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The Malta ProfessionalInvestor FundsA technical guideJune 2016

It is my great pleasure to welcome you to our 2016 edition of‘The Malta Professional Investor Funds – A technical guide.’

Professional Investor Funds are one of Malta’s primary investment fund vehicle for all types of professional and sophisticated investors. The PIF structure aims to provide a regulatory framework which is both robust and simultaneously adaptable to allow managers and promoters to innovate and to develop new products to meet the changing needs of the market.

Malta has adopted a lighter regulatory regime for de minimis Alternative Investment Fund Managers managing PIFs which, like Alternative Investment Funds, are promoted to professionalinvestors, but which, unlike AIFs, do not fall within the scope of the full AIFMD directive regime. Falling outside of the scope of the AIFM directive, de minimis AIFMs may avail themselves of existing EU member states’ national private placement regimes in order to market PIFs, insofar such regimes are retained by the respective EU member states.

The local industry continues to enjoy the commitments of the local government as well as the Malta Financial Services Authority which strive to preserve a leading regulatory andlegislative regime that is attractive to foreign business whilstmaintaining investor protection. The implementation of the regulatory agenda continues unabated, with much focus and discussion on depositary reform, remuneration policies and practices, the future of money market funds, extension of the AIFM directive passport to non-EU domiciled products and managers, and the likely impact of MiFID II all being in the headlines.

The purpose of this practical guide is to provide, in a clear and concise format, an overview of the PIF regime and how it fits in light of the AIFM directive. I hope you find this guide useful.

Our asset management advisory team looks forward to your feedback and in supporting you over the coming years so that we may collectively realize the many opportunities offered by this industry.

Ronald AttardCountry Managing PartnerErnst & Young Limited +356 2134 2134 [email protected]

Fore

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| The Malta Professional Investor Funds

sProfessional Investor Funds

Requirements of a PIF

Setting up and running a PIF

Investment Restrictions

Key service providers

Authorisation

Salient features of PIFs

Distribution of PIF products

PIF structures

Fund information and reporting obligations

Admissibility for Listing

Taxation

How can we help you?

Glossary

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Forward

In this report

Malta’s key success factors

01 Professional investor funds

02 Requirements of a PIF

03

Investment restrictions04

Key service providers05

Authorization06

Salient features of PIFs07

Distribution of PIF products08

PIF structures09

Fund information and reporting obligations10

Admissibility for listing11

Taxation12

How can we help you?13

Glossary14

Setting up and running a PIF

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• The Maltese workforce provides Malta with a competitive edge through a high-quality labor force at competitive rates. A key attraction of the Maltese labor force is its language skills and its advanced level of education.

• Financial services are an attractive career proposition for well-trained, highly motivated graduates and support personnel. Training in this sector is provided through institutions such as the University of Malta, Institute of Financial Services, the Malta Institute of Accountants, the Malta Institute of Management and renowned European Institutions.

Highly skilledlabor force

• Given Malta’s membership in the EU, legislation is reflective of EU legislation and directives. Therefore, further to having a legislative structure that facilitates the conduct of business in or from Malta, it provides foreign investors in Malta with the assurance of the quality and consistency synonymous with the EU.

• As an EU member state, businesses in Malta can passport their services to all other member states while the growing markets of North Africa and the Middle Eastern countries bordering the southern coast of the Mediterranean basin are easily accessible.

• The government is continually striving to simplify bureaucracy and shorten decision-making times.

Businessfriendlylegislativeframework

Soundregulatoryframeworkand accessibleregulator

• Malta’s legislation is in line with EU law and built on best practices from other finance centres. All financial services fall under one regulator, the Malta Financial Services Authority (MFSA). Companies benefit from streamlined procedures, reduced bureaucracy and lower regulatory fees.

• The MFSA is signatory to almost 30 Memoranda of Understanding with foreign regulators in order to provide a smooth trading environment for the financial services sector. One of Malta’s most appreciated advantages is the accessibility of the regulator, which establishes constructive working relationships with companies investing in Malta.

• Malta consistently scores high on the stability stakes, and its regulatory framework is also deemed to be particularly strong.

2 | The Malta Professional Investor Funds

Malta’s key successfactors

Small, activestock exchange

• Full member of International Organization of Securities Commissions (IOSCO) and the World Federation of Exchanges (WFE); following Malta’s accession to the EU, the Malta Stock Exchange, together with the exchanges of the other accession countries, was granted the status of full member of the Federation of European Securities Exchanges (FESE). Major sectors of the Maltese economy are represented on the lists of the Malta Stock Exchange.

• Since being set up in 1992, almost €3b worth of capital has been raised on the market for the private sector through the issue of corporate bonds and equity while a further €15b worth of Government of Malta stocks and treasury bills have been issued and fully taken up. Investor base of over 75,000 individual investors, which is a significant number given Malta’s economic size and population. The focus of the Malta Stock Exchange is mostly domestic.

Cost competitiveenvironment

• Competitive labor costs, rental rates and general expenses compared to mainland Europe. Companies in Malta can benefit from an extensive network of double taxation treaties as well as from a number of business promotional incentives.

• Malta has excellent communication links with regular flights to main international airports as well as fully digitalized national telephone network. Malta boasts a truly modern infrastructure with one of the highest broadband access rates in the EU.

• International connectivity is ensured by two satellite stations and four submarine fiber-optic links to mainland Europe. A wide range of quality office and industrial space with commercial office space in purposely built developments or stand-alone blocks readily available at affordable prices.

Infrastructure

The Malta Professional Investor Funds | 3

1 Subject to the Investment Services Act, 1994

• Traditional funds: • Equity • Fixed income • Mixed• Hedge funds• Real estate funds, including direct funds and infrastructure funds (see Section 9.2)• Private equity funds• Loan funds (see Section 9.4)• Thematic funds: • Specific segments, such as sustainable, socially responsible, ethical, environmental, energy, technology, natural resources and commodities • Exotic assets: • Tangible assets including luxury goods, such as art objects, jewelry, expensive alcohols (wines and spirits) • Intangible assets such as patents or other intellectual property rights

PIFs may be used to create funds with differentcharacteristics including:

• Direct and indirect funds• Exchange traded products • Structured products• Fund of funds• Master-feeder funds

1.1 The Professional investor fund regime in brief

The Professional Investor Fund (PIF) is a Malteseregulated branded investment fund for professionaland sophisticated investors.1

Some key characteristics of the PIF regime:

• A regulated EU structure• Suitable for all investment strategies — including traditional and alternative — and all asset classes• Three different classifications — experienced, qualifying and extraordinary — depending on the proposed target investors (refer to Section 3.3)• Flexible regulatory regime since PIFs are not intended for the general public but for professional or high net worth investors, they are not burdened with the restrictions usually imposed on retail funds• Light diversification and leverage rules depending on target investor (see Section 4.1)• Single fund or multi-fund structure, combining different investment strategies or asset classes in different sub-funds • Fast-track licensing process• Possibility of internally managed (self-managed) PIFs

1.2 A collective investment fund adapted to any type of investment fund project

As there are no restrictions on the types of eligible assets, PIFs may invest in a wide range of underlyinginvestments including:


EY supports asset managers and investment fund houses through the choice of investmentfund vehicle, the analysis of target markets,the definition of an efficient operating model and distribution strategy, and the selection of service providers.

01 Professional investor funds

2.2 Implications under the alternative investment fund managers (AIFM) directive

A PIF is an investment fund which is exempt from therelevant requirements of the AIFM directive3 provided that the PIF is either:

• Not leveraged and without redemption rights for a period of 5 years, and with aggregate assets under management below €500m Or• Has assets under management, including any assets acquired through the use of leverage, not exceeding €100m

The AIFM directive however provides “small” PIFs the possibility to opt for the full application of the directive,in which case would fall out of scope of this technicalguide. For more information kindly see our technicalguide on Malta Alternative Investment Funds.

