• Cross-Investments between sub-funds of Malta-registered SICAVs
  • June 7, 2013 | Author: Kurt Hyzler
  • Law Firm: CSB Advocates - Swatar Office
  • An investment company with variable share capital (“SICAV”) is by far the most common vehicle utilised by promoters for the licensing of Collective Investment Schemes in Malta. This is attributable to the flexibility associated with such vehicles, as provided by the Companies Act (Investment Companies with Variable Share Capital) Regulations (the “Regulations”).

    In terms of the Regulations, a SICAV may be constituted as either a multi-class company (“multi-class SICAV) or a multi-fund company (“multi-fund SICAV”).

    Multi-class SICAVs

    A duly licenced collective investment scheme constituted as a multi-class SICAV may, in terms of its memorandum and articles of association, be divided into different classes of shares. Each class of shares may be denominated in different currencies provided that any single class of shares may only be denominated in one currency.

    Following its incorporation and licencing, a multi-class SICAV may issue additional share classes with the prior approval of the Malta Financial Services Authority (“MFSA”).

    It is important to note here that each class of shares of a multi-class SICAV do not constitute a distinct sub-fund..

    Multi-fund SICAVs

    Like a multi-class SICAV, a duly licenced collective investment scheme which is constituted as a multi-fund SICAV may also be divided into different classes of shares, with the difference that each class or group of classes of shares of a multi-fund SICAV, also known as an “umbrella” structure, may constitute a distinct sub-fund to which assets and liabilities are allocated and shall be distinct from other assets and liabilities allocated to other sub-funds.

    A sub-fund may itself have separate class of shares which however will not constitute a separate sub-fund. Each class of shares may denominated in different currencies provided however that a class of shares may be denominated in only one currency.

    Following its incorporation and licencing, a multi-fund SICAV may create and issue a new class or classes of shares which may constitute a new sub-fund or be comprised in an existing sub-fund of the SICAV.

    From the above we note the main difference between the two types of SICAVs. A multi-class SICAV may not segregate any of its assets and liabilities between the different classes of shares and thus all the assets and liabilities of the said multi-class SICAV will be allocated to all investors across all the share classes on a pro rata basis. On the other hand, the class or group of classes of shares of a multi-fund SICAV may constituted as a separate sub-fund. Furthermore, by virtue of its memorandum of association, a multi-fund SICAV may elect to have the assets and liabilities of each sub-fund comprised in that multi-fund SICAV treated for all intents and purposes at law as a patrimony separate from the assets and liabilities of each other sub-fund of such multi-fund SICAV. Thus the liabilities incurred in respect of a sub-fund of a multi-fund SICAV shall be paid out of the assets forming part of the patrimony the said sub-fund and the creditors in respect thereof shall have no claim or right of action against the other assets of the company (which are allocated to the other sub-funds of the multi-fund SICAV).

    Cross Investment

    The cross investment between sub-funds of the same multi-fund SICAV duly licenced as a Professional Investor Fund (“PIF”) has been permitted on a case-by-case basis by the MFSA within specific policy parameters. However, the MFSA is now seeking to formulate a standard policy by introducing a specific rule (“Rule”) in Part BII and BIII of the Investment Services Rules for Professional Investor Funds (“PIF Rulebook”). To this end, in October 2012 the MFSA issued a circular addressed to the investment services industry informing the same of the proposed Rule and inviting comments. The MFSA issued a feedback statement on the 09th May 2013 notifying the industry of the feedback received and providing the final wording of the Rule as duly amended.

