Dr. Emaliese Lofaro, Manager, Regulatory Development Unit
Malta Financial Services Authority (MFSA)
As from July 1, 2013, fund managers who wish to set up, manage or market alternative investment funds in the EU must be compliant with the Alternative Investment Fund Managers Directive (AIFMD)1. The date is fast approaching and managers who wish to set up base in Europe ahead of this important date must be prepared. Malta has all the legal infrastructure in place to help them get AIFMD-licensed from day one. For some, the re-domiciliation route could be their best option in the present circumstances. Malta’s tried and tested re-domiciliation procedures for both funds and fund managers, and the guiding approach the domicile is renowned for, could indeed be the best proposition.
Malta: a domicile of choice
Re-domiciliation is an efficient way of migrating a fund or a fund management operation into Malta without having to dissolve and re-incorporate the investment company. The process ensures continuity of performance resulting in little disturbance to the investors and to the fund’s assets which do not need to be transferred to a new entity. In certain cases the fund may even keep in place its contractual relationships with its service providers as the Maltese regulatory regime allows funds to have certain providers based in other jurisdictions which are recognised by the Regulator.
Malta’s fund industry is internationally recognised as one of the European domiciles of choice both for UCITS funds and fund managers, as well as for alternative investment funds and their managers. Low costs and a meticulous and accessible regulator make Malta an attractive place for start-up funds to open. The Investment Services Act, the main legislation regulating the fund industry, provides a comprehensive regulatory framework for the setting up, licensing and marketing of all types of collective investment schemes and investment services providers. Malta’s regulatory framework provides the flexibility necessary to allow the setting up of a range of fund types and fund structures.
Worth mentioning is the latest innovative fund platform structure which has been put in place through the Companies Act (Recognised Incorporated Cell Companies) Regulations, 2012. This new vehicle enables fund platform promoters to offer a broad range of administrative services to fund clusters through a Recognised Incorporated Cell Company (RICC). The launching of the RICC has had an encouraging response from fund managers seeking to set up umbrella funds and is also proving of interest to managers whose overall investment fund strategy involves the separation of different investment strategies into separate legal entities for the purposes of appointing specialist managers or multiple promoters following similar strategies. Fund platforms provide the ideal solution for start-up funds because they reduce costs considerably while pooling expertise. The RICC can also serve as a framework for developing new managers who could eventually take over as managers of funds moving out of the RICC. The RICC itself is not a fund and does not require a collective investment scheme licence. It only requires a recognition certificate through which, with the approval of the MFSA, an RICC may service different types of funds – UCITS, non-UCITS or PIFs – which it will set up as incorporated cells. The incorporated cells are independent from both the central RICC and other related incorporated cells allowing each incorporated cell to make its own outsourcing and other arrangements. In the context of the AIFM Directive requiring a single manager and a single depository for each investment fund, an RICC can offer incorporated cells with different managers or allow a depository of choice for each incorporated cell promoter. Incorporated cells can adopt different currencies and financial year ends from other incorporated cells within the same RICCs structure, and can be quoted independently of each other and of the RICC on the Malta Stock Exchange.
Part of Malta’s attractiveness as a fund domicile is also undoubtedly due to the Passporting Regime and global distribution tools for EU fund managers under the UCITS Directive. The European Passport Regime which will come into force as from July 2013 under the AIFMD is also to be factored
in. The MFSA is on track to have all legislation in place ahead of the date when the AIFMD comes into effect. Consultations on new legislation have closed and provisions for further technical rules are well under way. Shortly the industry will receive a briefing on the application of all the Rules and Regulations and Malta will have a clear framework in place well ahead of the July deadline. Non-European alternative investment fund managers, on their part, are attempting to place themselves strategically within Europe in the event that the AIFMD may remove the private placements regimes therefore restricting their options for accessing EU investors.