2.3 The investment services rules for PIFs

Every license for a PIF is subject to SLCs which are setout in full in the investment services rules for professional investor funds issued by the MFSA. The investment services rules (the rules) describe thebasic principles to which license holders must adhere in the provision of investment services or in the operation of an investment fund. In certain circumstances, the standard requirements can be tailored to meet specific circumstances. The rules also include the necessary forms to be completed by applicants for an investment fund license.

2.1 Investment services act

The Maltese Investment Services Act (the Act) provides the statutory basis for regulating investmentfunds constituted in or from Malta.2

PIFs are a special class of investment funds which fallwithin the provisions of the Act. The primary objectiveof a PIF must be the collective investment of capitalacquired by means of an offer of units for subscriptions, sale or exchange and which has the following characteristics:

• The investment fund 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 investment fund or arrangement, continuously or in blocks at short intervals Or• Shares are, or have been, or will be issued continuously or in blocks at short intervals

PIFs which are not promoted to retail investors andwhich does not have the characteristics listed in paragraph (a) shall only be deemed to be aninvestment fund if the PIF, in specific circumstances as established by regulations under the Act, is exempted from such requirement and satisfies anyother conditions that may be prescribed.

Every license for a PIF is subject to Standard License Conditions (SLC) which are set out in full in the investment services rules for professional investor funds.


2 Investment Services Act, 19943 Directive 2011/61/EU on Alternative Investment Fund Managers

02 Requirements of a PIF

of its investments; the distribution of the company’scapital profits is prohibited by its memorandum and articles of association; no more than 15% of theincome derived from securities are retained by the company.

SICAVs and INVCOs can operate as a multi-fund structure, whereby the share capital may be divided into different classes of shares, with each class of shares representing a distinct sub-fund of the PIF.

3.1.2 Contractual funds

Contractual funds are governed by the Investment Services Act established by means of a deed of constitution entered into for such purpose by the manager and the custodian of such a PIF.9 They are not deemed to be a separate legal entity since they are established through a contractual obligation and can be licensed as a multi-fund or multi-class PIF. A contractual fund may set up one or more special purpose vehicles, which would be a company and through which the PIF may gain access to double taxation treaties.

3.1 PIFs structures

A PIF can be structured as an investment company (SICAV or INVCO), a contractual fund, unit trust or asa limited partnership.

3.1.1 Investment company

PIFs may be set up as limited liability companies andmay be established either as open-ended investmentcompanies (SICAVs) or close-ended investment companies (INVCOs).

A SICAV4 may be formed as a public or private company with variable share capital and is governedby the Companies Act5. A private company is restricted to the extent to which it can transfer sharesand is prohibited from issuing any invitation to the public to subscribe to any of the shares or debenturesof the company whilst a public company may offer itsshares or debentures to the public. SICAVs allow forthe introduction of additional investors without havingto wait for the liquidation of an existing investor. In anopen-ended PIF, the value of a unit reflects the NAV of the PIF. SICAVs can be formed as Incorporated CellCompanies, in terms of the Companies Act6 having each incorporated cell within an incorporated cellcompany as a limited liability company endowed withits own legal personality.

INVCOs7 are governed by the Companies Act8 and are public companies with a fixed share capital and itsbusiness is restricted to the investment of their fundsmainly in securities, or operating as a retirement fund.The activities of an INVCO are further restricted by the following requirements: The company’s holdings inany other company not being an investment companywith fixed share capital, does not exceed 15% by value


4 Investment Companies with Variable Share Capital5 Companies Act (Chapter 386 of the Laws of Malta)6 Companies Act (SICAV Incorporated Cell Companies) Regulations, 2010

7 Investment Companies with Fixed Share Capital8 Companies Act (Chapter 386 of the Laws of Malta)9 Investment Services Act (Contractual Funds) Regulations, 2011

EY supports asset managers and investmentfund houses through the creation of an investment fund structure that meets the regulatory requirements and tax specifications.

03 Setting up and running of a PIF

3.1.3 Unit trusts

PIFs can also be constituted by a trust deed between amanagement company and a trustee. They aregoverned by the Trusts and Trustees Act10 which Actenables both residents and non-residents to set upvarious trust structures such as constructive trusts,discretionary trusts, fixed interests trust and purpose trust. Trustees operating in Malta must be approved by the MFSA whilst trusts established in foreignjurisdictions may be recognized in Malta and it istherefore possible to set up an investment fund as aforeign law trust. The graphic design featured below illustrates the flexibility of a multi-fund PIF.

3.1.4 Limited partnerships

Limited partnerships benefit from a similar legislativeframework to the one offered to SICAVs and may beconstituted as multi-class partnerships or as multi-fundpartnerships and the capital of the partnership can bedivided into shares. Partnerships must have a registered office in Malta where they keep thepersonal information of all limited partners.

In addition, a limited partnership requires generalpartners who are fully liable and both partners canbe limited liability companies formed in any jurisdiction. Limited partnerships are governed bythe Companies Act.11

3.2 Multi-fund PIFs and share or unit classes

Multi-fund PIFs (otherwise known as umbrella funds)are single legal entities comprising two or more sub-funds or compartments, each with differentfeatures such as different investment policies andobjectives, different asset class investments and different target clients.


Schematic of a possible multi-fund, multiple share or unit class structure12

MULTI-FUND PIF

US equity UK equity Europe bonds Eurolong/short

Fee structure(combination of

entry, exit &ongoing)

Currency (e.g.,€,US$, JPY) or hedged

Dividend policy(distribution orcapitalization)

Investor type (e.g.,retail, professional

etc.)

PIF Sub-funds,each with specificfeatures

Share or unit classes, each withspecific features

Multi-fund UCITS

Europe equity

10 Trust and Trustees Act (Chapter 331 of the Laws of Malta)11 Limited partnership divided into shares in terms of the Companies Act (Chapter 386 of the Laws of Malta) and the Companies Act (Amendment of Tenth Schedule) Regulations, 201112 This graphic is designed to illustrate a multi-fund compartment, multiple shares or unit class structure and it is not designed to represent a typical structure.

Multi-fund PIFs may be created provided that the constitutional documents expressly permit it and the offering documentation specifies the investment policy, objectives and restrictions specific to each sub-fund. The multi-fund PIF may also elect, subject torelevant disclosure in its constitutional documents, tohave the assets and liabilities of each sub-fundcomprised in the PIF treated for all intents and purposes of law as a patrimony separate from the assets and liabilities of each other sub-fund of the PIF.

Investors may purchase shares or units in sub-fundswhich have different investment policies, objectives and restrictions, segregated assets and accounting records. Investors may, if permitted by the constitutional document or offering document, “switch” all or part of their investment from one compartment to another, in principle without incurringsignificant charges. Fund Promoters may consequently retain in the same PIF those investors who wish to change their investment strategy.

Multiple share or unit classes may also be created within a PIF or, in the case of a multi-fund PIF, within asub-fund.

While the investment objectives, policies and restrictions are defined at the level of the PIF or thesub-fund, share or unit classes permit theimplementation of features, generally customized to one or more specific needs or preferences, such as aspecific fee structure, currency of denomination,hedging policy, dividend policy, investor type orcountry of distribution.

Identification numbers (such as ISIN (International Security Identification Number)) would be attributed at the level of the share or unit class.


3.3 Eligibility of investors

Investors in PIFs must be able to demonstrate that they possess the required expertise, experience and knowledge to make investment decisions and assess their risk. Such investors must satisfy at least one of the following conditions depending on the type of PIF they will be investing in.

