Malta: Professional Investor Funds (Update)

Under Maltese law, collective investment schemes that qualify as Professional Investor Funds ("PIFs") are subject to a significantly lighter and more flexible regime than retail funds. Hedge funds, funds of funds, private equity funds, and property funds, are typically set up as a PIF, in Malta. The Investment Services Rules for Professional Investor Funds, issued by the Malta Financial Services Authority ("MFSA"), cater for a regulatory framework that is both robust and adaptable, allowing managers and promoters to innovate and to develop new products to meet the changing needs of the market. The level of regulation depends on the type of investors targeted, as a distinction is made between PIFs promoted to Experienced Investors, PIFs promoted to Qualifying Investors and PIFs promoted to Extraordinary Investors.

With the transposition of the Alternative Investment Fund Managers Directive ("AIFMD")¹, a new regime was created for Alternative Investment Funds ("AIFs"), alongside the existing PIF regime. AIFs governed by the Investment Services Rules for Alternative Investment Funds issued by the MFSA, are collective investment schemes for professional investors, which are managed by fund managers authorised under the AIFMD or, in the case of self-managed funds, are authorised in accordance with the AIFMD themselves. Further information on the licensing and ongoing requirements applicable to such AIFs is available upon request.

The main advantages of Malta as a fund domicile

The principal advantages which are generally perceived to give Malta a competitive edge as a fund domicile of choice, are the following:

1. the level of costs involved (in particular in terms of professional fees) is relatively low and competitive;
2. Malta's single regulator and supervisor, the MFSA, is approachable and seeks to provide a timely and efficient service;
3. Malta is an EU Member State and PIFs and other AIFs are licensed and supervised by the MFSA, which is considered to offer a measure of investor protection;
4. PIFs may be self-managed without the need to appoint a third party manager. Furthermore, PIFs do not need to appoint a manager, custodian, administrator or any other service provider established in Malta (except where the PIF's manager is an alternative investment fund manager authorised under the AIFMD ("AIFM") or the PIF is a self-managed fund which falls within the scope of the AIFMD, in which case, the rules on depositaries and AIFMs under the AIFMD must be complied with). It is sufficient for them to appoint any service provider authorised in a recognised jurisdiction for this purpose (including EU/EEA States, and signatories to bilateral or multilateral MoUs with the MFSA).
   
   Having said that, the necessary human and other resources to adequately cater for and provide such fund-specific services and generally all legal, accountancy/audit and other professional services which may be required by funds are available locally, with a number of local and foreign credit institutions, fund administrators and investment firms having a presence and operating in Malta.
5. it is possible for a PIF to invest in underlying assets through special purpose vehicles ("SPVs"). SPVs can and have often proved to be an efficient tool in tax planning for funds (particularly to benefit from a double tax treaty between Malta and the relevant jurisdiction where the assets are held or to provide the connecting factor between Malta and such jurisdiction where no double tax treaty has been concluded between the two countries, by establishing the SPV in a jurisdiction having a DTT with both jurisdictions), as well as in respect of asset acquisition and holding structures.

The regulatory regime applicable to PIFs, while sufficiently sound to afford the appropriate level of protection to professional investors (and to protect Malta's reputation) is very flexible so as to allow fund promoters to structure their set-ups in a way which best suits their needs. Furthermore, the MFSA continues to update and tweak the local rules in view of maintaining the country's competitiveness in the financial services sector and taking into account legislative developments at an EU level.

Licensing requirements

Collective investment schemes ("CISs"), including PIFs (and other AIFs), require a collective investment scheme licence in terms of the Investment Services Act (Chapter 370 of the Laws of Malta) to issue or create any units or carry on any activity in or from within Malta, or, if the CIS is formed in accordance with or existing under the laws of Malta, to issue or create units or carry on any activity in or from within a country, territory or other place outside Malta.

A PIF may be set up as an investment company with variable share capital ("SICAV"), an investment company with fixed share capital ("INVCO"), a limited partnership, a unit trust or a common contractual fund. Usually, clients opt for the corporate form (SICAV) for various reasons, including operational flexibility.