Re-domiciliation definition and trends
Both inward and outward re-domiciliations in Malta are regulated by the Continuation of Companies Regulations 2002 as subsequently amended issued under the Companies Act (hereinafter referred to as the “Continuation Regulations”. The Continuation Regulations provide that a body corporate formed and incorporated or registered under the laws of an approved country or jurisdiction other than Malta which is similar in nature to a company as known under the Laws of Malta, may, request the Registrar to be registered as being continued in Malta under the Companies Act.
Since promulgation of the Continuation Regulations, way back in 2002, there has been a steady flow of incoming companies every year. The statistics for the last five years show a satisfactory trend. In particular, Figure 1 illustrates the number of re-domiciliations from 2006 to date with a steady increase as from 2007 culminating in the highest number in 2010 and 2011. Most of the re-domiciliations in 2011 were of private investment companies and property companies.
The prospects for the Maltese fund industry in 2013 are encouraging. Malta has become a very attractive choice for fund managers re-domiciling existing funds from an offshore to an onshore jurisdiction within the European Union. Particularly Malta has distinguished itself from the traditional hedge fund jurisdictions for its innovative legislation and quality of service. The recent developments in the regulation of hedge funds in the EU are expected to ensure that Malta will continue to offer an attractive legal and regulatory framework for hedge fund managers to operate with the European Union as well as internationally. The AIFMD is proving to be a real game-changer for hedge fund managers, and its implementation will bring with it high compliance costs. For these reasons there has been great impetus on economies of scale which can be seen from the increase in the establishment of umbrella funds with different sub-funds set up for different clients and different purposes. This trend is expected to continue and attract a consistent flow of funds with a wide range of strategies targeting different categories of investors.
Conditions for re-domiciliation
In terms of the Continuation Regulation, companies are required to satisfy four general requirements to be eligible to re-domicile to Malta:
The body corporate planning to move to Malta must be set up in a structure which is similar to the corporate structures recognised by the Maltese Companies Act
The body corporate must be registered or incorporated in an approved jurisdiction2
The laws of the foreign jurisdiction must make provision for re-domiciliation of companies
The foreign company’s memorandum and articles of association or constituting act must allow the re-domiciliation of the company to another jurisdiction or be amended to that effect
Re-domiciliation of funds
Investment services have led the growth in Malta’s financial sector in 2012, as they have done over the past five years, with Professional Investor Funds seeing the biggest increase. Evidence of the growth can be found not just in the number of licenses and approvals issued by the MFSA but also in the increased number of foreign arrivals in all areas of investment services in 2012. Fund administration and, increasingly, fund management services are widening and deepening the range of skills and expertise available to clients by the day. For the latter, a growing number of service providers also means more competition in products, service and price.
Availability of global service providers, a stable economic, fiscal and tax regime, and a robust legal and regulatory framework are some of the most important factors driving the selection of a fund domicile. Malta delivers in all these areas and also offers a trusted re-domiciliation framework that has
been in place since 2002. Malta’s re-domiciliation framework also works in tandem with an efficient fund authorisation procedure resulting in a complete and seamless process.
All foreign companies proposing to carry on a licensable activity in Malta require a license. For a licensed entity such as a fund, the re-domiciliation process takes place simultaneously with the licensing of the investment vehicle in Malta. In the case of continuation of a foreign collective investment scheme, reference should be made to article 31 of the Investment Services Act, 1994 which deals with continuance of a foreign body corporate carrying on the business of a collective investment scheme in Malta. The Recognised Incorporated Cell Companies Regulations 2012 contain provisions for the continuation of companies in order for foreign funds to be able to make use of the innovative structure of the RICC. To this end, a foreign body corporate which carries out similar activities to those of a collective investment scheme, which is similar in nature to a company or multi-fund under Maltese Law, may be continued as an incorporated cell of an RICC.
The first step in the re-domiciliation process of a collective investment scheme is the submission of an application for a collective investment scheme licence. The application needs to be accompanied by the relevant prescribed documentation to be annexed with the Application Form3, drafted on the basis of the scheme post-re-domiciliation.