• Person having at least one year of relevant work experience in a professional position in the financial sector or a person who has been active in such types of investments

• Reasonable experience in the acquisition or disposal of funds or instruments with similar risk profiles to that of the proposed PIF

• Having carried out investment transactions of a significant size at a certain frequency

• Any other appropriate justification

• Person (or entity) must have net assets in excess of €750,000. If the PIF is established as a trust, this condition applies to the net value of the trust’s assets. Individuals must meet this threshold either on their own, or jointly with their spouse. This is a mandatory condition

• Reasonable experience in investment decisions on funds with a similar risk profile and in instruments of the proposed PIF

• A senior employee or director of service providers to the PIF

• A body corporate or partnership wholly owned by persons or entities satisfying any of these criteria that is used as an investment vehicle by such persons or entities

• An entity with at least €3.75m under discretionary management investing on its own account

• The investor is a PIF promoted to qualifying or extraordinary investors

• A relation or close friend of the promoters limited to 10 persons per PIF

• Person (or entity) must have net assets in excess of €7.5m. If the PIF is established as a trust, this condition applies to the net value of the trust’s assets. Individuals must meet this threshold either on their own, or jointly with their spouse. This is a mandatory condition

• The investor is a PIF promoted to extraordinary investors

• A senior employee or director of service providers to the PIF

• A body corporate or partnership wholly owned by persons or entities satisfying any of these criteria that is used as an investment vehicle by such persons or entity

Experienced investors Qualifying investors Extraordinary investors


PIFs targetingexperienced investors

PIFs targetingqualifying investors

PIFs targetingextraordinary investors


3.4 Regulatory characteristics and requirements

The following table presents a summary of other regulatory characteristics and requirements of PIFs

Regulator

Authorization/ licensing procedure

Structures available

Eligible investors

Maximum number ofshareholders

Minimum number of shareholders

Minimum investment

Use of sub-funds

Multi share classes

Investment restrictions

Leverage restrictions

Cross Sub-Investments

MFSA

Prior to setup

• Investment companies• Limited partnerships• Unit trust• Contractual fund(Refer to Section 3.1)

Refer to Section 3.3

No limit

No minimum

€10,000/ $10,000 orequivalent

Yes

Yes

Specific investmentrestrictions (refer to Section 4.1)

Up to 100%

No

MFSA

Prior to setup



No limit

No minimum

€75,000/ $75,000 or equivalent

Yes

Yes

No restrictions – subject togeneral diversification requirements (refer to Section 4.1)

No

Yes• Allowed to invest up to 50% of its assets into any sub-fund within the same PIF• The target sub-fund/s may not themselves invest in the sub-fund which is to invest in the target sub-fund/s • When applicable avoid duplication of fees

MFSA

Prior to setup



No limit

No minimum

€750,000/ $750,000 or equivalent

Yes

Yes

No restrictions – subject togeneral diversification requirements (refer to Section4.1)

No

Yes• Allowed to invest up to 50% of its assets into any sub-fund within the same PIF• The target sub-fund/s may not themselves invest in the sub-fund which is to invest in the target sub-fund/s • When applicable avoid duplication of fees

PIFs targetingexperienced investors

PIFs targetingqualifying investors

PIFs targetingextraordinary investors

Fees/ expenses including performance and advisoryfees

Transferability of shares orunits

Information to investors

Regulator due diligencechecks

Listing possible

NAV calculation

Subscription and redemption price

No restrictions given thatthey are duly disclosed inoffering document

• Generally freely transferable• Subject to informed investor qualifications

Offering documentation and financial statements

• Directors• Shareholders• Service providers

Yes

NAV required

Subscription andredemption conditions laid down in the constitutionaldocuments

No restrictions given that they are duly disclosed inoffering document


Offering documentation andfinancial statements


Yes

NAV required

Subscription and redemption conditions laiddown in the constitutional documents

No restrictions given that they are duly disclosed inoffering document


Offering documentation andfinancial statements


Yes

NAV required

Subscription and redemption conditions laiddown in the constitutional documents

The Malta Professional Investor Funds | 07The Malta Professional Investor Funds | 13

04 Investment restrictions

4.1 Investment restrictions

The MFSA’s investment services rules for PIFs provides relevant information and clarifications on the investment restrictions that must be adhered to by PIFs depending on the type of investor being

PIFs targeting experienced investors


targeted which restrictions are to be complied with by each sub-fund of a multi-fund PIF structure.

The following is a summary of the investment restrictions applicable to PIFs targeting the differenttypes of investor:

Restriction

• The PIF may hold ancillary liquid assets irrespective of its investment objective and policy

• Up to 20% of assets in securities issued by the same body. Limit may be increased to 35%/ 100% in case where the money market instrument is issued or guaranteed by authorities in OECD or EU/EEA member states/EEA credit institutions• Limit may be increased to 30% in case of transferable securities traded or dealt on a regulated market

• Up to 30% of assets in money market instruments issued by the same body. Limit may be increased to 35%/ 100% in case where the money market instrument is issued or guaranteed by authorities in OECD or EU/EEA member states/EEA credit institutions

• Up to 35% of assets in deposits held with a single body

• No restriction applicable with respect to investment in a single investment fund provided it qualifies as a UCITS or other open-ended investment fund subject to the equivalent risk spreading requirements applicable to the PIF• Up to 30% of asset in any single investment fund not qualifying as UCITS or as other investment fund defined in the preceding point• The PIF is to invest in at least 5 hedge funds in case the PIF is a fund of hedge funds

Instrument

Ancillary cash

Securities

Money market instrument

Deposits

Units in CIS

EY supports asset managers and investment fund houses through the structure and choice of the optimum investment fund structure coherent with the relevant investment objectives, policies and restrictions requirements.

Instrument

Cross sub-fund investment

Restriction

• The PIF may invest in shares of one or more sub-funds within the same PIF provided that this is permitted in the constitutional documents and Offering Memorandum of the PIF in question• A sub-fund is allowed to invest up to 50% of its assets in another sub-fund within the same PIF• The target sub-fund may not itself invest in the sub-fund which is to invest in the target sub-fund• Where the Manager of the sub-fund and the manager of the target sub-fund is the same (or in case affiliated), only one set of management fees (excluding performance fees), subscription and redemption fees shall be applicable

PIFs targeting qualifying investors/extraordinary investors

PIFs targeting experienced investors - continued


Restriction

• Exposure to a single counterparty limited to 20% of total assets; such exposure may be reduced if acceptable collateral is provided by the relevant counterparty • Netting of the mark-to-market value of the OTC-derivative positions with the same counterparty is allowed only if the PIF has a contractual netting agreement with the counterparty

• The Master PIF shall satisfy the leverage restrictions of the PIF in case it is setup as a Feeder Fund

• Up to 25% of assets – directly or indirectly (through an SPV) – in any one single immovable property• The PIF is to invest in at least 5 different properties in case it invests solely in immovable property• The PIF may invest up to 100% of total assets in any single property fund or SPV provided such fund or SPV complies with the investment, borrowing and leverage conditions applicable to PIFs targeting Experienced investors

• Allowed only if considered to be appropriate and in the best interest of investors and entails acceptable levels of risk and investment is made in accordance with good market practice and involves the provision of adequate collateral

• Direct borrowing for investment purpose/ leverage via the use of derivatives is limited to 100% of the value of the PIF

• Aggregate maximum exposure to a single issuer/ counterparty (through securities, money market instruments, deposits and OTC-derivatives) is limited to 40% of total assets• The PIF cannot enter into cross sub-fund investments (if case the PIF is established as a multi-fund)

Instrument

Financial derivative instruments

Feeder fund

Immovable property

Repurchase/ reverse repurchase and stock lending or borrowingarrangements

Leverage

General

5.1 Typical organization of a PIF

This section outlines the typical organization of a PIF, summarizes the roles of the main service providers and outlines the factors impacting the choice of

PIF investment company which has appointed anasset manager


organizational model. As part of the formationprocedures of a PIF, several service providers must beappointed. The following diagrams show illustrative examples (other models may be possible) of the organization of an PIF.

PIF investment company which has not appointed an asset manager15

EY supports asset managers and investment fund houses with the selection of service providers having consideration to the target assets and organizational model of the investment fund.

