Financial Services Regulations

Collective Investment Schemes

The Investment Services Act, Chapter 370 of the Laws of Malta (ISA) provides the statutory basis for regulating collective investment schemes established in or operating in or from Malta. A collective investment scheme generally collects money from the public, pools them together and invests such funds in assets, subject to those investment objectives being published in the scheme’s prospectus.

A CIS may be established in Malta in any of the below structures:

1. Investment Company with Variable Share Capital (SICAV);
2. Investment Company with Fixed Share Capital (INVCO);
3. Limited Partnership
4. Unit trust;
5. Contractual fund;
6. Incorporated Cell (either of Incorporated Cell Company or Recognised Incorporated Cell Company)

The aforementioned legal structures may permit their establishment either (i) as multi-fund (umbrella) companies with investment compartments thereunder (‘sub-funds’) whose assets and liabilities are segregated, thus enabling major cost-savings and allowing investors to easily switch between different sub-funds, or (ii) as multi-class companies whose capital is divided into multiple classes of shares.

According to the object and purpose of the CIS, it may be licensed as:

1. Non-Retail CIS

• Professional Investor Funds (PIFs)
• Alternative Investment Funds (AIFs)

2. Retail CIS

• UCITS Funds
• Retail Non- UCITs Funds

Our firm has the knowledge and expertise to provide your business with comprehensive assistance with the regulation and other matters such as with:

• corporate and fund structuring;
• drafting of corporate and offering documentation;
• coordinating the licence application with the Malta Financial Services Authority (MFSA);
• ongoing regulatory compliance and advice;
• passporting in or out of Malta under the relevant directives (UCITS and AIFMD); and
• listing with the Malta Stock Exchange (MSE)

Our spectrum of services and sectors of expertise include inter alia taxation, dispute resolution, employment, litigation, compliance and data protection, thus ensuring holistic assistance and bespoke advice to our clients throughout the life cycle of the collective investment scheme.

Professional Investor Funds

Professional Investor Funds (PIFs) are a special class of collective investment schemes which fall within the provisions of the Investment Services Act, 1994. PIFs are non-retail funds which are not subject to investment restrictions (apart from PIFs promoted to Experienced Investors) and are not regulated to the same extent as other Collective Investment Schemes (e.g. UCITS and AIFs). They are essentially AIFs which fall outside the scope of AIFMD and are therefore able to avail themselves of a lighter regulatory regime. They have been extensively used for investment in non-traditional investments and/or specialist instruments including private equity, derivatives, real estate, and traded endowment plans. Most Maltese PIFs are used for hedge fund set-ups.

As per the MFSA’s circular dated 19^th May 2015 and with effect from 1^st June 2015, a PIF may be established in the case of:

• A de minimis self-managed fund ( a self-managed fund above threshold may only be established as an AIF);
• A de minimis EU AIFM (however if the fund manager transitions to an EU AIFM, either by voluntarily opting in the AIFMD or by exceeding the respective de minimis thresholds, the fund will have to be converted to an AIF);
• A non-EU AIFM (a third country fund manager may also establish an AIF, subject to compliance with special provisions applicable to non-EU AIFMs managing EU AIFs).

Under the new regulatory status quo, EU AIFMs shall only be able to act as managers for AIFs.

The MFSA’s regulatory PIF regime distinguishes three principal categories:

• PIFs promoted to Experienced Investors (‘Experienced Investor Funds’);
• PIFs promoted to Qualifying Investors (‘Qualifying Investor Funds’); and
• PIFs promoted to Extraordinary Investors (‘Extraordinary Investor Funds’).

