Nowhere is this effort more apparent than in Malta’s comprehensive range of structure offerings for collective investment schemes[1] (“CIS”) as well as the wide choice of segregated cell arrangements for same.[2] Although the concept of distinct patrimonies is not a novel one,[3] Malta’s first foray into segregated cell corporate structures started in 1995 through the addition of Article 84 of the then new Companies Act which empowered the Minister responsible for commercial partnerships to issue regulations for investment companies allowing for the “creation of individual sub-funds and considering same as separate and distinct entities for such purposes as may be established”.

Fast-forwarding to 2012, Malta’s investment company (“SICAV”) offering now permits the setting up of multi-class and multi-fund structures with or without a separate patrimony for each sub-fund as well as, more recently, incorporated cell companies (“ICCs”). Whereas the multi-fund SICAV allows the creation of sub-funds whose assets and liabilities constitute a distinct patrimony from those of other sub-funds and the SICAV itself, the ICC concept takes segregation to the next level. In order to address the two main shortcomings[4] of the multi-fund structure, the Companies Act (SICAV Incorporated Cell Companies) Regulations (S.L. 386.14, laws of Malta) (the “ICC Regulations”) deem each incorporated cell (“IC”) to be a limited liability company with separate legal personality. Under the ICC Regulations, the ICC itself as well as each IC created would each be structured as a SICAV licensed as a CIS. The ICC Regulations also expressly prohibited ICs from creating segregated sub-funds. Whilst innovative, the fact that the ICC needed to be licensed (and carry on activity) as a CIS in its own right was seen by many as excluding what is perhaps the natural use for an ICC – the fund platform.

The RICC

On 17 April, 2012 a new vehicle was added to Malta’s repertoire of cellular fund vehicles, the Recognised Incorporated Cell Company (“RICC”). Directly targeting fund platform providers, the Companies Act (Recognised Incorporated Cell Companies) Regulations (S.L. 386.15, laws of Malta) (the “RICC Regulations”) permit the creation of (or conversion into) an incorporated cell company type vehicle[5] where the “core” or RICC’s activities would be limited to providing, in exchange for payment of a platform fee, certain administrative services to its ICs. Albeit falling short of fully fledged fund administration services,[6] the range of permitted administrative services for RICCs covers the typical platform type services such as assistance in setting up ICs, assistance in selecting as well as contracting with external service providers, standardisation of documentation for the IC as well as other ancillary services approved by the competent authority (the “MFSA”).[7] The permitted administrative services coupled with the requirements that each IC have the same registered office as the RICC (registered office services) and have at least one director in common with the RICC (directorship services) make this an intriguing business model for both existing and prospective fund platform providers. Further, as the RICC is itself a separate company, its shareholders would be able to benefit from Malta’s tax regime for limited liability companies.

In terms of the RICC Regulations, the RICC would be required to apply for a recognition certificate in terms of Article 9A of the Investment Services Act (Cap. 370, laws of Malta) (the “ISA”) and, in this regard, the MFSA issued a new sub-set of Investment Services Rules for Recognised Persons outlining the recognition requirements and application documentation required as well as setting-out the on-going requirements for RICCs (Part AIII and Part BIII). Although the recognition requirements are essentially a trimmed down version of those for other Recognised Persons (fund administrators), there are some peculiarities of note: (a) the RICC must select the type of funds which it will set-up as ICs (one of: Retail UCITS, Retail Non-UCITS or Professional Investor Funds (“PIFs”)) and restrict itself to such type; (b) the RICC is required to have at all times a fit and proper person acting as its ‘Sponsoring Agent’ with responsibility for all aspects of compliance and for acting as the RICC’s main point of contact with the MFSA; and (c) the application for recognition of an RICC must be accompanied by an application for licensing of the first IC.


Fund Platforms: the RICC vs. the Multi-Fund SICAV at a glance

Pros

Cons

  • ICs offer better segregation than sub-funds (separate legal entities vs. distinct patrimony).
  • Cross-IC investment clearly provided for as well as intra-IC contracting permitted (separate legal entities vs. patrimonies with no legal personality relying on that of the SICAV).
  • Allows the fund platform promoter (the RICC) to generate revenue streams from a platform fee.
  • Could potentially permit multi-manager / multi-depositary fund platforms under UCITS and AIFMD.
  • Multiplication of fees and expenses (annual return, compliance costs, etc).
  • Could potentially become unwieldy to run from a corporate governance perspective for larger platforms (each IC would need to hold board meetings).
  • Legislation / regulations still in need of “running in”.

 

 


The ICs of RICCs

Retaining all of the features of the ICC regime for ICs (and an additional one), the RICC Regulations permit the creation by the RICC of ICs established as SICAVs or INVCOs. A welcome addition to the RICC Regulations in comparison to the ICC Regulations is the removal of the restriction of ICs, in turn, establishing segregated sub-funds thus allowing more structuring flexibility. Much has already been written about ICCs and the features of ICs but, in summary, ICs of an RICC may be established: (a) afresh by virtue of a resolution of the Board of the RICC followed by the entry into an M&A for the IC; (b) by transformation from a Maltese non-cellular company or a SICAV into an IC; (c) by relocating from another ICC or RICC; or (d) by redomiciling an overseas cellular or non-cellular company as an IC of a Maltese RICC. Confirming its orientation towards fund platform providers, the RICC Regulations provide that ICs should, subject to certain exceptions, use the standard form documentation provided by the RICC[8] and that departures from same are only permitted with the RICC’s consent as well as make provision for the expulsion of ICs from the RICC in certain extreme circumstances.