15 See Section 5.8 for further detailed information on internally managed or self-managed PIFs.

Internally managedPIF

board of directorsDepositary

Prime broker

Auditor

Administrator, registrar,

transfer agent

Depositary(if applicable)

Prime broker

Auditor

Administrator, registrar,

transfer agent

Third-partyInvestment manager

Investment advisors

Assetmanager

Investment fund(board of directors)

05 Key service providers

Investmentcommittee

Portfolio managersor

Investment company

The principle duties of the service providers are as follows:

5.2 Asset manager

A PIF may only appoint a De minimis manager as itsasset manager, which is exempted from the full scope of the AIFM directive. The asset manager is responsible to manage the PIF (or certain sub-funds ofthe PIF) with respect to the investment, divestment and reinvestment of the assets of the PIF. It is a delegate of the PIF and it must be duly licensed or authorised to provide such services provided that the asset manager shall qualify as a de minimis AIFM, being exempted from the full scope AIFM directive.

The asset manager’s role — which may be undertakenby one or more parties — ordinarily comprises:

• Overall control of the operation of the PIF (which may not be necessary in corporate funds with a board of directors)• The role of the investment manager carrying out the day-to-day investment management. The asset manager may also assume the role of the administrator.

The asset manager may either have an established place of business in Malta or a recognized jurisdiction.13

Not all PIFs are required to appoint an external asset manager (See Section 5.8).

5.3 Investment advisor

The investment advisor advises the asset manager or the PIF with respect to the investment, divestment and reinvestment of the assets of the PIF. The investmentadviser will not have any discretion with respect to theinvestment and re-investment of the assets of the PIF.

PIFs are generally not required to appoint aninvestment advisor. Furthermore, the proposed investment advisor need not be established and regulated in Malta. When the investment advisor isappointed directly by the manager rather than by thePIF such investment adviser is not subject to the MFSA’s approval and no eligibility criteria apply.

5.4 Custodian/depositary

A PIF targeted to experienced investors is to appointa custodian or depositary or prime broker (See Section5.6) who is responsible for the safe keeping of the assets of the PIF and for undertaking monitoring duties over the PIF’s asset manager. The custodian or depositary should be independent from the asset manager and need not be established and regulated in Malta subject it is duly licensed and authorized toprovide such services.

Although the MFSA recommends that PIFs promoted to qualifying or extraordinary investors appoint a custodian or depositary, under the current MFSA’s investment services rules there is no obligation for such PIFs to appoint a custodian or depositary. Whereno custodian is appointed, responsibility for the establishment of proper arrangements for the safe keeping of the PIF’s assets remains with the directors/ general partner(s)/trustee and officers of the PIF. The PIF will be required to outline the arrangements it will be put in place to ensure adequate safekeeping ofits assets.


13 The Regulator of the jurisdiction in question having enacted a (bilateral) Memorandum of Understanding with the MFSA in the area of Securities supervision

5.5 Administrator

Administrative services in relation to the PIF may be carried out by a fund administrator. The administrator’srole ordinarily covers, amongst other things:

• Liaison with shareholders • Calculation of NAVs• Reconciliations • Pricing the investment portfolio• Payment of bills • Preparation of financial statements • Fund accounting • Performance reporting• Compliance reporting • Preparation of contract notes

The role of the administrator may be carried out either by:

• A separate administrator appointed directly by the PIF (in which case the asset manager’s role would be limited to the day-to-day management of the PIF’s portfolio) Or• The asset manager itself, after it has been delegated with such duties by the PIF Or• A separate administrator appointed by the asset manager in the instance that the latter has been delegated with such duty by the PIF but has opted to outsource it to a third-party


5.6 Prime broker

The PIF may appoint one or more prime brokers. Before entering into relevant agreement with a primebroker, the PIF shall exercise due skill, care and diligence on an on-going basis.

The depositary may be appointed as prime brokerprovided that it must separate the custody activities from its brokerage activities.

5.7 Auditor

The PIF shall appoint an auditor approved by theMFSA and the PIF shall obtain from its auditor a signed letter of engagement defining clearly the extent of the auditor's responsibilities and the terms of appointment.

5.8 Internally managed or self-managed PIFs

A PIF may opt not to appoint a third-party investmentmanager and thus the PIF will be carrying out internally the investment management function. Forthe purpose of this section, the term “PIF” shall beunderstood to refer to “internally managed or self-managed PIF.”

5.8.1 Operational arrangements

A PIF should organize and control its affairs in a responsible manner and is to have adequate operational, administrative and financial proceduresand controls to ensure compliance with all regulatory requirements.

The PIF would also need to have the adequate andappropriate human and technical resources that arenecessary for its proper management and to effectively perform its activities.


The board of directors of the PIF would be responsiblefor the management of the PIF’s assets which board ofdirectors may either be directly involved in the portfolio management function or else shall establish an in-house investment committee.

5.8.2 Capital requirements

The PIF is to have sufficient financial resources at itsdisposal to enable it to conduct its business effectively,to meet its liabilities and to be prepared to cope withthe risks to which it is exposed. It is to maintain as an“initial capital” of €125,000 or $125,000 and that thenet asset value of the PIF is expected to exceed this amount on an on-going basis.

Responsible for the overall management of the assets of the PIF

The Investment Committee shall: • Monitor and review the Investment Policy of the PIF • Establish and review guidelines for the investment by the PIF • Issue rules and asset selection criteria • Setting up portfolio structure and allocation parameters • Make recommendations to the board of directors

• Delegated the day-to-day portfolio management • Undertake the day-to-day portfolio management in line with the

investment guidelines set by the Investment Committee and in accordance with the PIF's offering documentation

Board of directors

Investment committee

Portfolio manager

Third-party investment

manager

Or

•

Operational setup of a self-managed PIF

Preparatory Pre-licensing Post-licensing

Initial submission of documents for authorization including: • Application Form • Draft documents and any

additional information

• Submission of final documents

• Listing on the official list of licensed entities

• Issue of licence

MFS

AM

ain

docu

men

ts

6.1 Initial consideration

In practice, a large amount of work will be performedby the promoters, consultants, auditors or legal advisors and proposed service providers before submission of the application for the licensing of a PIF.

6.2 Authorization process and requirements

A PIF is to obtain authorization and licence from theMFSA to be able to operate. The approval process for setting up a new PIF can be divided into three phases:

6.2.1 Preparatory phase

• PIF promoters or asset managers with the assistance of the advisors, prepare a detailed proposal of their activities and discuss the terms at meetings with the MFSA in order for the MFSA to provide relevant guidance and clarifications as necessary.

• PIF promoters submit the draft application documents as outlined below, which documents will be reviewed by the MFSA and may request additional evidence, corrections, or proof of the fit

and proper test, among other things.

• The MFSA will consider the nature of the proposed PIF and a decision is made regarding which SLCs should apply. These represent ongoing requirements which will need to be satisfied by the PIF.

Authorization Process


EY supports asset managers and investment fund houses with the investment fund setupand application for authorisation, as well as restructuring and liquidation.

06 Authorization

6.2.2 Pre-licensing phase

• When all review points noted in the draft application are resolved, the MFSA will issue an “in principle” approval for a license. Following this, PIF promoters must: [i] finalise any outstanding issues and [ii] submit signed final application documents• A license will be issued once all pre-licensing issues are resolved

6.2.3 Post-licensing / pre-commencement of business phase

• The MFSA will determine whether the applicant needs to satisfy any post-licensing matters before formal commencement of business can take off

The initial application documents to be submittedshould at least include:

• Application form• Application fee• A near final draft offering documentation or marketing documentation• A near final draft of the memorandum and articles of association/partnership deed/ trust deed/ fund rules (as applicable)• Resolution from the board of directors/ general partners/management company• Information including personal questionnaire forms on the directors/general partners• Information including personal questionnaire forms on the qualifying founder shareholders (holding 10% or more of the voting rights) including personal questionnaire forms• Personal questionnaire forms of the individuals holding the post of directors• Personal questionnaire forms and competency forms of the individuals holding the post of compliance officer and money laundering reporting officer

In the case of internally managed orself-managed PIFs,the following additional documents must also be submitted:

• Personal questionnaire forms, competency forms and CVs of the individuals responsible for the asset management function of the PIF • Investment committee terms of reference• Confirmations from the Investment committee members and portfolio managers• Portfolio delegation agreement (if applicable)

Further details of the operational structure of aninternally managed PIF are outlined in section 5.8.

