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Establishment & Listing of a Collective Investment Scheme Introduction What is a CIS? A CIS is a scheme established for the purpose of collecting and pooling funds from the general public and, subsequently, investing these funds in assets in accordance with certain investment objectives published in a Prospectus. The value of the units/shares held by the public in a CIS reflects the value per unit/share of the underlying assets of a CIS - in the case of a CIS which is 'open-ended', its size expands and contracts as investors buy and sell units in it, while a 'close-ended' CIS has a fixed share capital. Types of CISs CISs may take various forms including: - unit trusts under the Trusts Act, 1988 although a foreign law must be chosen to govern the trust arrangement. - investment partnerships as a partnership en commandite or en nom collectif, however in such a case at least one partner (and such partner cannot be a limited liability company) must have unlimited liability; - open-ended investment companies that are set up in the form of a variable share capital company or SICAV in terms of the Companies Act, 1995; or - close-ended investment companies (or INVCO) also set up in terms of the Companies Act, 1995. Licencing A CIS operating in or from Malta or which is organised under the Laws of Malta and which has any of the following characteristics will require a license: - it operates according to the principle of risk spreading; or - the contribution 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 CIS, continuously or in blocks at short intervals; or - units are, or have been, or will be issued continuously or in blocks at short intervals. A Maltese CIS carrying on any activities from abroad must have a valid CIS license. Exemption from requirement of a license The following CISs are exempted from the requirement of obtaining a license: - a scheme involving participants each of which carries on a business other than that which constitutes an investment service and enters into the arrangement for commercial purposes related to that business; - a scheme which operates according to the principle of risk spreading or in respect of which the contributions of the participants and the profits or income out of which payments are to be made to them are pooled but only if the general purpose of the scheme is commercial and not for investment purposes; - a CIS which the MFSA is satisfied is essentially private in nature and purpose; and - a scheme approved by the MFSA and operated by a company for its own employees, former employees and their dependants, or for employees, former employees and/or their dependants of companies in the same group, in instruments issued by a company/companies within that group. The Players The Promoters of a CIS need to appoint a Fund Manager and a Custodian (or trustee). The Fund Manager of a CIS and the Custodian must be independent of each other and act independently and solely in the interests of the investors. Any replacement of the Fund Manager or Custodian must be approved by the MFSA. The Manager usually also takes over the function of Registrar of participants in the scheme. It is not uncommon for the Manager to employ a specialist Investment Advisor. However it is also possible for a CIS not to delegate the power of discretionary management to the Manager but instead retain the power to make investment decisions itself. In such a case the regulators would require the scheme's officers to be suitably qualified and experienced. Fund Manager Every licensed CIS must employ the services of an external Fund Manager, unless, in certain circumstances and with the approval of the MFSA, it is constituted as a company with its own management and, therefore, specifically exempted from this requirement. The Fund Manager must, generally, be set up under the Laws of Malta as an investment services company having an established place of business in Malta and sufficient financial resources to conduct its business and meet its liabilities. A Fund Manager must be licensed under the ISA enabling it to provide management, administration, safekeeping or investment advice to a CIS. The two local fund managers are Valletta Fund Management Limited (a subsidiary of Bank of Valletta p.l.c.) and HSBC Fund Management Limited (formerly Tri-Med Fund Management Limited). However, the MFSA has the authority, in appropriate circumstances, to exempt an overseas Fund Manager of sufficient standing and repute from certain of the formalities associated with the licensing. The extent of exemption will mainly depend upon the level of regulation that is exercised in the primary jurisdiction. Custodian A CIS must also engage the services of an external Custodian which, generally speaking, must have an established place of business in Malta. Alternative custodianship arrangements may be approved by the MFSA where these provide adequate protection for investors and the scheme's assets. The
following entities are eligible to act as Custodian: Both HSBC Bank plc and Bank of Valletta plc are licensed custodians for CISs. Application Process with the MFSA A CIS, whether local or based abroad, or each sub-fund in the case of an umbrella fund, seeking a listing - whether Primary or Secondary - on the Malta Stock Exchange must be licensed under the ISA before it can be listed. A Primary listing is appropriate where the CIS is not already listed elsewhere whereas a Secondary listing refers to a situation where a CIS is already listed elsewhere. The application requirements and the ongoing requirements to which such licences are subject are summarised below. There are three phases - as follows:- 1. At the outset, it is recommended that the promoters meet with the MFSA to outline their proposal. If a meeting is not possible, the promoters may write with the appropriate information. 2.