The main differences are summarized in the table below:

	Experienced Investor Funds	Qualifying Investor Funds	Extraordinary Investor Funds
Minimum Investment	€10,000	€75,000	€750,000
Eligible Investors	Experienced Investors	Qualifying Investors	Extraordinary Investors
Setup time	2-3 months	2-3 months	2-3 months
Investment Restrictions	Direct borrowing for investment purposes and leverage through the use of derivatives is restricted to 100% of NAV. Other investment restrictions apply.	None, unless the fund invests in immovable property.	None.
Borrowing Restrictions
Fund Manager	Optional. Self-managed PIFs allowed.	Optional. Self-managed PIFs allowed.	Optional. Self-managed PIFs allowed.
Fund Administrator	Optional	Optional	Optional
Investment Adviser	Optional	Optional	Optional
Custodian/Prime Broker	Required (must be independent from Fund Manager)	Optional (provided that there are adequate safekeeping arrangements)	Optional (provided that there are adequate safekeeping arrangements)
Money Laundering Reporting Officer (MLRO)	Required	Required	Required
Compliance Officer (may also act as MLRO)	Required	Required	Required
Auditor	Required	Required	Required
Offering Documentation	Offering Document	Offering Document	Offering Document  / Marketing Document
Listing	Optional	Optional	Optional

Alternative Investment Funds

The Alternative Investment Fund Management Directive (“AIFMD”) is intended to create a harmonized framework for the management and marketing of non-UCITS funds within the context of a high level of investor protection.

The transposition of the AIFMD in Malta has been effected under the Investment Services Act (Cap. 370 of the Laws of Malta), the subsidiary legislation and the Investment Services Rules issued thereunder.

An AIF is essentially a collective investment scheme which is not licensed as a UCITS fund and is defined 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”. Therefore, hedge funds, private equity funds, real estate funds, venture capital funds and others all fall within the scope of the AIFMD

Full compliance with the aforementioned Directive provides an AIFM with the opportunity to avail itself of the European passport (AIFM Passport) for the cross-border marketing and management of AIFs within the EU.

The AIFMD also adopts a lighter “de minimis” regulatory regime with regard to sub-threshold fund managers.

The MFSA has committed itself to process applications for the authorisation of AIFs within seven working days, provided all relevant documentation has been provided and that all functionaries appointed for the AIF are based and regulated in Malta, the EU, the EEA and other OECD jurisdictions. With respect to self-managed AIFs, the MFSA shall inform the applicant in writing within 3 months of the submission of a complete application, whether or not the licence has been granted.

Undertakings for Collective Investments in Transferable Securities (UCITS)

UCITS are open-ended Undertakings for Collective Investment in Transferable Securities regulated on an EU level. UCITS funds are able to be freely marketed across Europe and their units distributed cross-border by following the notification procedure set out in the UCITS Directive. Maltese UCITS schemes are popular due to their flexibility and the tax efficient features that they offer. They are open to all investors (both retail and institutional) and are the most common investment fund type in Europe. The UCITS brand is also recognised internationally, and many UCITS funds are registered in non-European countries such as Switzerland, Hong Kong, Singapore, Taiwan, Bahrain, Chile and Peru.

Key Features of UCITS

Fund Promoter	The promoter is responsible for the fund’s structure set up and distribution. No eligibility requirements are applicable
Fund Manager	Optional. A Maltese UCITS scheme may be self-managed or may appoint a UCITS European management company approved by the MFSA. The manager must have satisfactory financial resources and liquidity at its disposal
Custodian	Required. The UCITS scheme must appoint a custodian to whom the assets of the scheme are entrusted for safekeeping. The custodian must have an established place of business in Malta and be a licensed institution or another institution acceptable to the MFSA, with a place of business in Malta
Administrator	Optional. The UCITS scheme may appoint an administrator, who need not be based in Malta, provided such administrator is recognized by the MFSA. The services typically provided include valuation, transfer agency and registrar, corporate secretariat and listing agent
Investment Advisor	Optional. The UCITS may appoint an investment advisor who must have sufficient financial resources and liquidity at his disposal and demonstrate sufficient and relevant experience
Compliance Officer	Required
Money Laundering Reporting Officer (MLRO)	Required
Auditor	Required. An auditor must be approved by the MFSA and is responsible for certifying the fund’s annual report and accounts, which should include an audit report. The scheme must have at all times a Compliance Officer and a Money Laundering Reporting Officer
Approval Time	2-3 months. Dependent on factors such as fund’s complexity and submission of complete applications
Listing	Optional
Taxation	Exempt from income and capital gains tax (subject to not investing in immovable property situated in Malta)
VAT	Exempt without credit

Management Company Passport

A key development under UCITS IV is the introduction of a passport for UCITS management companies permitting UCITS funds to be managed on a cross-border basis. This means that a management company located in one member state is permitted to manage UCITS established in other member states.