The MFSA recommends applicants to file an application only once all constituents of the project are in final draft form.


7.1 Special purpose vehicles

A Special Purpose Vehicle (SPV) is a legal entity which is set up for a specific limited purpose by another entity (i.e., the originator), in that the SPV has no purpose other than the transaction for which ithas been created. A PIF (or the asset manager acting on behalf of the PIF) will establish an SPV in order to facilitate investments in certain assets such as benefiting from a regulatory and tax perspective by incorporating the SPV in a more attractive jurisdictionor to finance a new venture without increasing the debt burden of the PIF.

From a regulatory perspective, the MFSA defines anSPV as being setup by the PIF as part of its investment strategy for the purpose of achieving itsinvestment objectives, being (directly or indirectly) owned and controlled via majority of voting sharesand having the majority of the SPV’s directors in common with the PIF. For a Malta-based AIF using anSPV for investment purposes, it must ensure that theSPV is established in a jurisdiction which is not a FATF Blacklisted country, it maintains at all time the majority of directorship and it must ensure that the investments effected through any SPV are in accordance with the investment objectives, policies and restrictions of the PIF.

7.2 Re-domiciliation of PIFs

Maltese legislation allows for the re-domiciliation of corporate entities, which means that a fund established as an investment company in anotherjurisdiction may continue to exist in Malta under certain conditions. The continuation allows for the transfer of the corporate entity seat of incorporationfrom one jurisdiction to Malta thus allowing thecontinuing corporate existence of the re-domiciled

corporate entity.

For a fund to be re-domiciled to Malta, it must be,formed and registered in an approved jurisdiction, able to adopt a similar corporate structure proposed to the PIF (e.g., as an investment company), allowed tore-domicile by the laws of the approved jurisdiction and not be in the process of dissolution or winding up.

The process is seamless given that the PIF regime allows service providers to be based in otherjurisdictions. Also, there is no transfer of assets and the status of investors does not change.

7.3 Side pocket

Where a PIF invests in illiquid assets, some or all of these assets may, under certain circumstances, be transferred to a side pocket. The purpose of side pockets is to mitigate risks arising from certain assets becoming illiquid, thus the PIF would not realise such asset to meet its redemption obligations, or turns out to be hard-to-value and as a result the price of shares for subscription and redemption will not accurately reflect the fair value of the assets as it cannot be valued accurately.

The assets in the side pocket would be separated fromthe main pool of assets allowing the PIF to continue inthe issue and redemption of shares in the liquid pool of assets.

On the date of the creation of the side pocket, the assets are allocated to the new share class — the side pocket. The investors of the existing share class will receive shares in the side pocket on a pro rata basis according to their holding in the existing share class.


07 Salient features of PIFs

7.5 Draw downs

PIFs (established as SICAVs) targeting qualifying orextraordinary investors may enter into written agreements with investors to effect draw downs oncommitted funds thus allowing investor funds to be drawn down by the PIF or its asset manager asinvestment opportunities arises.

Any PIF to provide such arrangement is to complywith the following conditions:

• Request on committed funds shall be effected pro-rata amongst all relevant investors in the PIF• Any fresh call for further commitments shall be made once all outstanding commitments from existing investors have been requested• Any shares to be issued at a “discount”14 to existing investors on committed funds, the nature of which to be disclosed in the PIF’s constitutional documents, shall be applicable only to any outstanding commitment provided that shares are issued at a price not below the NAV at the time the investor first subscribed to the shares• Copies of the written agreements are to be held at the PIF’s registered office and are to be available for inspection by MFSA officials during compliance visits• Specific risk warnings to be included in the offering memorandum noting that investors will be issued shares at a “discount” if the NAV of the share prevailing at the time of the draw down exceeds the pre-agreed price otherwise the investor would, in effect, be paying a premium for such shares

The side pocket is closed to any new subscriptions andsuspended from redemptions.

The manager is required to manage the assets in the side pocket with the objective of realising them in thebest interest of, and if warranted, distributing the proceeds to, investors. Shares in the side pocket areto be redeemed upon the sale of the asset or when theasset is transferred to the main liquid portfolio of assets.

The MFSA permits the use of side pockets provided that statutory information is disclosed in the PIF’s constitutional documents and that certain conditions are satisfied.

7.4 Side letters

The use of side letters allows for greater flexibility to the PIF or its asset manager to enter into tailored arrangements with specific investors without the requirement to amend the conditions disclosed in thePIF’s constitutional documents.

To create a side letter, the following conditions are tobe met:

• The side letter must be approved by the PIF’s board of directors prior to being issued• Any side letter issued must be retained at the registered office of the PIF and is to be available for inspection by the MFSA during compliance visits


14 Companies Act (Investment Companies with Variable Share Capital) Regulations (Legal Notice 241 of 2006, as amended)

PIFs can be marketed to professional investors underthe national private placement regimes (i.e., subject tonational requirements) (NPPRs) where such regimesexist. The NPPRs allows for the distribution of PIFs inEU member states as the passport regime of the AIFMdirective is not applicable since PIF products fall out-of-scope of the directive.

Since De minimis AIFMs are not required to comply with the full requirements of the AIFM directive, suchAIFMs in distributing their PIF product have at least the following options:

• Continue to market the PIF under the NPPRs, where permitted Or • “Opt-in” – i.e., voluntary comply with the requirements of the AIFM directive (in which case the PIF is to be restructured as an AIF) — and benefit from the passport regime

In most key distribution markets, national distributionrules permit private placement. NPPRs permit participants to buy and sell financial instruments, including units of PIFs, to each other without having to comply with rules that would usually apply whenthe same instrument are offered to retail investors.

Typically, NPPRs may provide exemptions from national public distribution regimes for distribution offunds meeting certain criteria to:

• A limited number of investors• A specific type of investor e.g., professional or qualified investors, or high net worth individuals• Investors subscribe a minimum amount


08 Distribution of PIF products

A major benefit of PIFs is that the MFSA’s investment services rules do not impose restrictions on the type of eligible assets a PIF may invest in other thangeneral investment restrictions pertaining to thediversification of risk in relation to PIFs targeting Experienced investors – who are more akin to retailinvestors.

The MFSA has still issued guidance notes on different types of structures a PIF may be established as. This section provides a brief outline of the requirements relating to PIFs being structured as a property fund,money market fund, private equity fund, loan fundand as a shariah-compliant fund.

9.1 Recognized incorporated cell companies (RICC)

The MFSA has introduced the “cellular concept” as a new vehicle for setting up investment funds in Malta which caters in particular to fund platforms.

Investment funds would be established as incorporated cells within the platform of a recognisedincorporated cell company (RICC) .

Similar to a multi-fund, the RICC platform provides forthe separation of the assets and liabilities between theRICC and each incorporated cell. The difference is thatin a RICC structure liability is limited through theseparate legal identity of each incorporated cell (aseach cell has its separate legal personality), whereas in multi-fund PIF, limitation of liability is achieved through the option of segregation of assets and liabilities of each sub-fund stipulated by virtue of the memorandum of association of the UC. Thebenefit of the RICC structure is that it allows for several types of licensed CISs to coexist under one platform while retaining separate features and separate legal patrimonies while each incorporatedcell may benefit from certain cost savings through thecentralization and standardization of contractualagreements.


15 “Main objective” is to be interpreted as the PIF’s main investment objective being to invest in the property as its main asset class (>20% of NAV)

Main objective is investing in immovable property15

Limited exposure to direct/indirect investment in properties

Investment objective Investment restrictions

Type of investorsExperienced Qualifying

• No investment restrictions

• Open-ended – Up to 50% of NAV• Closed-ended – No restriction

• No restriction

A MMF must indicate in its offering document whether it is a short term MMF or a MMF. In both cases, specificdisclosure is required to draw the attention to the difference between the MMF and investment in a bank deposit. It should be clear, for example, that an objective to preserve capital is not a capital guarantee.