Legal personality for ICs comes at a cost. Each IC will be required to comply with all the requirements applicable to standalone SICAVs / INVCOs (tweaked to take into account the above features) under the Companies Act including the payment of annual return fees, filing of accounts, tax returns, compliance costs, etc. Perhaps the most onerous requirement, however, is the natural corollary of an IC being a company: it must have its own board of directors. Whilst the RICC may supply one or more directors for its ICs (indeed at least one must be in common), the post-Weavering[9] expectations of directors of funds would mean that directors should have sufficient time to dedicate to their directorships and board meetings should be properly organised and regularly held, making an RICC perhaps unwieldy for larger platforms.

As a company in its own right, each IC is also subject to the full authorisation requirement under the ISA as a CIS. In this regard, the MFSA supplemented each of the standard licensing conditions for Retail UCITs, Retail Non-UCITS and PIFs with a dedicated section on CIS set-up as ICs of an RICC. Thus an IC (and their sub-funds) may, depending on the type of RICC of which it forms part, be established as a Self-Managed or Third-Party Managed CIS licensed as a UCITS Fund, Non-Retail UCITS Fund or a PIF.

Besides the cost-savings and other efficiencies through centralisation and standardisation when compared to separate stand-alone CIS, the RICC model appears to offer another not so-obvious selling point and benefit for fund platform operators. One of the major challenges for fund platform operators using the multi-fund SICAV model both under the UCITS Directive (2009/65/EC) as well as under the looming AIFM Directive (2011/61/EC) is the requirement of a single manager and a single depositary for each UCITS / AIF including its investment compartments (which is generally accepted to catch sub-funds). With each IC being a company in its own right, an RICC fund platform could potentially offer ICs with different managers[10] (perhaps in conjunction with a Self-Managed option) and allow the addition of the depositary of choice for each IC promoter (again perhaps in conjunction with a default depositary option).

Time will tell whether or not the RICC structure will become the vehicle of choice for fund platform providers in Malta; one thing is, however, certain Malta’s on-going efforts to identify flexible and business friendly solutions will undoubtedly continue.

Published in the FinanceMalta Insight Newsletter – June 2012



[1] Collective Investment Schemes can under Maltese law be structured as (in order of popularity) investment companies (open-ended or close-ended), limited partnerships, unit trusts, contractual funds as well as foundations.

[2] Malta also has protected cell and incorporated cell company legislation for insurance companies and, relatively recently, extended the concept of segregated cells to all registered organisations through the second schedule to the Malta Civil Code.

[3] The concept of a patrimony (an ensemble of assets and liabilities separate from other such patrimonies) dates back to Roman law which is in turn one of the major sources of Malta’s Civil Code.

[4] These are (a) the inability of one sub-fund to contract with another sub-fund (since they are the same legal person) and (b) concerns that a foreign jurisdiction might as a matter of private international law not recognise the statutory segregation between sub-funds under Maltese law. One might also add the on-going legal debate regarding the permissibility of cross-investment from one sub-fund into another of the same SICAV.

[5] In contrast to the ICC, the RICC would not be a SICAV. Its ICs would, however, be either SICAVs (open-ended investment companies) or INVCOs (close-ended investment companies).

[6] Such as fund accounting, valuation, preparation of net asset value and registrar and transfer agency services. These would presumably be outsourced to fund administrators of the ICs’ choosing or the preferred provider with whom the RICC could have an umbrella arrangement.

[7] The full list is as follows: (i) Provision of administrative services related to the establishment of ICs; (ii) Procurement of external service providers and approval of any changes thereto; (iii) Negotiation of service provision agreements and changes thereto; (iv) Submission of any model agreements to be used by ICs of an RICC; (v) Submission to the competent authority of any changes or amendments to model agreements and submission of any new model agreements negotiated with service providers for the approval of the competent authority; (vi) Signature of tripartite agreements between service providers, the RICC and an IC based on the model agreements; (vii) Standardisation of any other documentation to be used by ICs; (viii) Approval and joint signature of any applications for licences (including variations, extensions thereof) to be submitted by or on behalf of ICs which are in the course of being formed; (ix) Provision of written declarations identifying any changes to model agreements already submitted to the competent authority, including a NIL declaration confirming that no changes have been made; (x) Provision of ancillary services as may be approved by the competent authority.

[8] This requirement is further reinforced by the MFSA’s SLCs for ICs of an RICC where departures from the standard form offering documentation, service contracts as well as choice of service providers is only by way of exception.                         

[9] Weavering Macro Fixed Income Fund Limited (In Liquidation) vs. Peterson (unreported) Cayman Grand Ct. (Fin. Serv. Div.) No. FSD 113 26th Aug. 2011. Although in essence this judgement merely confirmed UK case law principles regarding the duties of directors, it serves as a stark reminder of the onerous expectations of directors particularly in the context of funds.

[10] This is already catered for in SLCs 17.3 and 22.3 of Parts BI (Retail Non-UCITS) and BII (Retail UCITS), respectively, of the Investment Services Rules for Retail CIS.