A CIS may be structured as a multi-fund (umbrella) scheme, with a number of sub-funds thereunder, constituted by one or more different classes of shares (which could be denominated in different currencies). The assets and liabilities of each sub-fund are considered to constitute a separate patrimony distinct from the assets and liabilities of (and ring-fenced from the creditors of) the other sub-funds.

Furthermore, it possible for a CIS in the form of a SICAV to be constituted as an incorporated cell company ("ICC") in accordance with the Companies Act (SICAV Incorporated Cell Companies) Regulations (Legal Notice 559 of 2010). The ICC may establish one or more funds as incorporated cells, each cell being a limited liability company (SICAV or INVCO) with separate legal personality (unlike the sub-funds of a multi-fund SICAV, which may have their assets and liabilities treated as a separate patrimony but do not have legal personality separate from that of the SICAV) and requiring a CIS licence independently from the ICC. It is also possible to set up a Recognised Incorprated Cell Company ("RICC"); the RICC is consituted as a limited liability company, which may establish incorporated cells in the form of SICAVs or INVCOs, and which purports to provide such incorporated cells with administrative services, in accordance with the Companies Act (Recognised Incorporated Cell Companies) Regulations (Legal Notice 119 of 2012). The RICC is required to obtain recognition from the MFSA for the provision of administrative services, while each incorporated cell must obtain a CIS licence. The rules on ICCs and RICCs are designed particularly to accommodate fund platforms. The RICC structure presents certain advantages compared to the ICC, including the fact that the RICC itself must not be licensed as a CIS, the incorporated cells of an RICC may themselves be constituted as umbrella companies, with their own segregated sub-funds, and such incorporated cells may consist of a mix of externally managed and internally managed CISs.

The application for a licence to operate a PIF must be made to the MFSA. The MFSA may only license a PIF if it is satisfied that the PIF will comply in all respects with the relevant legislation, regulations and rules and that its directors and officers, or in the case of a unit trust or limited partnership, its trustee(s) or general partner(s) respectively, are fit and proper persons to carry out the functions required of them in connection with the scheme.

Upon submission of all documentation relative to the licence application in draft form (to the satisfaction of MFSA), it is usually a matter of weeks for MFSA to issue an in-principle approval in respect of the Fund. This is then followed by a submission of all documents duly signed in original, after which the MFSA issues a licence accordingly (a process which takes a couple of days). More detailed information of the process and steps involved in applying for a licence is available upon request.

The PIF may appoint any service provider (e.g. investment manager, adviser, administrator, custodian or prime broker) it deems necessary. However, for PIFs targeting Experienced Investors, and for PIFs managed by an AIFM or self-managed PIFs within the scope of the AIFMD, the appointment of a custodian with monitoring duties is compulsory. As a rule, the external service providers appointed by a PIF do not have to be established in Malta. For PIFs managed by an AIFM or self-managed PIFs within the scope the AIFMD, the custodian needs to be established in the same country as the AIF; however, the MFSA allows credit institutions established in another Member State to be appointed as a custodian, until 22 July, 2017.

Where all service providers are based outside Malta and the PIF has not appointed a local resident director (in the case of a scheme set up as an investment company), a local general partner (in the case of a scheme set up as a limited partnership); or a local trustee (in the case of a scheme set up as a unit trust / common contractual fund), the PIF has to appoint a Local Representative.

If one or more of the proposed service providers is not based in a Recognised Jurisdiction or is not the subsidiary of a firm that is regulated in a Recognised Jurisdiction² that retains control of its subsidiary and undertakes to provide all the necessary information to the MFSA, then the promoters should submit an application for preliminary indication of acceptability of a PIF.

It is possible for PIFs to be set up as self-managed funds, in which case the PIF would be subject to a minimum capital requirement (EUR125,000 or USD125,000) and certain other supplementary licensing conditions. Self-managed PIFs may establish an in-house Investment Committee, which is expected to hold the majority of its meetings in Malta. The Investment Committee may delegate the day-to-day investment management of the assets of the PIF to one or more Portfolio Manager/s, who will effect day-to-day transactions within the investment guidelines set by the Investment Committee and in accordance with the investment objectives, policy and restrictions described in the fund's Offering Document/ Marketing Document. A more detailed overview of the rules applicable to self-managed funds is found in Annex 2 hereto.