The next stage is that the promoters submit a draft CIS Licence Application
Form(s), together with supporting documents as specified in the Application
Form itself. A sample copy of the Application Form is set out in Schedule
E of the Guidelines. The supporting documentation to be submitted
with the Application Form is listed in Appendix A. In the case of locally based schemes, an Individual Questionnaire (Schedule D to the Guidelines) is also required in respect of each Director (in the case of a corporate scheme) or otherwise in respect of each senior officer involved in the operation of the Scheme. In the case of overseas based schemes, Individual Questionnaires will not be required. However a brief CV should instead be submitted in respect of the persons referred to above. The Application fee, which is not refundable, is due at this stage (see below). In the case of an overseas umbrella fund, only those sub-funds seeking a listing require a Collective Investment Scheme Licence from the MFSA. (Application Forms are only required in respect of those sub-funds seeking a listing, rather than in respect of all the sub funds constituting the umbrella fund.) Relevant documentation as specified in the Guidelines should be attached to the Application. All material submitted should be in English, or if in another language, should be accompanied by an English translation. 3. The draft Application form(s) is reviewed and comments provided to the Applicant who is invited to revert with his own comments. The MFSA may ask for more information and may make such further enquiries as it considers necessary. "Fit and proper" checks begin at this stage. This entails following up all the information which has been provided in the Application documents submitted. Where applicable, this includes contacting regulators abroad. 4. In the meantime, the MFSA will also review the supporting documentation (see 2 above) submitted with the draft application and will provide comments, where appropriate. Where an overseas based scheme is to be promoted to the public in Malta, a local Agent licensed to provide investment services by MFSA, must be appointed in terms of SLC 9.12 of the Investment Services Guidelines. The Agent will act as MFSA's and investors' local point of contact, and will be required to submit any promotional material distributed locally, including the scheme's Prospectus, to the MFSA for its approval. The Prospectus of an overseas based scheme promoted in Malta, which has to be registered with the Registry of Companies at MFSA, must include certain details specifically relevant to local investors. The required details such as listing information on the Malta Stock Exchange, taxation provisions, exchange control requirements, details of the local appointed agent etc., can be provided by means of a supplement or addendum to the Prospectus. The supplement/addendum should be prepared at this stage. 5. In the case of an overseas based scheme which is already supervised by a primary regulator (i.e. the home regulator) who is deemed to be competent and reliable, the MFSA adopts a less intrusive stance. Every licence is issued subject to SLCs. With the Manager's/Agent's assistance, a review of the SLCs is carried out with the objective of identifying those that could be disapplied or amended. This approach avoids the possibility of duplicating a requirement already imposed by the primary regulator and also identifies any supplementary conditions which may need to be applied. The objective is to draft SLCs tailored to reflect the Application concerned, and which will then be tabled for discussion and agreement. These licence conditions are very important since they represent the ongoing requirements to which the Applicant will be subject, once licensed. 6. In the case of a new locally based Scheme, the MFSA will consider the nature of the proposed Scheme and the kind of investors to whom it is to be marketed. It will also look at the experience and track records of all parties associated with the scheme. The SLCs in the Guidelines will form the basis for discussions with the MFSA. The Guidelines are modelled on UK standards, especially the Core Conduct of Business Rules issued by the Securities and Investment Board (the predecessor of the UK Financial Services Authority) and the Code of Conduct of the Investment Management Regulatory Organisation (IMRO). The MFSA may permit some derogation from the standard requirements where the Scheme is not to be marketed to the public, or where the circumstances justify such treatment, as long as there is adequate protection of investors. The applicant will have the opportunity to consider the conditions before the licence is granted. Particular conditions apply to licences granted to specialist funds, such as venture capital or futures and options funds. 7. Once the review of the Application documents has been completed and the draft licence conditions have been agreed, signed copies of the Application form(s) and the supporting documents in their final format will be required. 8. Once the Application is received in its final format, an estimate can be carried out of how long it will take the process to reach completion. Every effort is carried out to accommodate the promoters' time frame. 9. The Executive Committee of the MFSA is responsible for deciding whether or not to grant a licence. A licence fee becomes payable upon the issue of a licence - and annually thereafter. Listing on the Malta Stock Exchange The