    By virtue of the proposed Rule, a sub-fund of a PIF multi-fund/ umbrella SICAV targeting qualifying or extraordinary investors would be permitted to invest in units of one or more sub-funds within the same PIF multi-fund SICAV subject to the following parameters:

    1. the PIF multi-fund SICAV must, by virtue of its memorandum of association, elect to have the assets and liabilities of each sub-fund comprised in that PIF multi-fund SICAV treated as a patrimony separate from the assets and liabilities of each of the other sub-funds of such PIF multi-fund SICAV;
    2. The memorandum and articles of association and the offering memorandum of the PIF multi-fund SICAV and Offering Supplement of the relevant sub-fund must permit the cross-investment between sub-funds;
    3. the relevant sub-fund will not be allowed to invest more than 50% of its assets into another sub-fund or sub-funds within the same PIF multi-fund SICAV. It was noted by respondents to the circular that such restriction had no basis at law. However, the MFSA justified the retention of the restriction by stating that its rationale is based on an attempt to secure an element of diversification and to prevent the sub-fund from investing all or primarily all of its assets in one other sub-fund within the same PIF multi-fund SICAV which ultimately result in a master-feeder structure;
    4. the target sub-fund/s may not themselves invest in the sub-fund which will invest in the target sub-fund/s;
    5. in order to avoid duplication of fees, where the manager of the sub-fund and the manager of the target sub-fund is the same or (in the case of different managers) where one manager is an affiliate of the other, only one set of management (excl. performance fees), subscription and/or redemption fees applies between the sub-fund and the target sub-fund, provided that this restriction shall apply only in respect of and to the extent (up to the portion) of the investment of the sub-fund in the target sub-fund;
    6. for the purposes of ensuring compliance with any applicable capital requirements, cross-investments will be counted once; and
    7. any voting rights acquired by the sub-fund from the acquisition of the units in the target sub-fund will not be applied.

    The Exclusions

    The Rule is applicable to sub-funds of PIF multi-fund SICAVs which target “qualifying investors” (minimum investment threshold of Eur 75,000 or equivalent) or “extraordinary investors” (minimum investment threshold of Eur 750,000 or equivalent) which intend to invest in other sub-funds within the same PIF multi-fund SICAV thus excluding sub-funds of retail funds such as UCITS schemes (although this is allowed in terms of Luxembourg law) and sub-funds of PIF multi-fund SICAVs which target “experienced investors”. To this end the MFSA noted that following the implementation of the Rule, it will investigate the possibility of introducing a similar rule on cross sub-fund investments for retail schemes and PIF multi-fund SICAVs targeting experienced investors. We expect the MFSA to issue a  separate discussion circular in this regard.

    By way of completeness it is to be noted that a multi-fund collective investment scheme could also be constituted as limited partnership (also known as partnership en commandite) and contractual funds (also known as mutual funds) whereby it is elected that the assets and liabilities of each sub-class comprised in that partnership/contractual fund are to be treated for all intents and purposes at law as a patrimony separate from the assets and liabilities of each of the other sub-class of such partnership/contractual fund. Despite their resemblance to the SICAV vehicle, from the wording of the Rule it is inferred that it would not apply to collective investment schemes constituted as limited partnerships or contractual funds. It is to be noted here that the provisions relating to limited partnerships are currently being revised and as such the possibility of applying the Rule to such regime is under review. We do not see any reason at law why the Rule should not also apply to limited partnerships.

    Required Amendment to the Law

    Due to the lack of separate legal personality between the sub-funds of a PIF multi-fund SICAV, any purchase of units by one sub-fund in the other sub-fund would be tantamount to a purchase by the PIF multi-fund SICAV of its own shares. Article 84(6) of the Companies Act provides that any own shares purchased by the SICAV “shall be cancelled”.

    During the discussion process it was noted to the MFSA that the above quoted article, as is currently in force, would impede the cross investment between sub-funds. Accordingly, unless this provision is amended, it was felt that it would create significant doubt as to the legal permissibility and validity of cross sub-fund investments.

    The MFSA agreed with the comments made and accordingly proposed amendments to the Regulations which would have the effect of disapplying Article 84(6) of the Companies Act with respect to the cross investment between sub-funds of the same multi-fund SICAV.

    Whilst the amendments to the Regulations are currently awaiting publication in the Government Gazette, the Rule will come into force upon such publication.

    With the transposition of the Alternative Investment Fund Managers Directive around the corner the MFSA noted the fact that the introduction of the Rule in the PIF Rulebook is without prejudice to the possibility of introducing a different set of rules for Alternative Investment Funds as a result of such transposition process.

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