Requirements applicable to property (real estate) funds

General investment restrictions

Leverage

Borrowing (for liquidity purposes)

General investment restriction

• Up to 25% in any one single immovable property• Must invest in at least 5 different properties • May not invest up to 100% of total assets in any single property fund

• Open-ended – No leverage is permitted• Closed-ended – Up to 100% of NAV

• No restriction

• Between 10% —20% of NAV may be invested in property• No other investment restriction shall apply other than the standard PIF investment restrictions

09 PIF structures

Requirements applicable to MMF


9.2 Property (real estate) funds

The MFSA had issued a specific guidance note on PIFs structured as property funds. The guidance note discloses that any PIF targeting Extraordinary investors falls outside the scope of this policy and thatany such PIF established as a property fund would besubject to the general investment restrictions applicable to PIFs targeting extraordinary investors.

The table below provides a brief summary of PIFs established as a property fund targetingexperienced or qualifying investors.

9.3 Money market funds

The MFSA had issued supplementary conditions forPIFs setup as a Money Market Fund (MMF) in accordance with CESR’s guidelines on a common definition of European money market funds16 which

lay down the specific requirements of the MMF’s eligible assets, investment regulations, valuation rulesand rules relating to the assessment of any investmentin money market instruments.

Under these regulations, a MMF is a PIF which investsin money market financial instruments, offering returns in line with money market rates.

These regulations also distinguish between aShort-term MMF and a MMF. Also, a PIF is notallowed to include, as part of its name, the term“money market fund” or similar unless it adheres with the MFSA’s supplementary conditions.

Both short term MMFs and MMFs must comply with general guidelines and also have to comply with specific guidelines relating to their category.

A MMF must indicate in its offering documentation whether it is a short term MMF or a MMF. In both cases, specificdisclosure is required to draw the attention to the difference between the MMF and investment in a bank deposit. It should be clear, for example, that an objective to preserve capital is not a capital guarantee.

Objective

Valuation method

Type of NAV

Dealings

Eligible assets

Short-term MMF MMF

Having the primary investment objective of maintaining the principal of the PIF and aim to provide a return in line with money market rates

Constant net asset value (NAV) or variable NAV Variable NAV

Marking-to-market or amortised cost Marking-to-market

Daily subscription and redemption (unless marketed solely as an employee savings scheme)

• Money market instruments which comply with the criteria for money market instruments as set out in the rules (requirements outlined hereunder)• Deposits with credit institutions• Derivatives used in line with money market investment strategy of the fund. Derivatives which give exposure to foreign exchange may only be used for hedging purposes. Investment in non-base currency securities is allowed provided the currency exposure is fully hedged.• Other investment funds that comply with the definition • Other investment funds that comply of a short-term money market fund with the definitions of a short-term money market fund or a money market fund

21 CERS/10-049

9.4 Loan funds

A PIF is allowed to “invest through loans” provided that it constitutes either (i) the direct origination ofloans by the PIF or (ii) the acquisition by the PIF of aportfolio of loans or a direct interest in loans which

Conditions and restrictions

gives rise to a direct legal relationship between the PIF(as lender) and the borrower.

The requirements for PIFs structured as “Loan Funds”are summarised in the table below.


17 The term “financial undertaking” shall be defined as: (a) a credit institution as defined in point (1) of article 4(1) of regulation (EU) 575/2013; (b) an investment firm as defined in point (1) of article 4(1) of directive 2004/39/EC; (c) an insurance undertaking as defined in point (1) of article 13 of directive 2009/138/EC; (d) a financial holding as defined in point (20) of article 4(1) of regulation (EU) 575/2013; and (e) a mixed-activity holding company as defined in point (22) of article 4(1) of regulation (EU) 575/201318 The term “foreign currency lending” means lending in any currency other than the legal tender of the country in which the borrower is domiciled.

• The PIF may only issue loans to unlisted companies and SMEs provided the entity receiving the loan is prohibited from transferring such loan to a third-party nor it qualifies as a “financial undertaking”17 • Households and individuals are not eligible to receive any financing from the PIF• The PIF is to be structured as a “closed ended” fund• (In case of multi-fund PIFs) all sub-funds are to be licensed as “loan funds”

• Professional clients as defined in Section I of Annex II of MiFID • An investor elected to be treated as a “Professional Client” and commits to invest a minimum of €100,000 • Qualifying investors (as defined in Section 3.3)• Extraordinary investor (as defined in Section 3.3)

• Short selling, leverage and reuse of collateral is not permitted• May invest up to 30% of its assets in liquid assets • Up to 10% of its capital may be issued as loans to a single “eligible entity” (the said restriction shall also apply in case the PIF is to invest in a “portfolio of loans”) • May invest up to 10% of its capital in units of other “loan funds”• The aggregate value of the units in other “loan funds” shall not exceed 20%• The PIF may acquire up to 25% of the units of a single “loan fund”• Borrowing is permitted subject to certain restrictions• Cross sub-fund investment is allowed subject to certain restrictions (Refer to Section 3.4)• May engage in “foreign currency lending” subject to the high level principles in MFSA rule 1 of 2012 on foreign currency lending18

• May be performed either by an “external valuer”, being independent from the investment manager and PIF, or by the investment manager provided that such task is functionally independent from the portfolio management function and the credit granting function; and other measures ensure that conflicts of interest are mitigated and that undue influence upon the internal valuers is prevented.

General requirements

Eligible investors and minimum entry levels

Investment restrictions

Valuation

Although Shariah-compliant funds are generally subject to the same rules and regulations applicable toall of the PIFs established in Malta, it should be notedthe following:

• Risk-spreading principles need to be followed unless this is waived or is not a requirement in terms of the proviso to the definition of “collective investment scheme” in the Act• The managing body of the PIF (e.g., board of directors) is responsible to ensure that the relevant Shariah principles and requirements as disclosed in all information provided to investors are adhered by the PIF• Extra-financial criteria must comply with all prevailing regulatory and statutory requirements which are mainly any additional Shariah guidelines which the PIF will adopt

A PIF compliant with Shariah law and principles is to appoint a Shariah advisory board in addition to thekey service providers (Section 5 refers). In the governance structure of a PIF, the Shariah advisoryboard can be defined as a committee composed of Islamic Shariah scholars acting as advisors to the PIFto ensure that transactions and/or activities carried out on behalf of the CIS are in compliance with Shariah principles and guidelines.

The asset manager (or an “internally managed” PIF) is to appoint a Shariah advisory board to be composed of at least two “internationally recognizedIslamic Shariah scholars” to ensure that the PIF meets Shariah compliance standards in the management ofits assets. Members of the Shariah advisory board areto be independent from the asset manager (or theportfolio management function in a “internally managed” PIF). A legal entity may be appointed asShariah advisor, which in turn would appoint a Shariahadvisory board.

PIF structured as a “Loan Fund” also have additional specific requirements imposed on the key service providers.

9.4.1 Asset manager

The Asset Manager shall be responsible for themanagement of the PIF with respect to the investment,divestment and reinvestment of the assets of the PIF and its risk management. Due to the underlying assetsof the PIF (i.e. loans), the manager is expected to havethe necessary knowledge and experience in area of granting of loans including credit assessment, credit provisioning monitoring and control of exposure (the same requirements shall apply in case of “internally managed” PIFs).

9.4.2 Custodian or depositary

A Custodian/Depositary must be appointed to be responsible for the safe keeping of PIF’s assets of the PIF. This is an additional requirement to PIFs targetingQualifying or Extraordinary investors as referred to Section 3.4.

9.5 Shariah-compliant funds

The MFSA issued guidance notes to assist promoters establishing PIFs to be Shariah-compliant in terms ofthe local regulations and the Act.19

PIFs may generally be structured as either: Shariah-compliant equity fund; Ijarah fund; or Murabaha fund. Other structures may also be considered by the MFSA provided that such structuresare compliant with Shariah law.