application procedure and Listing Requirements involve the following
steps: The CIS seeking a listing must be established in conformity with all applicable legislation in the jurisdiction of incorporation. Shares must be freely transferable. The number of directors must be not less than 3, none of which may be corporate directors. Copies of the directors' service contracts must be made available to the general public for inspection at the time of the Annual General Meeting of the CIS. The directors of the CIS are to accept full responsibility for the contents of the Listing Document and are to acknowledge in writing to the MSE that they accept full responsibility for the CIS's compliance with all Exchange requirements and continuing obligations. The CIS's investment policy must provide for an adequate spread of risk and should be clearly defined. Unless a CIS's Fund Manager or Custodian perform these functions, a CIS should appoint a Registrar and a Paying Agent. In the case of overseas CISs which are already in existence, their Annual Report and Audited Accounts must be prepared in accordance with International Accounting Standards and independently audited and reported on in accordance with International Accounting Standards on Auditing. An overseas CIS that advertises or carries out any promotional activity in Malta must appoint an authorized agent licensed by the MFSA in terms of the ISA. The Listing Document (or prospectus) must contain, inter alia, all the information required by the MFSA to be contained in an Offering Document (or prospectus) in respect of a CIS together with any other information that may be required by the exchange. The Listing Document must also specify the name of the stock exchange on which the Primary Listing is or is to be together with particulars of any other stock exchange on which any of the shares are listed or dealt in. The Listing Document must be accompanied by a letter signed by every director of the CIS confirming that it includes all such information within their knowledge that investors and their professional advisors ought to know. In the case of an overseas CIS seeking a Secondary Listing, the MSE may authorize the omission of any information otherwise required to be included in the Listing Document. No material amendment to the final proof Listing Document will be allowed without the consent of the MSE. Primary Listing An
application for a Primary Listing must be done on the appropriate
application form to which must be attached the following documentation: Secondary Listing For
those companies already listed outside Malta, the procedure for seeking
a Secondary Listing on the MSE is rather straight-forward and the
required documentation has been kept to a minimum: Once listed, the continuing obligations for secondary listings are, essentially, limited to ensuring that future disclosures to the exchange regulating the Primary Listing are simultaneously submitted to the MSE. Marketing the Fund All advertisements and other documentation which is made available to the public must obtain the prior approval of the MFSA in terms of Section 11 of the Investment Services Act. Once documentation is approved, simply making it available to the public or verbally transmitting information contained therein, does not require a separate licence. Nevertheless it is highly improbable that a fund is marketed in such a manner. Promoting the fund to the public, which as a minimum also includes arranging for prospective investors to invest in the CIS, requires a separate licence under the Investment Services Act. Stockbrokers can exercise this function without need of a separate licence in virtue of an exemption in Section 3(d) of Legal Notice 6 of 1995 as amended by Legal Notice 95 of 1995. The major local banks are suitably licenced to sell funds to the public. Reports A
CIS is required to submit monthly returns and semi-annual and annual
audited reports to the MFSA. The annual report must include a report
by the Custodian which must state, inter alia, whether in its opinion,