Exemptions from the licensing requirement for foreign service providers

The following foreign services providers, appointed in respect of a PIF licensed by the MFSA, are exempt from the requirement to hold a licence or recognition certificate issued by the MFSA under the Investment Services Act:

• a person resident outside Malta acting as trustee or custodian;
• a person resident outside Malta providing the services of management of investments and, or investment advice;
• a person resident outside Malta providing administrative services;

where the MFSA is satisfied that such person is of sufficient standing and repute. The above mentioned exemptions from the licence / recognition requirement are not automatically operative; their applicability is subject to a determination in writing by the MFSA that the requested exemption applies.

Furthermore, EU AIFMs managing Maltese AIFs are exempted from the licensing requirement under the Investment Services Act, where they duly exercise their passport rights under AIFMD, following the prescribed notification procedure.

Redomiciliation

Foreign funds established as a company in jurisdictions permitting redomiciliation, may apply to be registered as being continued in Malta under the Companies Act (Chapter 386 of the Laws of Malta), without the need to wind-up the company and to create a new entity.

Ongoing requirements

The rules applicable to PIFs are formulated as Standard Licence Conditions ("SLCs") established by the MFSA and set out in the Investment Services Rules for Professional Investor Funds. The MFSA may agree to disapply or amend certain SLCs (where the circumstances justify such treatment, as long as investors are adequately protected) and/or to impose additional conditions.

PIFs are required to appoint a Compliance Officer, a Money Laundering Reporting Officer and a local auditor approved by the MFSA. They are subject to certain minimum disclosure, record keeping and reporting requirements. An overview of the salient features of the Maltese regime applicable to each category, i.e. 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") is given in Annex 1.

Qualifying Investor Funds and Extraordinary Investor Funds are not subject to any investment, leverage or borrowing restrictions, whilst Experienced Investor Funds are subject to certain restrictions and diversification requirements (an overview hereof is given in Annex 3). Furthermore, it is now expressly stated in the Investment Services Rules for Professional Investor Funds that PIFs are not bound to comply with the principle of risk spreading. Where the main objective of a PIF is investing in immovable property, certain restrictions on leverage may apply in respect of Experienced Investor Funds and open-ended Qualifying Investor Funds (further details hereon are available upon request).

If a PIF effects its investments through one or more SPVs owned or controlled via a majority shareholding of the voting shares either directly or indirectly by the PIF, the SPV(s) must be established in Malta or in a jurisdiction which is not an FATF blacklisted country. In principle, the PIF must through its directors or general partner(s) at all times maintain the majority directorship of any SPV.

Enhanced Flexibility

PIFs are permitted to use side pockets in order deal with situations where certain assets within the fund's portfolio become illiquid or comparatively hard to value, subject to certain conditions.

The use of side letters is allowed, but these must be circulated and approved by the Board of Directors / General Partner / Manager prior to issue, and must be kept in Malta at the registered office and be made available to MFSA for inspection.

Drawdown arrangements, whereby investors commit themselves to subscribe for a maximum amount of units in the fund which may be issued at a discount, are allowed for Qualifying Investor Funds and Extraordinary Investor Funds, subject to certain disclosure requirements and other conditions.

For Qualifying Investor Funds and Extraordinary Investor Funds, cross-investment between the sub-funds of an umbrella structure may be permitted in terms of the PIF's constitutional documents and offering documents, subject to certain disclosure requirements and other conditions.

Corporate Governance

The MFSA has issued a "Corporate Governance Manual for Directors of Investment Companies and Collective Investment Schemes; the purpose of the Manual is to provide general guidance to directors of CISs on how to implement good corporate governance practice.