19 MFSA guidance note for Shariah compliant funds

10.1 Offering document

All PIFs must have an offering document for which the PIF and/or its manager are to be responsible. The offering document must provide sufficient information to enable a potential experienced, qualifying and/or extraordinary investors to make aninformed investment decision of the investment proposed to them and, in particular, of the risks attached thereto.

The offering document of a PIF would ordinarily include the following information:

• Investment strategy, objective and details of how any changes may be implemented • Information on where any master PIF is established and in the case of fund of fund structures where the underlying funds are established• The main legal implications of the investment contracts • Intended leverage and collateral arrangements• The identity of the service providers (asset manager, depositary (if applicable), auditor, prime broker etc., their obligations, including depositary liability and investors’ rights) • Valuation procedures • Fees and expenses to be borne by investors • Provisions to ensure fair treatment of investors, together with details of any preferential treatment• Liquidity management procedures, including how subscriptions and redemptions are processed

10.2 Financial reporting

10.2.1 Annual report

PIFs are required to produce an annual report including, audited financial statements, which should be published and submitted to the MFSA within 6 months of the end of the accounting period.

The annual report must include:

• A balance sheet or a statement of assets and liabilities — including details of accounting and valuation policies• Number of shares in circulation• NAV per share and mid-market price per share• An analysis of the portfolio by economic, geographic, currency, or other appropriate measure, such analysis should show the value of each investment category as a percentage of net assets and of total scheme assets • Notional exposure relating to each position in FDI• A statement of the change in composition of the portfolio• A statement of the developments concerning the assets of the scheme during the period• A comparative table covering the last three accounting periods, including the total NAV of the scheme and the NAV per unit or share


EY supports asset managers and investment fund houses with the drafting of investment fund documentation including prospectuses and other investor information, preparation of financial reports, and periodic reporting to the supervisory authority.

Investment fund 10 information and reporting obligations

• Details of the category of transactions of the resulting amount of commitments • Report by the investment manager on the activities of scheme during the period• A report by the custodian/depositary (PIFs targeting experienced investors) on whether the PIF has been managed: • In accordance with the limitations imposed on the investment borrowing powers of the Scheme by the constitutional documents and by the MFSA • In accordance with its constitutional documents and its license conditions• Names and addresses of all functionaries• Details of significant changes to the offering memorandum during the period• A statement regarding breaches of license conditions and/or regulatory sanctions

10.2.2 Half-yearly report

PIFs are not required to produce a half-yearly report.Should such PIFs opt to produce one, this should be published and submitted to the MFSA within 2 months of the end of the accounting period.

10.2.3 Directors confirmation

Copies of annual and half-yearly reports submitted to the MFSA should be accompanied by a directors’ confirmation to the effect that to the best of their knowledge, the report is complete and accurate in allmaterial respects and conforms to MFSA’s requirements in terms of the PIF’s license conditions.

10.2.4 Regulatory statistical returns

The Central Bank of Malta requires certain PIFs (whichexclude certain pension funds and money market funds) to submit specific statistical information.

10.2.5 Compliance report

The compliance officer of a PIF must prepare a compliance report at least every six months and will have to be presented to the senior officials (directors, general partners, trustee, manager, as applicable). Such report must also be made available to the MFSA when compliance visits are carried out.

10.2.6 Reporting obligations to competent authorities — AIFM directive implications

The AIFM directive has introduced new regulatory reporting obligations applicable to PIFs which requirements are determined by the type of theinvestment manager being appointed, that is an EU ornon-EU AIFM or a de minimis AIFM. In this regard, AIFMs are to provide a multitude of information to the competent authorities, on a periodic basis.

This section is to provide a summary of the reporting obligations transposed from the AIFM directive.

For the purpose of the table below, we shall only highlight the reporting obligations related to PIFs which fall below the AIFM directive exemption threshold.20

Summary of reporting obligations


20 Total AUM below the threshold of either €100 or €500m – article 3(2) of the AIFM directive

PIF

Unleveraged

Leveraged

Regulatory framework

De minimis AIFM

De minimis AIFM

Reporting obligations

• Main instruments in which the PIF is trading • Principal exposures and most important concentrations

• Same reporting obligations as for “unleveraged” PIFs

Frequency

Annual

Annual

11.1 Introduction

In certain cases, investors, in particular institutional investors, will only be permitted to purchase securities (generally shares or units) issued by investment funds that are listed on a recognized or regulated stock exchange. As a result, a stockexchange listing will often be important to accessing certain distribution channels.

11.2 Application procedure for PIFs seeking authorization and admissibility for listing

A formal application should be lodged with the ListingAuthority in accordance with the application form asoutlined in the listing rules at least 5 business days prior to the date of hearing of the application by the listing committee of the listing authority.

Furthermore, the following requirements shall also besatisfied:

• The application form shall be duly completed and signed by a duly authorized representative of the PIF and the sponsor• In the case of any other legal form, the application form shall also be signed by a duly authorized officer for and on behalf of the PIF and if appropriate the management company• Copy of the prospectus or offering memorandum (including relevant offering supplements were applicable) marked to indicate where the relevant listing requirements have been included• Any other documents or information which the listing authority shall require

The listing authority shall notify its decision toapprove or refuse an application including the approval or refusal of the prospectus or offering memorandum before the end of the period of 10 days beginning with the date on which the application isreceived, which time limit may be extended to 20working days if the public offer involves units issuedby the PIF which does not have any units admitted to trading on a regulated market and which has notpreviously offered units to the public. In addition,once the PIF is listed, it shall comply with the continuing obligations at all times.


EY listing services:• Feasibility analysis and determination of listing process and requirements• Support with preparation and submission of listing application• Support with selection of listing service providers• Support with changes of fund listing

11 Admissibility for listing

12.1 Introduction

The Maltese tax system for PIFs is highly beneficial forboth scheme and investor, while Malta’s corporate tax regime makes the country the ideal location formanagement companies and other service providersto base operations.

12.2 Taxation on PIFs

The tax treatment of PIFs depends on the classification of the fund. Maltese law distinguishes between prescribed and non-prescribed funds, whichdistinction, is important to establish whether and howtax is to be charged on investment income, capital gains and dividend contributions.

Prescribed funds – are funds established in Maltaand have over 85% of assets which are situated in Malta. Such PIFs are subject to a withholding tax of 10% which is imposed in interest, discounts or premiums earned on Maltese government stocks or bonds, and bonds issued by listed companies as well as investment income payable by corporate entities.Bank interest is taxed at 15% whilst income from immovable property situated in Malta is subject to tax at the normal rate of 35%.

Non-prescribed funds – are any investment fundswhich does not qualify as a prescribed fund which has more than 15% of assets situated outside Malta.Income and gains derived from such funds are exemptfrom income tax (except for profits and capital gains relating to immovable property situated in Malta whichis taxed at the normal rate of 35%).

Subject to certain conditions, capital gains realized ontransfers or redemption of scheme units by non-resident investors, irrespective of whether the funds are prescribed or not, are exempt from Maltesetax. Dividends distributed by a fund whether theseare reinvested or otherwise, to non-resident

investors are not subject to tax in Malta.

An exemption from stamp duty applies in respect oftransfers of securities by licensed funds and in respect of transfers by investors of the units of a licensed fund.

12.3 Taxation on individuals

The incidence of tax will depend on the type of transfer whether the fund is prescribed or non-prescribed, and the tax residence of the investor.Since the withholding tax on prescribed funds is charged at fund level, any capital gains made by investors from the redemption, cancellation or liquidation of securities in listed funds are not subjectto further tax in the hands of the investor.

In the case of non-prescribed funds, since most of theincome is exempt from tax, distributions are taxed at the rate of 15% only when made to residentindividuals. Other distributions are not taxed in Malta.

12.4 Tax treatment from highly-qualified professionals

Malta has introduced a new tax incentive scheme in 2011 targeting highly-qualified foreign executives. Individuals having their domicile outside of Malta andwho are employed in senior positions with a companythat is licensed or recognized by the MFSA to conduct financial business in or from Malta, can benefit from a flat personal income tax rate of 15% on income up to €5m. Any income over €5m will be tax-free.