the CIS has been managed: Local agents appointed by CISs based overseas are required to submit an annual report confirming adherence by the CIS to its license conditions. Prospectus A CIS is required to provide a Prospectus to its investors free of charge. MFSA approval is required before publication of the Prospectus and before any amendments may be made to it. A Prospectus must contain sufficient information for investors to make an informed decision about the proposed investment and, accordingly, must, inter alia, contain a description of the CIS's investment objectives and criteria along with sufficient disclosure to inform investors of the risks associated with their proposed investment. Investment Restrictions Appendix B lists the standard investment restrictions to which a CIS is subject. Additional restrictions may be imposed by the MFSA or by the CIS in its prospectus. MFSA Fees For
the CIS (excluding sub-funds), the Application Fee is Lm650 while
the Annual Fee is Lm700. For each sub-fund of the scheme there is: Registrar of Companies - Registration Fees The
fees payable by a company to the Registrar of Companies upon registration
are calculated according to the company's authorised share capital
as follows: MSE - CIS Listing Fees The MSE charges an Initial Fee of Lm500 plus an Annual Listing Fee of Lm500 payable in advance within one month of the Scheme obtaining a listing and subsequently within one month of the anniversary of listing. Where
the Scheme lists Multiple Classes of Securities, the Annual Fees are: If the Collective Investment Scheme has a primary listing on an overseas exchange, the annual and initial fees due to the Exchange will be equivalent to 50% of the standard rate. Taxation Licensed CISs may choose between 2 alternative fiscal regimes, namely: 1. CIS Exempt from Income Tax A
licenced CIS may choose to be exempt from income tax in Malta but,
in that case, they cannot avail themselves of Malta's vast network
of Double Taxation Treaties. However the exemption does not apply
in the case of investment income of a Prescribed Fund. Prescribed
Funds are those which have at least 85% of their assets situated in
Malta. A withholding tax is imposed on all income derived by these
Funds at the following rates: 2. CIS paying 25% Income Tax CISs set up as SICAVs (but not as unit trusts or partnerships), may elect to be liable to income tax at the favourable rate of 25% (as opposed to the standard corporate tax rate of 35%) and benefit from Malta's Double Taxation Treaties. For obvious reasons, this fiscal regime is more suitable for CISs that intend investing internationally. It should be pointed out that non-resident shareholders (i.e. investors) in a SICAV are entitled to a two-thirds (2/3) refund of the Malta tax paid by the SICAV upon receipt of a dividend paid out of the foreign source profits of the SICAV. The refund may even be of 100% in the case of a 'qualifying participation'. In the following example it is being presumed that the CIS has elected to be liable to tax at 25% and that it is eligible for the Flat-Rate Foreign Tax Credit (FRFTC):
Although
the above calculation presumes that the FRFTC credit would apply,
this is not necessarily so. In fact, which of the various types of
relief is available depends on the location of the source country
and the evidence provided to the Maltese Revenue Authorities. Capital Gains A capital gain made by a non-resident upon the disposal of his shares in a CIS is not liable to tax. A capital gain made by a Maltese resident upon the disposal of shares in a CIS quoted on the Malta Stock Exchange are also exempt from tax, except in the case of a CIS which is a Non-Prescribed Fund. A Non-Prescribed Fund is one which invests more than 15% of its assets in foreign securities. In such a case a final withholding tax on capital gains of 15% is charged on any gains realised on redemption, or switching of investments. The capital gain will be calculated as follows: Proceeds of Disposal, less Cost of Acquisition. On the occasion of the first disposal of shares after 28th February 2001, shares held by the investor on that date shall be deemed to have been acquired at the price of the shares as last quoted on the Malta Stock Exchange prior to the 1st March 2001. Where an investor invests more than once in a Fund, the calculation of the withholding tax on capital gains shall be based on the average cost of the acquisition of these shares. Capital gains realised by non residents (who are covered by the exemption provided in section 12(1) (c) (ii) of the Income Tax Act) on the transfers (including redemptions) of Shares in the Company, are exempt from tax in Malta, even if the fund is not listed on the Malta Stock Exchange. Other Fiscal Benefits In
addition, the following attractive features should also be highlighted: List of documents that need to be submitted with the CIS license application: -
the constitutional documents of the CIS (e.g. Memorandum and Articles
of Association of a SICAV) The Investment Services Guidelines include the following restrictions on the investment and borrowing powers of a CIS: -
no more than 10% of assets may be invested in securities which are
not traded on a liquid and highly regulated market; |
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