• General Requirments

• The Manager of the Scheme and the custodian must be independent of each other and act independently and solely in the interests of unit-holders.  A replacement of the management company or custodian must be approved by the MFSC.
• Where the Scheme assumes a corporate form, the directors must be approved by the MFSC.  Similarly, the directors of the fund management company must be approved.
• MFSC approval is required for amendments to the principal documents submitted with an application for a licence for a Collective Investment Scheme.
• The investment company must have procedures in place to ensure its compliance with all regulatory requirements.
• An overseas based scheme which will be promoted in Malta must appoint a local Representative/Agent which is in possession of an investment services licence.

A Collective Investment Scheme must employ the services of a management company unless, in certain circumstances and with the approval of the MFSC, it is constituted as a company with its own management.

The following requirements apply with respect to the management company of a Collective Investment Scheme.

The management company generally must have an established place of business in Malta and should have sufficient financial resources to conduct its business and meet its liabilities.  If an investment company does not have a management company, it should have sufficient financial resources to support its operation.  The MFSC has the power, in appropriate circumstances, to exempt from the licensing requirements an overseas manager or administrator of sufficient standing and repute.

The business of a management company must be limited to the management of Collective Investment Schemes.

The management company is responsible for appointing an auditor.

Custodian

Generally, a Collective Investment Scheme's custodian must be incorporated in Malta and have an established place of business here.  Alternative custodianship arrangements may be accepted by the MFSC where these provide adequate protection of unit-holders and the scheme's assets.

The following entities are eligible to act as custodian:

• a bank licensed under the Banking Act of Malta that meets certain minimum Financial Resources Requirements; or
• any other institution approved by the MFSC.

A Collective Investment Scheme is required to submit monthly returns and semi-annual and annual audited reports to the MFSC.  The contents of the reports are described in the MFSC Investment Services Guidelines.

A report by the custodian regarding the conduct of the scheme must be included in the annual report.  The report must state whether, in the custodian's opinion, the Collective Investment Scheme has been managed (1) in accordance with the limitations imposed on investment and borrowing powers by the constitutional documents and the MFSC; and (2) otherwise in accordance with the provisions of the constitutional documents and licence conditions.

Local Agents appointed by Schemes based overseas are required to submit an annual report confirming adherence by the Scheme to its licence conditions.

Prospectus

The following requirements apply with respect to the prospectus of a Collective Investment Scheme.

• A Collective Investment Scheme is required to provide a prospectus free of charge to prospective investors.
• MFSC approval is required before publication of the prospectus and any amendments.
• A prospectus must contain sufficient information for investors to make an informed judgement about investment.  A Collective Investment Scheme's investment restrictions have to be described in the prospectus, along with sufficient disclosure to inform investors of the risks of their investment.  For more specific information regarding disclosure, please refer to the MFSC Investment Services Guidelines.

Investment Restrictions

The Guidelines include examples of investment restrictions which may be applied to a scheme which is available to the public.  These restrictions are in the nature of general limitations on investment and borrowing and are imposed as conditions to the Collective Investment Scheme's licence.  These restrictions include:

• no more than 1 0% of assets may be invested in securities which are not traded on a liquid and highly regulated market;
• no more than 10% of assets may be invested in securities of any one issuer;
• no more than 1 0% of assets should be on deposit with any one entity (or no more than 30% with a bank licensed in Malta or approved by the MFSC);
• a scheme should not hold more than 10% of any class of security issued by a single issuer;
• a scheme and its manager should not control more than 20% of the share capital or votes of a company, or sufficient instruments to exercise significant influence over an issuer;
• with MFSC approval, a scheme may invest up to 100% of its assets in securities issued by one state or government;
• with respect to shares of other investment companies, (1) no more than 20% of assets should be invested in such other schemes, (2) if assets are invested in another scheme with the same manager, the manager should waive any fee it is entitled to charge for its own account, and
• (3) where the manager receives a commission because of an investment in another scheme, the commission should be paid into the assets of the scheme;
• schemes may employ techniques and use instruments for efficient portfolio management or to provide protection against exchange rate and other risks subject to MFSC conditions and limitations;
• schemes may not be leveraged or geared through the use of futures, options or other derivatives;
• a scheme may invest in nil paid or partly paid shares and subscribe for placements or underwriting as long as the amount due to be paid does not exceed 5% of assets (or more to the extent that sufficient cash not otherwise committed is available to convert the full amount outstanding);
• a scheme may borrow up to 1O% of net assets; and
• particular conditions apply to special types of funds, such as venture capital funds, money market funds, real property funds, futures and options funds, umbrella funds, master-feeder funds and closed-end funds.

Investment and borrowing restrictions may be wholly or partially waived in the case of a Collective Investment Scheme which will market its units only to professional investors.

The sponsor of a Collective Investment Scheme should approach the MFSC at an early stage to determine the specific conditions which will be applied to a particular scheme.

Operation and Management

The MFSC Investment Services Guidelines contain requirements regarding the operation and management of a Collective Investment Scheme, including licence conditions applicable to record-keeping, advertising and financial reporting.