AIFMD

A distinction is made, for regulatory purposes, between AIFMs and self-managed AIFs which require, or opt to apply for, a licence in accordance with the AIFMD (as implemented locally), and those which rely on the exemption provided for in article 3(2) of the AIFMD ("de minimis exemption"). The de minimis exemption applies to the following AIFMs (including self-managed AIFs):

1. AIFMs which either directly or indirectly, through a company with which the AIFM is linked by common management or control, or by a substantive direct or indirect holding, manage portfolios of AIFs whose assets under management, including any assets acquired through use of leverage, in total do not exceed a threshold of EUR 100 million; or
2. AIFMs which either directly or indirectly, through a company with which the AIFM is linked by common management or control, or by a substantive direct or indirect holding, manage portfolios of AIFs whose assets under management in total do not exceed a threshold of EUR 500 million when the portfolios of AIFs consist of AIFs that are unleveraged and have no redemption rights exercisable during a period of 5 years following the date of initial investment in each AIF.

AIFMs that fall under the de minimis exemption, do not benefit from any of the rights (including passporting rights) granted under the AIFMD, unless they choose to opt in under the AIFMD.

Whereas the AIFMD prescribes that AIFMs relying on the de minimis exemption must be at least subject to registration with the competent authorities of their own Member State, Malta decided to require such AIFMs to obtain the appropriate licence under the Investment Services Act (rather than mere registration).

The MFSA updated the Investment Services Rules for Professional Investor Fund in view of the transposition of the AIFMD into Maltese law, with effect from 22 July 2013. PIFs are AIFs, as defined in the AIFMD, and if PIFs are self-managed (i.e. PIFs that choose not to appoint an external AIFM), they are treated as an AIFM in their own right for the purpose of the AIFMD. Essentially, PIF licences may be issued under the updated Investment Services Rules for Professional Investor Fund in the following cases:

1. the PIF may be licensed as a de minimis self-managed AIF;
2. the PIF may be managed by a de minimis AIFM (i.e. an AIFM relying on the de minimis exemption);
3. the PIF may be managed by an AIFM in full compliance with the AIFMD: in such event, it is the AIFM's responsibility to ensure that the PIF operates, and is managed and marketed, in accordance with the AIFMD rules as implemented in the relevant jurisdiction/s; or
4. the PIF may be managed by a non-EU AIFM subject to the relevant conditions of the AIFMD under which other EU Member States may allow such PIFs to be marketed to professional investors in their territory.

For CISs targeting professional investors, it is also possible to apply for an AIF licence under the Investment Services Rules for Alternative Investment Funds which came into effect on 22 July 2013, instead of a PIF licence. Further information on the AIF regime is available upon request.

Managers and self-managed CISs established in Malta which were licensed before 22 July 2013 have a one year transitional period, until 22 July 2014, in order to meet the relevant requirement under the AIFMD regime and to apply for a conversion or extension of their licence, as may be required, by submitting the relevant self assessment form to the MFSA by 31 March 2014.

Listing

A PIF (other than a private investment company) which has been granted or has applied for a collective investment scheme licence may apply for admissibility to listing with the Listing Authority (the MFSA). The application for admissibility to listing may be made concurrently with the application for the collective investment scheme licence. At present, Malta has one recognised exchange on which units or shares of collective investment schemes may be listed: the Malta Stock Exchange.

Fees payable to MFSA

Note: the fees due to the MFSA set out below are given for information purposes only and are the current fees chargeable by MFSA at the time of writing and are subject to change from time to time.

The fee structure for fees payable to the MFSA is as follows:

[Fees payable in respect of listing (both those due to MFSA as Listing Authority and those due to Malta Stock Exchange if the scheme is listed on such exchange) will be provided on request upon receiving more detailed information as to the nature of the scheme.]

The registration fee payable to the Registrar of Companies for investment companies, upon incorporation, is currently set at €1,750.

Taxation

Malta offers a favourable tax regime for collective investment funds (including PIFs, AIFs and UCITS) and has a comprehensive Double Tax Treaty network.

For tax purposes, a distinction is made between prescribed and non-prescribed funds. Essentially, a fund in a locally based scheme that has assets situated in Malta constituting at least 85% of its total asset value is classified as a Prescribed Fund; other licensed funds, including funds in an overseas-based scheme, are Non-prescribed Funds.