This can be done both by way of establishing a branch, and on a cross-border basis. A branch has to comply with the relevant conduct of business rules of the host member state; in cross-border situations, the home member state conduct of business rules apply. The management company (its organisational structure including risk management) is supervised by home state regulation while the UCITS is governed by host state regulation.

The provisions of UCITS IV Directive also enable the set-up of master-feeder structures, whereby one UCITS invests at least 85% of its Net Asset Value (NAV) in another UCITS, thus enabling the management and administration of these structures to be centralized in a single jurisdiction and economies of scales to be realized (with respective reduction in costs to investors).

Non- UCITS Retail Schemes

Malta also allows for the setup of non-UCITS schemes. Non-UCITS are retail funds that are made available to the general public and thus are regulated in a greater level of detail than other funds which are offered to more experienced investors. Non-UCITS can only offer their units in Malta, however the requirements for the set-up and operation of these funds are similar to UCITS. Therefore, their use is limited and a non-UCITS is only set up if the fund is solely intended for the Maltese market and does not require an EU passport. An overseas based non-UCITS fund must obtain a UCITS license before it can be sold in Malta.

A ‘Retirement Fund’ is a company established for the principal purpose of holding and investing the contributions made to one or more retirement schemes and/or to one or more overseas retirement schemes. Its main purpose is to act as a pooling vehicle through which one or more retirement schemes may channel the investments of the contributions received by the respective schemes. It must invest contributions (received from retirement schemes) and all returns on such contributions in instruments and other assets, with the aim of maximising the return on such contributions. These investments must be in conformity with the investment restrictions and objectives of the retirement scheme.
A Retirement Fund, just like the Occupational Retirement Scheme, requires a licence to carry on the activity of a retirement fund in or from Malta.
The main characteristics of the funds are summarised below:

	Retirement Funds
Legal Form	SICAV
Nature	N/A
Retirement Scheme Administrator	XX
Auditor	Required
Actuary	N/A
Investment Manager	Optional
Custodian	Optional
Investment Advisor	Optional
Back-Office Administrator	Optional
Introducer	N/A
Investment Management Function	Required (separation from custody function is mandatory)
Custody Function	Required (separation from investment management function is mandatory)
Investment Restrictions	Must comply with the investment restrictions of the Retirement Scheme and/or Overseas Retirement Scheme.

The Retirement Pensions Act 2011, Chapter 514 of the Laws of Malta (the “Act”), sets out inter alia the regulatory framework for the establishment of Pillar Two and Pillar Three Retirement Schemes and Funds.

RETIREMENT SCHEMES

The Retirement Pensions Act distinguishes between two different kinds of schemes, i.e. Occupational and Personal Retirement Schemes, both established for the principal purpose of providing Retirement Benefits.

An Occupational Retirement Scheme is a scheme or arrangement established by an employer or a number of employers or an association representing employers, jointly or separately, for the benefit of the employees and under which payments are made to members and beneficiaries for the principal purpose of providing retirement benefits.   It is established with the purpose of collecting the contributions made by an employer, or by an employer and employees, or by employees through an employment relationship and investing these contributions in assets earmarked to provide retirement benefits to members and beneficiaries thereof.

A Personal Retirement Scheme on the other hand, is established with the purpose of providing retirement benefits to an individual or a number of unrelated individuals.  Access to these schemes is not offered through the employment of the individuals concerned.

Retirement Benefits refer to benefits payable with reference to retirement, or on having reached a particular age, and may involve supplementary benefits paid on disability, death or other circumstances.

Both types of Retirement Schemes may be established either as a Defined Benefit Scheme (whereby employee benefits are sorted out based on a formula using factors such as salary history and duration of employment) or as a Defined Contribution Scheme (where the employees’ contributions and the employer’s contributions are both invested and the proceeds used to buy a pension and/or other benefits at retirement. The value of the ultimate benefits payable from the scheme depends on the amount of contributions paid, the investment return achieved less any fees and charges, and the cost of buying the benefits).

