internally managed AIF that could be classified as de minimis may “opt in” under the AIFMD and choose to be subject to all the obligations prescribed therein. In doing so, it would be able acquire the AIFMD passport, which is otherwise not available to de minimis AIFMs.
ii) Retail schemes
A Maltese Ucits which is not self-managed must appoint a Maltese management company as defined in the Investment Services Act (Marketing of Ucits) Regulations, 2011. The Manager must be in possession of a Category 2 Investment Services Licence and will be expected to comply with the Standard Licence Conditions prescribed in Part BII of the ISP Rulebook. By virtue of the Ucits IV Directive2, Ucits Managers may make use of the Ucits passport.
Any delegation of management duties to a Sub-Manager must be notified to the MFSA and must be in accordance with a number of conditions, as contained in section 4 of Part BII of the ISP Rulebook. The liability of the Manager will in no case be affected by delegation of any its functions to third parties.
A Maltese Ucits which does not appoint a Manager (a self-managed Ucits) is required to adhere to the supplementary conditions applicable to self-managed schemes included in Part BII of the CIS Rulebook as well as to Appendix VIII of the said Rulebook.
The fund administrator
Fund administrative services may be carried out either by the Manager or by a third party Administrator.
In the case of an AIF, the administrative function must be carried out either in accordance with the rules relative to the AIFM (in the case that the AIFM retains the administrative function) or in accordance with the rules on delegation (where an external Administrator is appointed), both as contained in Part BIII of the ISP Rulebook.
Meanwhile, the administrative function within a Ucits must be carried out either in accordance with the rules relative to a Ucits Manager (in the case that the Manager retains the administrative function) or in accordance with the rules on delegation (where an external Administrator is appointed), both as contained in Part BII of the ISP Rulebook.
In either case, where the Administrator is established in Malta, it will be required to be in possession of a Fund Administration Recognition Certificate issued in terms of Article 9A of the ISA.
The primary role of the Custodian is that of safe-keeping the assets of the scheme and of monitoring the activities of the Manager. All service providers intending to act as Custodians in Malta are required to be based in Malta and in possession of a Category 4 Investment Services Licence and all must comply with the Standard Licence Conditions contained in Sections 1 and 2 of Part BIV of the ISP Rulebook on the requirements relative to the Custodians of both Ucits and AIFs.
Among these requirements are:
- the Custodian’s classification as a Malta-licensed credit institution or as any one of the other institutions listed in Section 1 of Part BIV as eligible for appointment as a Custodian. In relation to custodians of AIFs, the MFSA shall allow credit institutions which have their registered offices in the Union and not being established in Malta to be appointed as custodians until 22 July 2017.
- effective management of the Custodian by at least two individuals;
- cooperation in an open and honest manner with the MFSA and prompt notification of any relevant information;
- establishment, implementation and maintenance of the appropriate organisational procedures and mechanisms;
- establishment, implementation and maintenance of adequate risk management policies and procedures; and
- compliance with certain requirements relating to financial resources, accounting and record-keeping.
Besides compliance with Sections 1 and 2 of Part BIV of the ISP Rules, the Custodian of an AIF must also comply with the supplementary conditions contained in Section 4 of Part BIV of the ISP Rulebook. In the case of the Custodian of a Ucits, compliance with Section 3 of the same must be ensured. Any entity proposing to act as Custodian to both AIFs and Ucits would have to comply with both sections as appropriate in relation to each fund.
The obligation to appoint a Custodian does not apply to PIFs promoted to Qualifying Investors or to those promoted to Extraordinary Investors. In the case of these types of funds, the funds’ governing bodies may take on the responsibility for the safe-keeping of the PIF’s assets in place of an external Custodian. However, the appointment of a Custodian is always recommended by the MFSA.
The investment advisor
The role of the Investment Advisor is that of providing financial advice to the fund or to its Manager with regards to the investment and re-investment of the assets of the fund. As the name implies, the Investment Advisor’s role is purely advisory and does not include any discretion as to the actual application of a fund’s assets.
The appointment of an Investment Advisor is not mandatory and any Investment Advisor appointed need not be established and regulated in Malta. However, where any Investment Advisor proposed to be appointed is in fact established in Malta, such Investment Advisor is required to be in possession of a Category 1A, 1B, 2 or 3 Investment Services Licence and authorised by the MFSA to provide investment advice to collective investment schemes.