Subsequently, the Registrar of Companies is approached with regards to the proposed re-domiciliation. Relevant due diligence enquires are undertaken by the Malta Financial Services Authority where necessary, with the cooperation of the regulator of the overseas scheme. The proposed structure and the documentation to be used by the Scheme would need to be in line with requirements specified in the Maltese Investment Services Rules for Retail Collective Investment Schemes or the Investment Services Rules for Professional Investor Funds depending on the type of fund which one is seeking to re-domicile to Malta.
If all applicable requirements have been fulfilled, the Malta Financial Services Authority will issue an ‘in principle’ decision of approval, and the promoters can proceed to finalise all relevant documentation previously in draft form. The Authorisation Unit set up within the Malta Financial Services Authority and the Registrar of Companies liaise between themselves through the process of re-domiciliation and the Scheme will be licensed and re-domiciled on the same date.
Cost effectiveness in this process is key and fund jurisdictions will have to compete based on whether managers will keep a profitable business model post AIFMD. There are a host of other regulatory developments which funds and their service providers will have to adapt to over the next few years, including MIFID II and UCITS V. MiFID II takes a transversal approach and impacts the conduct of business obligations in various ways. Under UCITS IV and AIFMD, Management Companies will have
to master operational challenges to cope with their central administration and internal governance requirements. AIF managers will also face increased complexity and will need to adapt their business and operation model accordingly. They will need to take decisions on whether to outsource portfolio or risk management function and define new investment management processes. In this context, the Maltese Financial Industry is competing head on with other key jurisdictions supported by a highly responsive and business-oriented regulator that is a key consideration going forward given the demanding regulation environment prevailing in Europe and beyond.
Alternatives to redomiciliation
Maltese legislation offers various alternative options to redomiciliation which still enable foreign companies and funds to relocate. One alternative is a cross-border merger. A merger can help raise a company’s profile and its competitiveness through introduction into the EU market. It can also allow companies to expand, develop new products or restructure themselves, reducing production and distribution costs. Mergers of one or more foreign companies registered in a Member State or EEA State, with a Maltese company are regulated by the Cross-Border Mergers of Limited Liability Companies Regulations, 2007. Mergers of UCITS funds must comply with the provisions of the UCITS IV Directive as transposed in the Investment Services Act (UCITS Merger) Regulations, 2011. These provide inter alia that mergers of UCITS are subject to prior authorisation by the competent authorities of the merging UCITS home Member State.
Another available option is that of setting up a European Company (SE) in Malta in accordance with Council Regulation 2157/2001. An SE can register in any Member State of the European Union, and transfer its registered office to other member states. SEs can be created in the following ways:
By merger of national companies from different member states
By the creation of a joint venture between companies (or other entities) in different member states
By the creation of a SE subsidiary of a national company
By the conversion of a national company into an SE
A foreign company may also form a branch or place of business in Malta in terms of the Maltese Companies Act. All the relevant documents, including copies of the memorandum and articles of the foreign company and a list of directors and the company secretary, required under article 385, have to be submitted to the Registrar within one month of the establishment of the branch or place of business in Malta.
Alternatively one may set up a new company. A company may prefer to wind up in the foreign country and incorporate a new company in Malta under the Companies Act. The length of time to incorporate a company depends on the type of company being incorporated and on whether all information and documentation is available and in order. Once the Registrar of Companies has all necessary documentation and information, the process may take from as little as 24 hours. Guidelines on the Registration of Companies in Malta are available on the MFSA website.
1(AIFMD) Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010
2Funds have been approved from a diversity of locations across Europe and beyond. Presently, the approved jurisdictions are the EU Member States and FATF Countries. Only countries which are blacklisted by FATF are not considered approved jurisdictions.
3All application documents are available for download from the MFSA website on www.mfsa.com.mt