In the case of Prescribed Funds, the CIS qualifies for an exemption from tax on income "other than income from immovable property situated in Malta and investment income" earned by the Prescribed Fund. The withholding tax on local investment income is 15% for bank interest and 10% for other investment income; income derived by the Prescribed Fund from immovable property situated in Malta is taxed at a flat rate of 35%.

There is no withholding tax on investment income received by Non-prescribed Funds (including overseas based CISs), which enjoy an exemption from tax on income (other than income from immovable property situated in Malta) and capital gains realised on their investments and also enjoy a blanket stamp duty exemption on their transactions. Please also note that there is no Wealth or Net Asset Value Tax in Malta.

Foreign investors are not subject to Maltese tax on capital gains or income when they dispose of their investment (through redemption by the Fund or disposal to a third party) or when they receive a dividend or other income from the Fund. These would also be entitled to benefit from the stamp duty exemption obtained for the Fund in connection with the acquisition or disposal of their units in the Fund.

Apart from the tax treatment of Funds and investors therein described above, foreign Fund Managers find Malta to be a tax efficient location in respect of fee and participation income or gains (including carried interest through participation shares or otherwise in the Fund) which they receive from the Fund, particularly when they establish their own operations in Malta but also when they remain established in, and provide the management services from, their own jurisdiction. This is mainly due to the fact that Maltese law would offer flexibility to structure participation income / carried interest in a variety of ways (whether as dividends, capital gains or bonus shares) which when coupled with the various tax benefits offered by Maltese tax domestic laws can offer substantial opportunities of tax planning and tax efficiency in the light of the tax treatment and practice of their own jurisdictions (when they eventually repatriate the funds in such jurisdiction).

Amongst the local tax benefits which have usually and will continue to come useful in the context of such tax planning are:

• the 6/7 refund of tax granted to non-resident shareholders of Maltese companies (or foreign companies carrying on activities in Malta) who would have paid tax in Malta on income generated or otherwise taxable in Malta (e.g. investment management activities) at the standard rate of tax at 35% (leaving a tax leakage of a maximum 5% in Malta which in some cases can be further reduced) - this does not apply to non-prescribed funds which do not pay tax in Malta and consequently there is no need to grant a refund to non-resident shareholders (which receive tax-free dividend);
• no Maltese tax on dividends (including bonus shares which are considered as dividends under Maltese law) paid by a Maltese company or by Maltese collective investment scheme to non-resident shareholders;
• no stamp duty on issues or transfers of shares in Maltese companies the majority of whose business interests are situated outside Malta;
• no tax on capital gains made by non-residents on the disposal of their shares in Maltese companies or the redemption of their units in collective investment schemes.

Taxation of "Highly Qualified Persons"

In order to attract more foreign investment and specialised skills to Malta in the investment fund industry (as well as in banking and insurance), a scheme was recently launched for non-Malta domiciled or ordinarily resident 'Highly Qualified Persons' in receipt of employment income of a minimum of €75,000³ (excluding the annual value of fringe benefits) from an eligible office (senior positions such as CEO, CFO, COO, Portfolio Manager, Chief Investment Officer, Chief Risk Officer, Senior Trader, Senior Analyst etc.) with companies licensed and/or recognised by the MFSA. These are subject to tax at a flat rate of 15% on their employment income which is subject to tax in Malta (rather than to the usual progressive rates which can go up to 35%). This incentive applies for 5 years for EEA and Swiss nationals and 4 years for third country nationals.

Our services

MamoTCV offers a comprehensive range of corporate and commercial legal services. In the area of financial services, the firm offers, among other services:

• advice on financial services legislation and regulation and local implementation of EU law;
• assistance with the setting up and redomiciliation of funds and investment firms and applications for licences;
• passporting of UCITS, fund managers, investment firms and credit institutions;
• liaising with the Malta Financial Services Authority and relevant government departments;
• drafting of offering documents, constitutional and corporate documents as well as agreements with service providers to funds;
• registration of companies in Malta; and
• company secretary and registered office services for companies (including special purpose vehicles) established in Malta.

Besides the strictly legal services we offer to clients, we are in a position to provide a one-stop shop service through the close co-operation arrangements which we have established with a number of local services providers (including, fund administrators and persons who can act as local directors on the Board of the investment company) as well as our good relationship with a number of banks, audit firms and the MFSA.