In order to qualify for this tax incentive, the employeemust earn a minimum of €75,000 per year (adjustedannually in line with the retail price index), amongst other criteria. The highly-qualified persons rules, 2011, provides relevant information on the executivepositions that may benefit from such incentive.


12 Taxation


EU nationals can benefit for a maximum period of tenyears from the reduced tax rate wheras EEA andSwiss nationals for a period of five consecutive years.


13.1 Who we are

In Malta, we combine our European and global capability with our local knowledge to deliver a fullrange of services to meet our clients’ business needs.

Our global asset management network encompasses key financial centers in EMEIA (Europe, Middle East,India and Africa), the Americas, Asia-Pacific, and Japan, comprising 13,500 professionals including over 1,000 partners. For several years, the Maltese firm has been investing heavily in staff development, office modernization and information technology. Theprofessionalism of our teams combine to offer ourever-increasing portfolio of clients a seamless servicefocused mainly on the provision of value.

Our combination of talent and resources gives us theability to anticipate and adapt to the rapid and accelerating changes to today’s global economy.

13.2 How we support our clients

Being the most globally connected of the Big Four organizations, operating in four integrated regions — the Americas, EMEIA, Asia-Pacific, and Japan —enables our Malta asset management advisory practice to work effectively on a cross-border basis:

• Moving swiftly to bring together the best teams to serve our clients, working together on key issues, and leveraging our strengths, capabilities, and knowledge irrespective of geographies• Providing seamless, consistent, high-quality services to our financial services clients across EMEIA and globally• Responding quickly and effectively to market developments that impact our clients

• Providing our clients access to our perspective on current and emerging trends, industry issues, and regulation

13.3 Our services

Our asset management advisory services include regulatory services, audit, financial accounting, and tax covering the complete lifecycle of an investmentfund from concept, through launch, to business as usual, and beyond.

We tailor our approach to the unique needs of each client of the investment fund, asset management andfund service providers industry, serving as a businessadvisor to management while providing the objectivitydemanded by regulators, boards, counterparties, and investors. Our multi-disciplinary approach encompassing regulatory, tax, reporting, and other operational aspects allow us to provide a holistic answer to our clients’ needs.

We can assist you with a wide range of services including:

Asset management advisory services

Assisting fund promoters, asset managers and fund service providers in:

• The conception, design and authorization of investment funds as well with the application for authorization, restructuring and liquidation• The selection of the relevant service providers• The definition of a market positioning strategy related to the concept and strategy of external distribution channels• The registration of your investment fund with local regulatory authorities

13 How can we help?


Audit services

Our audit service adopts a thorough examination of your organization’s needs to assist you with:

• Ongoing external audit including audit of the regulatory returns• Accounting and financial reporting• Financial accounting advisory• Service organization control reporting

Tax services

Supporting implementation and review of compliance with current and future tax requirements, including:

• Corporate tax advice and reporting• European fund tax reporting services• Tax compliance, including periodic submission of tax returns and tax computations • VAT compliance and advisory services• Local and international tax compliance, reporting and planning

Listing services

• Feasibility analysis and determination of the listing process and requirements • Support with the selection of a local listing agent, calculation agent, and any other service providers Valuation and business modeling services

• Valuation support services in the context of the AIFM directive• Valuation services including model review and OTC derivative valuation• External opinion as external valuer• Select valuation services (e.g., selected parameters)• Impairment testing• Model building• Model validation and review

Definition

Directive 2011/61/EC of the European parliament and of the council of 8 June 2011 on Alternative Investment Fund Managers Including the commission delegated regulation (EU) No 231/2013, commissionimplementing regulation (EU) No 447/2013 and commission implementing regulation (EU) No 448/2013

A collective investment scheme, including sub-fundsthereof, 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 UCITSscheme in terms of the UCITS directive

A legal person whose regular business in managing ofAIFs in terms of the AIFM directive

A jurisdiction including EU/ EEA member states andjurisdiction which competent authority has signatoriesto a multilateral or bilateral memorandum of understanding with the MFSA covering thesupervision of securities and markets

An AIF which is not an open-ended PIF

A fund manager which: (i) either directly or indirectly manages AIFs whose assets under management, including any assets acquired through use of leverage,in total do not exceed a threshold of €100m; or(ii) either directly or indirectly manages AIFs whoseassets under management in total do not exceed a threshold of €500m when the portfolios of AIFsconsist of AIFs that are unleveraged and have noredemption rights exercisable during a period of 5 years following the date of initial investment in eachAIF

Term

AIFM directive

Alternative Investor Fund or AIF

Alternative Investment Fund Manager or AIFM

Approved jurisdiction

Closed-ended PIF

De minimis AIFM


14 Glossary

Definition

Directive 2004/39/EC of the European parliamentand of the council of the 21st April 2004 on markets in financial instruments amending council directive 85/511/EEC and 93/6/EEC and directive 2000/12/EC of the European parliament and of the council and repealing council directive 93/22/EEC

A PIF which allows the right to redeem interest at leastonce a year with redemption at a price which does not vary significantly from the net asset value per share of the AIF.

An investor who possesses the experience, knowledge and expertise to make its own investment decisions and properly assess the risks that it incurs including:Entities authorised or regulated to operate in thefinancial markets; large undertakings satisfying atleast two of the following criteria: Balance sheet total€20m; net turnover €40m; own funds €20m; and/or national and regional governments, public bodies thatmanage public debts, central banks, international and supranational institutions (e.g., World Bank)

An Investor who is not a Professional investor Shares in an investment company, units in a unit trust,or any other form of representation of the rights and interests of participants in a collective investment scheme.

A legal entity set up for a specific purpose by anotherentity (i.e., the originator)

Directive 2009/65/EC of the European parliamentand of the council of 13 July 2009 on the coordination of laws, regulations and administrativeprovisions relating to undertakings for collectiveinvestment in transferable securities (UCITS) (recast)

Term

MiFID

Open-ended PIF

Professional investor

Retail investor

Shares

Special Purpose Vehicle/ SPV

UCITS directive


Cont

acts Asset Management

Ronald Attard [email protected]

Karl Mercieca [email protected]

Assurance

Anthony Doublet [email protected]

Christopher Portelli [email protected]

Tax

Christopher Naudi [email protected]

Robert Attard [email protected]

Valuation and Business Modeling

Chris Meilak [email protected]

Ernst & Young LimitedRegional Business Centre Achille Ferris Street Msida MSD 1751 Malta

Tel: +356 2134 2134 Fax: +356 2133 0280 Email: [email protected]

The Malta AlternativeInvestment Fund

A technical guide

November 2015

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Manager

Furt

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efer

enceFor further information, we recommend our technical fund

guide entitled “The Malta Alternative Investment Fund Manager – A technical guide”. The guide provides an overview of the Malta asset manager regime, how it is impacted by the Alternative Investment Fund Managers directive and a summary of the regulations to the formation and operation of such asset managers in Malta.

For further information, we recommend our technical fund guide entitled “The Malta Alternative Investment Funds — A technical guide.” The guide provides an introduction to Malta as a center for investment funds structured as an Alternative Investment Fund, how it fits within the scope of the Alternative Investment Fund Managers directive and a summary of the regulations to the formation and operation of such investment funds in Malta.

For further information, we recommend our technical fund guide entitled “The Malta UCITS Funds — A technical guide.” The guide provides an introduction of the UCITS brand and how it fits within the scope of the UCITS directive. It also provides an overview to Malta as a center for these types of investment funds, a summary of the regulations to the formation and operation of UCITS brand investment funds in Malta.

The Malta UCITSFund

A technical guide

November 2015

© 2

015

EYG

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d. A

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s Re

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ed.

The Malta AlternativeInvestment Fund

A technical guide

November 2015

© 2

015

EYG

M L

imite

d. A

ll R

ight

s Re

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EY | Assurance | Tax | Transactions | Advisory

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