Fund management regulationRegulatory framework and authorities
How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?
The Malta Financial Services Authority (MFSA) regulates funds, fund managers and those marketing funds in Malta.
The Maltese regulatory regime for funds, fund managers and entities marketing funds, was enacted on 19 September 1994 with the adoption of the Investment Services Act, CAP 370 of the Laws of Malta (the ISA), which introduced the concept of a collective investment scheme (CIS) into Maltese law as well as a licensing requirement for CISs and their service providers on the basis of the nature of the services provided in respect of specific classes of financial instruments.
The ISA has, over the years, been significantly revised and supplemented in order to transpose relevant EU legislation, including the Alternative Investment Fund Managers Directive (AIFMD), the Undertakings for the Collective Investment in Transferable Securities (UCITS) Directive and Markets in Financial Instruments Directive (MiFID II). The ISA remains, however, the cornerstone of fund regulation in Malta.
Fund managers are all required to hold a Class 2 investment services licence. However, fund managers may be classified as alternative investment fund managers (AIFMs) in terms of AIFMD, de minimis AIFMs, being under-threshold fund managers, and UCITS ManCos established under the UCITS Directive. On the other hand, funds may take the form of UCITS Funds, alternative investment funds (AIFs), notified alternative investment funds (NAIFs) or professional investor funds (PIFs). NAIFs are not regulated by the MFSA. Regulatory responsibility for their operations and oversight is shifted to the AIFMs.
The establishment or appointment of a regulated investment management entity separate from the fund is possible but not obligatory, as funds incorporated in Malta can opt to be self-managed. In such cases, the fund takes responsibility for the investment management structure internally through the establishment of the appropriate internal mechanisms.Fund administration
Is fund administration regulated in your jurisdiction?
Yes. The statutory basis for regulating the provision of fund administration is detailed through the ISA, which states that any person who, in or from Malta, provides to licence holders in Malta, or to equivalent authorised persons and schemes overseas, administrative services that do not themselves constitute licensable activity under the ISA, shall require MFSA recognition.Authorisation
What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?Licensing process
The legal structure chosen to set up an investment fund in Malta will determine the procedures and documentation required. The licensing process for the setting up of investment funds is divided into three phases:
- the preparatory phase;
- the pre-licensing phase; and
- the post licensing or pre-commencement of business phase.
During the preparatory phase, an outline of the proposal and the draft application form together with the supporting documentation and a non-refundable fee are submitted to the MFSA. The MFSA will then initiate its due diligence process and review the documents submitted.
During the pre-licensing phase, provided that the MFSA is satisfied with the draft application, it will issue its in-principle approval for the issue of a CIS licence. The applicant must then submit final signed copies of the application documentation. The MFSA may also impose any other pre-licensing conditions it deems appropriate, which must be satisfied prior to the issue of the licence.
During the post-licensing phase, the applicant may also be required to satisfy a number of post-licensing conditions, prior to commencement of business.
A Maltese management company or operator of a fund (to the extent that the services provided to the fund qualify as investment services in terms of the ISA) must be licensed by the MFSA. Such licence is subject to a number of requirements, including:
- a place of business in Malta from where the activities are carried out;
- sufficient financial resources and liquidity to be able to conduct its business effectively and meet its liabilities when they fall due; and
- compliance with MFSA requirements applicable to the licence holder, which mainly relate to business organisation, systems, experience and expertise.
Upon licensing, fund managers and operators of funds are required to comply with the ongoing regulatory obligations set out in applicable MFSA Rulebooks and the AML/CFT obligations emanating from the Financial Intelligence Analysis Unit Implementing Procedures.Territorial scope of regulation
What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?
The general principle is that the management of local CIS is subject to licensing in terms of the ISA, unless a specific exemption applies or the overseas fund manager is able to avail itself of EU passporting rights. Indeed, the management company passport under the UCITS IV Directive (Directive 2009/65/EC) ended the requirement that the investment fund management company needs to be established in the same country in which the UCITS is established. Additionally, the adoption of the AIFMD also meant that the investment fund management company need not be established in the same country in which the AIF is established.
Management company established in another EU/EEA member state
Prior to providing services in Malta or performing management activities in Malta, the EU fund manager will need to first exercise its passport rights under the relevant EU directive.
Prior to providing services in Malta or performing management activities in Malta, the overseas fund manager will need to first exercise its management passport under the relevant EU directive. Authorisation requirements apply in respect of non-EU AIMFs managing an EU AIF.
Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?
Yes. The acquisition of a qualifying shareholding in a fund manager is subject to prior authorisation. The ISA defines qualifying shareholding as:
Restrictions on compensation and profit sharing
a direct or indirect holding in a company which represents 10% or more of the share capital or of the voting rights …. or which makes it possible to exercise a significant influence over the management of the company in which that holding subsists.
Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?
Specifically, with respect to the payment of performance fees to fund managers of UCITS funds or of retail AIFs, the Investment Services Act (Performance Fees) Regulations set out the rules to be followed for the adoption, payment and disclosure of performance fees.