Last updated: August 2013

ANNEX 1 - Summary of regulatory requirements

ANNEX 2 – Self-managed Funds

When a PIF is set up as a self-managed scheme (namely one which does not appoint an external investment manager with discretionary management powers), the Supplementary Licence Conditions in Appendix I to the Investment Services Rules for Professional Investor Funds issued by then MFSA will apply. The most relevant provisions relating to management of self-managed funds are summarised below:

The management of the assets of the fund is to be the responsibility of the Board of Directors, at least one of whom must be resident in Malta. The Board of Directors of the fund may establish an in-house Investment Committee made up of at least three members, whose composition may include Board members.

The Terms of Reference of the Investment Committee, which regulate the proceedings of the Investment Committee, and any changes thereto, are subject to the prior approval of the MFSA.

The majority of Investment Committee meetings – the required frequency of which should depend on the nature of the Scheme's investment policy, but which should be at least quarterly – are to be physically held in Malta (i.e. the minimum number of members that form a quorum necessary for a meeting must be physically present in Malta). Minutes of Investment Committee meetings should be available in Malta for review during MFSA's compliance visits.

The role of the Investment Committee will be to:

1. monitor and review the investment policy of the Scheme;
2. establish and review guidelines for investments by the Scheme;
3. issue of rules for stock selection;
4. set up the portfolio structure and asset allocation; and
5. make recommendations to the Board of Directors of the Scheme.

Where the Scheme has not appointed an Investment Committee, the functions mentioned above shall be undertaken by the Directors of the Scheme and any reference made herein to the Investment Committee shall be construed as reference to the Board of Directors of the Scheme.

The Investment Committee may delegate the day-to-day investment management of the assets of the Scheme to one or more officials of the Scheme (referred to as "the Portfolio Manager/s") – who will effect day-to-day transactions within the investment guidelines set by the Investment Committee and in accordance with the investment objectives, policy and restrictions described in the fund's Offering Document/ Marketing Document.

Like the Directors, the Investment Committee members and Portfolio Manager/s must be approved by MFSA and to this effect a Personal Questionnaire and Competency Form should be submitted in respect of them. They are expected to have the necessary expertise and experience in asset management to carry out their respective management functions (it should be noted that the fit and proper test applied by MFSA in respect of the Directors / Investment Committee members of self-managed funds is more onerous than that applicable to the Directors of funds appointing a regulated external investment manager, precisely because of the absence of such third party manager which means that they take on a responsibility which would otherwise be delegated to an experienced professional manager).

A self-managed Fund is required to have an initial paid up share capital of not less than €125,000 / USD 125,000, and its net asset value is expected to exceed this amount on an on-going basis. If such minimum initial capital is fully subscribed to as Founder Shares (namely the shares initially subscribed by the founders/promoters of the Fund), these would usually and typically carry all voting rights and powers of control at general meetings of the Company but there are usually attached to them no dividend or other financial benefits otherwise applicable to shares offered to Investors. In order to avoid such considerable amount of initial 'dead' (i.e. not financially rewarding) capital, what is usually done is that the promoters would subscribe to only a nominal amount of such €125,000 by way of Founder Shares and would take up the balance thereof in the form of Investor Shares, which they can subsequently retain as an investment in the fund or otherwise transfer to third parties.

ANNEX 3 – Investment and borrowing restrictions for Experienced Investor Funds

The investment and borrowing restrictions for PIFs targeting Experienced Investors as set out in Part B I of the Investment Services Rules for Professional Investor Funds (the "Rules"), which restrictions became applicable on 1^st January 2010, can be summarised as follows:

• The PIF shall comply with the investment restrictions within six months from the launch of the fund or upon reaching a value equivalent to EUR 2,500,000 / USD 2,500,000.
• A PIF may only enter into repurchase/reverse repurchase and stock lending or borrowing agreements if entering into such agreements by the PIF is appropriate and in the interest of investors in the PIF, and entails an acceptable level of risk; and in accordance with good market practice, which involves the provision of adequate collateral in accordance with good market practice.
• Investment by the PIF in Financial Derivative Instruments as part of its investment policy in order to obtain exposure to underlying assets shall be without prejudice to the limits set out in the Rules which apply in the case of direct investments in such underlying assets.⁴
• Direct borrowing for investment purposes and leverage via the use of derivatives is restricted to 100% of NAV. The PIF's exposure relating to derivative instruments is calculated taking into account: the current value of the underlying asset; the counterparty risk; future market movements; and the time available to liquidate positions.⁵
• The PIF must be managed according to the risk spreading principle, and the following diversification requirements must be adhered to:⁶
• • The PIF may invest up to 20% of its total assets in securities issued by the same body and up to 30% of its assets in money market instruments issued by the same body provided that:
  • 1. the 20% / 30% limit set out above may be increased to a maximum of 100% in the case of securities and money market instruments issued or guaranteed by an OECD or EU/ EEA Member State, its local authorities or public international bodies of which one or more such States are members;
    2. the 20% / 30% limit set out above may be increased to a maximum of 35% in the case of securities and money market instruments guaranteed by a credit institution authorised in the EEA or which is subject to equivalent prudential requirements;
    3. the 20% limit set out above may be increased up to a maximum of 30% in the case of transferable securities traded in or dealt on a regulated market which operates regularly, is recognised and is open to the public.
  • The PIF may invest up to a maximum of 35% of its total assets in deposits held with a single body.
  • The PIF is not subject to any investment restrictions with respect to investments in a single collective investment scheme provided that the underlying scheme is a UCITS or other open ended collective investment scheme subject to risk spreading requirements which are at least comparable to those applicable to the PIF itself. The PIF may invest up to a maximum of 30% of its total assets in any single collective investment scheme which does not satisfy the aforesaid conditions.
  • Where the PIF is a fund of hedge funds it shall invest in at least five hedge funds.
  • Where the PIF enters into OTC derivative transactions, it shall ensure that its exposure to a single counterparty is limited to 20% of its total assets. The exposure to one counterparty in an OTC derivative transaction may be reduced where the counterparty provides the PIF with acceptable collateral in accordance with good market practice to the satisfaction of the PIF or its Manager.⁷
  • The PIF shall limit its aggregate maximum exposure (through securities, money market instrument, deposits and OTC derivatives transactions) to a single issuer/ counterparty to 40% of its total assets.
• Where the PIF has been set up as a Feeder Fund, the underlying fund shall satisfy the leverage restrictions applicable to the PIF.
• Specific conditions and restrictions apply to PIFs investing directly or indirectly in immoveable property.

Footnotes

1 Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers

2 A Recognised Jurisdiction is defined as including the EU and EEA Members as well as signatories to a Multilateral MoU or Bilateral MoU with the MFSA covering the relevant sector or financial services and other OECD members.

3 The minimum amount of income of €75,000 is adjusted annually in line with the Retail Price Index as published in by the National Statistics Office.

4 The exposure to the underlying assets should be calculated using the Commitment Approach indicated in Section 13 of Part B.II of the Investment Services Rules for Retail Collective Investment Schemes.

5 The PIF's exposure relating to borrowing for investment purposes is the amount so borrowed. The assessment of the PIF's global exposure to derivative instruments should be assessed on the basis of the Value at Risk Approach or the Commitment Approach as set out in Section 13 of Part B.II of the Investment Services Rules for Retail Collective Investment Schemes.

6 In the case of PIFs investing in alternative assets, the MFSA may impose tailored investment restrictions.

7 The exposure per counterparty of an OTC derivative should not be measured on the basis of the notional value of the OTC derivative, but on the maximum potential loss incurred by the PIF if the counterparty defaults. The PIF may net the mark-to-market value of its OTC derivative positions with the same counterparty, thus reducing the PIF's exposure to its counterparty, provided that the PIF has a contractual netting agreement with its counterparty which creates a single legal obligation such that, in the event of the counterparty's failure to perform owing to default, bankruptcy, liquidation or any similar circumstance, the PIF would have a claim to receive or an obligation to pay only the net sum of the positive and negative mark-to-market values of included individual transactions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.