By definition, the scope of Collective Investment Schemes (CISs) is to pool money from a number of investors, to be invested by a fund manager. The fund is divided into units, and these are acquired by investors, to take a stake in the fund, and become unitholders.
CISs are defined under the Maltese Investment Services Act [Chapter 370 of the Laws of Malta], as having the following characteristics:
the scheme or arrangement operates according to the principle of risk spreading; and either
- the contributions of the participants and the profits or income out of which payments are to be made to them are pooled; or
- 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
- units are, or have been, or will be issued continuously or in blocks at short intervals.
To issue or create units or in order for a CIS to carry on any activity, it must be duly licensed by the MFSA, complying with the provisions of the Investment Services Rules and regulations provided under the Act and provided that the directors and officers are deemed to be fit and proper persons.
Malta caters for a number of different categories of CIS, which include:
UCITS are governed by an EU-harmonised regulatory regime allowing such funds to be registered and sold in Europe on the basis of a single authorisation from one EU member state. UCITS offer a high degree of investor protection as they are recognised by regulators worldwide and can be marketed to retail and institutional investors. In order for this type of fund to be set up, it must be ensured that the scheme’s head office has to be registered and established in Malta, there must be at least two directors, with at least one independent from the fund manager and the custodian, and finally, local substance is a requirement, but it depends on the fund’s structure.
AIFs on the other hand are governed by the AIFM Directive (AIFMD). The introduction of the AIFMD offered the possibility of passporting AIFs across other EU Member States. An AIF can be managed in two ways:
- If the AIF is third-party managed, then the AIFM must be authorised as such in terms of the AIFMD; or
- If the AIF is self-managed, then the Board of Directors of the AIF must set up an Investment Committee composed of 3 persons, with at least one person residing in Malta. This type of AIF must still comply with all the provisions of the AIFMD.
More recently the MFSA has introduced Notified Alternative Investment Funds (NAIFs) that may only be marketed to professional investors and those investors who invest a minimum of €100,000 (or equivalent) and declare in writing to the AIFM and the NAIF that they are aware and accept the risks associated with the investment. In the case of a NAIF, the AIFM is only required to notify the MFSA of its setup; no authorisation or approval is required by the MFSA and they are not subject to ongoing supervision. The AIFM holds full responsibility for the NAIF and for the fulfilment of its obligations.
PIFs are a type of CIS that is aimed at professional investors, as classified; PIFs are the common vehicle of choice for hedge fund structures. Their underlying assets vary from transferable securities, immovable property and infrastructure to more complicated asset classes such as derivatives. Maltese-based funds that include investment in virtual currencies must be set up as PIFs. PIFs are not required to appoint a Custodian to cover the full suite of custody obligations but are required to have adequate safekeeping arrangements for the fund’s assets in place. PIFs are not required to appoint a third-party manager, administrator or any other service provider who is licenced in Malta.
The licensing process for UCITS, AIFs and PIFs in Malta typically consists of the following steps:
Phase One – Preparatory
Preliminary meetings are held with the MFSA to discuss the details of the structure with the promoters and present a copy of the draft application. This should take place in advance of the submission of the application.
Phase two – Pre-Licencing
The MFSA will issue its ‘in-principle’ approval. The licence is issued as soon as all pre-licensing issues are resolved.
Phase three – Post Licencing
The Applicant may be required to satisfy a number of post-licensing conditions prior to formal commencement of business.
Article written by Senior Associate Dr Cherise Abela Grech.
Disclaimer: This article is not intended to impart legal advice and readers are asked to seek verification of statements made before acting on them.