In the case of AIFs, MFSA approval is not required and no eligibility criteria apply. The proposal of an Investment Advisor to a retail scheme, on the other hand, is subject to MFSA approval where the proposal is made by the Manager (as opposed to where the proposal is made by the scheme itself).
All funds are required to appoint an Auditor. An Auditor’s report should be included in each of the AIF’s annual reports.
The compliance officer
All funds are required to appoint a Compliance Officer. Responsibility for the fund’s compliance with its licence conditions rests with the Board of Directors in the case of a scheme set up as an investment company, with the General Partner in the case of a scheme set up as a limited partnership or with the AIFM/Manager in the case of a scheme set up as a unit trust or a common contractual fund. A scheme should request its Compliance Officer to prepare a Compliance Report on a six-monthly basis.
Money-laundering reporting officer
All funds are required to appoint a Money-Laundering Reporting Officer. Responsibility for the fund’s compliance with its obligations as regards the prevention of money-laundering rests with the Board of Directors in the case of a scheme set up as an investment company, with the General Partner in the case of a scheme set up as a limited partnership or with the AIFM/Manager in the case of a scheme set up as a unit trust or a common contractual fund.
Incorporated cell structures for fund platforms
The fund platform business was facilitated in Malta in 2012 with the introduction of the Recognised Incorporated Cell Company (RICC).
Under the RICC structure, the incorporated cell company provides administrative services (support functions rather than fully-fledged fund administration services) to its incorporated cells (ICs), each of which has separate legal personality and each of which must be licensed as a collective investment scheme. The ICs may be of any type of fund, whether AIF or Ucits. The RICC itself would not require an investment services licence but would instead require a recognition certificate. Management of each IC may be carried out either by the IC itself or by a third party investment manager appointed by the IC and approved by the RICC. A promoter can also set up a SICAV with sub-funds having segregated assets and liabilities or even with sub-funds which are established as ICs.
RICCs and their ICs are regulated by the Companies Act (Recognised Incorporated Cell Companies) Regulations, 2012 and the applicable sections of the ISP Rulebook.
Application for a fund licence
The application process for a fund licence under the ISA may be divided into three phases as follows:
Phase 1 – Preparatory
The MFSA recommends that fund promoters first set up a meeting with MFSA representatives in order to discuss their proposal. This meeting should be set up prior to the actual submission of an application. At this stage, the MFSA will provide guidance on the relevant regulatory requirements and on the completion of the application documents. Meanwhile, the promoter would be required to provide a comprehensive description of the proposed fund activities.
Once the preliminary discussions are completed, the promoter should submit a draft application form to the MFSA together with the supporting documents referenced in such form. The application form and supporting documentation will be reviewed by the MFSA, which will revert to the applicant with its comments. The “fit and proper” checks – which entail following up on the information that has been provided in the application documents – begin at this stage. The MFSA will also consider the nature of the proposed fund and a decision will be reached as to which Standard Licence Conditions should apply. These licence conditions will represent the ongoing requirements to which the promoter will be subject, if and when licensed.
Phase 2 – Pre-licensing
Once the review of the draft application form and of the supporting documents has been completed, the MFSA, if satisfied, will issue its “in principle” approval for the issue of a licence. At this stage, the applicant will be required to resolve any outstanding issues and to thereafter submit a revised application. A licence will be issued once all issues are resolved and the revised application is approved by the MFSA.
Phase 3 – Post-licensing/pre-commencement of business
The applicant may be required to satisfy certain post-licensing conditions prior to formal commencement of business.
Application for preliminary indication of acceptability in the case of PIFs
An application for preliminary indication of acceptability must be submitted in respect of a prospective PIF having one or more of its Service Providers based in a country that is not a Recognised Jurisdiction. The MFSA will review the proposed structure of the PIF and its prospective Service Providers and will inform the applicant as to the acceptability or otherwise of these structures, ordinarily within the period of seven working days from receipt of the application. In the case that the MFSA’s communication is positive in this regard, the promoter would be in a position to submit an application for a PIF licence in the manner described above.
Regulatory approval time
The MFSA is used to working within agreed timeframes and deadlines. These may vary according to particular circumstances, such as the promptness or otherwise of submission of information from the fund promoter and the nature and complexity of the funds in question and of the relevant verification processes.