Furthermore, an Occupational Retirement Scheme may be established either as a Closed Scheme (established at the initiative of a single employer or a group of related employers or an association representing employers and membership of the scheme is limited thereto) or as an Open Scheme (established as a a Retirement Scheme, whose membership is open to a number of unrelated employers and self-employed persons).

Retirement Schemes require a licence to carry on any activity for the provision of retirement benefits. The commencement of payment of retirement benefits to a member of a scheme may not be made on a date earlier than that on which the member has attained the age of 50, or not later than that on which the member has attained the age of 75.

The scheme may proceed to the investment of its contributions either directly or indirectly in the market (whereby indirect investment is achieved through a retirement fund or another collective investment scheme). Several investment restrictions are applicable.

An Occupational Retirement Scheme which qualifies as an Institution for Occupational Retirement Provision may exercise its passporting rights under the ‘Occupational Pensions Directive’ (Directive 2003/41/EC of the European Parliament and of the Council of 3 June 2003 on the activities and supervision of institutions for occupational retirement schemes) as transposed into national legislation by S.L. 514.05 ‘Retirement Pensions (European Passport Rights for institutions for occupational retirement provision) Regulations’. Consequently, such a Scheme may receive contributions from employers (or ‘sponsoring undertakings’ as defined in the Directive) located in other EU/EEA countries and provide benefits to employees of the contributing employers.

 

Retirement Benefits for a Defined Contribution Retirement Scheme (Occupational or Personal)

Retirement Benefits shall be paid in the following forms:

1. Initial cash lump sum (optional: on the retirement date, a Member may elect to take up to 30% of his assets in the Scheme as a cash lamp sum); or
2. Programmed withdrawals and/or life annuity (mandatory); or
3. Additional cash lamp sum (optional: where the remaining assets are deemed more than adequate to generate sufficient income throughout the member’s lifetime, then 50% of the excess value of these assets may be withdrawn as an additional cash lump sum. Please note that this lump sum may be opted for after 3 years from commencement of that member’s retirement benefits, and every year thereafter).

 

The main characteristics of the schemes are summarised below:

	Occupational Retirement Schemes	Personal Retirement Schemes
Legal Form	SICAV, trust, contract or any other legal form as may be approved by the MFSA	SICAV, trust, contract or any other legal form as may be approved by the MFSA
Nature	Either Defined Benefit or Defined Contribution Scheme (Closed or Open)	Either Defined Benefit or Defined Contribution Scheme
Retirement Scheme Administrator	Required	Required
Auditor	Required	Required
Actuary	Required only in the case of a Defined Benefit Retirement Scheme	Required only in the case of a Defined Benefit Retirement Scheme
Investment Manager	Optional	Optional
Custodian	Optional	Optional
Investment Advisor	Optional	Optional
Back-Office Administrator	Optional	Optional
Introducer	N/A	Optional
Investment Management Function	Required (separation from custody function is mandatory)	Required (separation from custody function is mandatory)
Custody Function	Required (separation from investment management function is mandatory)	Required (separation from investment management function is mandatory)
Investment Restrictions	Yes	Yes

	Retirement Scheme Administrator	Investment Manager	Custodian	Back-Office Administrator	Introducer
Type of authorisation	Licence	Licence	Licence	Recognition	N/A – Appointed by Personal Retirement Schemes/Schemes Administrators
Activity	Administering the operation of a Retirement Scheme	Management of the assets of a Retirement Scheme/Fund	Acting as custodian or trustee of a Retirement Scheme/Fund	Back-office administrative activities	Introducing clients to Retirement Schemes/Scheme Administrators
Independence requirement	Yes	Yes	Yes	N/A	N/A
Financial Resources Requirement	Yes	Yes	Yes	N/A	N/A
Compliance Officer	Required	Required	Required	Required	N/A
Money Laundering Reporting Officer (MLRO)	Required	Required	Required	Required	N/A
Auditor	Required	Required	Required	Required (as per Companies Act provisions)	N/A
Insurance	Required	Required	Required	N/A	N/A

 

At GMX we have a wealth of experience to help you through the licencing/recognition process (as applicable to your particular situation) and to advise you on your ongoing requirements as a service provider to a Retirement Scheme/Fund. Please contact us by email to info@gmxlaw.com so as to provide you with bespoke tailored-fit solutions that meet your individual needs.