The Regulator
The Malta Financial Services Authority (MFSA) is responsible for the recognition, regulation and supervision of Fund Administrators and it also licenses, regulates and supervises investment services, insurance principals and intermediaries, collective investment schemes and recognized investment exchanges. The MFSA requires the highest standards of probity and honesty and every license and recognition is issued subject to standard conditions which may be adapted to suit certain circumstances so long as standards are not compromised.
The Applicable Law
The Investment Services Act (CAP. 370 of the Laws of Malta) provides that any person who in Malta or from Malta provides to license holders in Malta, or to equivalent authorised persons and schemes overseas, administrative services which do not themselves constitute licensable activity under this Act, shall be required to apply for recognition by the MFSA.
Fund Administration
Fund administration services typically include:
- Preparation of Net Asset Value;
- Reconciliations;
- Pricing the Investment Portfolio;
- Fund Accounting;
- Preparation of Contract Notes;
- Transfer Agency;
- Payment of Bills;
- Preparation of Financial Statements;
- Performance Reporting;
- Compliance Reporting;
- Registrar.
The above is not an exhaustive list of services which may be provided by a Fund Administrator. The first six line items are generally regarded as the core services ordinarily performed by Fund Administrators for which recognition in terms of the Investment Services Act is required. On the other hand, the provision of one or a limited number of the other ancillary services does not necessarily trigger the recognition requirement under the Investment Services Act, although this is an issue that is determined by the MFSA.
Exemption from the registration requirement
The Investment Services Act (Exemption) Regulations provides that a person resident outside Malta, providing administrative services to a collective investment scheme licensed in Malta, is exempt from the requirement of obtaining a recognition when providing such services to:
- a collective investment scheme licensed under the Investment Services Act and qualifying as a Professional Investor Fund, where the MFSA is satisfied that such person is of sufficient standing and repute; or
- a collective investment scheme licensed under the Investment Services Act and which does not qualify as a Professional Investor Fund provided that such person is adequately regulated in its country of residence to the satisfaction of the MFSA and is considered by the same authority to be of sufficient standing and repute.
Recognition requirements
A Fund Administrator is required to be effectively directed or managed by at least two individuals in satisfaction of the “dual control” principle. Any person proposing to occupy the post of Director and all of the officers of an applicant Fund Administrator are required to be fit and proper persons to carry out the functions required of them. This entails appointing persons who are of sufficiently good repute and sufficiently experienced so as to ensure the sound and prudent management of the Fund Administrator.
A request for recognition as an Administrator of a Collective Investment Scheme in terms of the Investment Services Act should be supported by the following documents:
- a duly completed Application for recognition as an Administrator of a Collective Investment Scheme;
- a business plan, including a description of the Fund Administration Services to be provided and details as to whom such services will be provided;
- Memorandum & Articles of Association, deed of partnership or equivalent constitutive document depending on the legal structure of the Applicant;
- a copy of the most recent audited accounts of the Applicant or in the case of a new entity, three year financial projections;
- a duly completed Personal Questionnaire by each Director and qualifying shareholder of the Fund Administrator as well as by the proposed Compliance Officer and Money Laundering Reporting Officer.
- resolution of the Directors/ General Partners of the Fund Administrator confirming their intention to apply for a Recognition as an Administrator of a Collective Investment Scheme in terms of the Investment Services Act;
- address of the premises in Malta from where the Fund Administration Services will be rendered including the relevant contact details;
- Memorandum and Articles of Association and most recent audited accounts of any Qualifying corporate shareholders of the Fund Administrator;
- a chart which illustrates the internal operational structure of the Applicant with respect to its proposed fund administration business (this should show names, reporting lines and roles);
- a diagram showing the relationships between the Fund Administrator and other members (if any) of the group. The “family tree” submitted should give details up to the ultimate beneficial owner(s), showing percentage sizes of holdings in each entity; unless:
- the entity has one ultimate beneficial owner with a holding of over 50% of the voting rights; or
- the entity has no less than fifty ultimate beneficial owners who between them account for over 50% of the voting rights.
- an application fee of EUR3,000 and an annual supervisory fee of EUR 1,200.
The above is an indicative list of the documentation that is required, given that the MFSA retains the discretion to require applicant Fund Administrator to submit whatever additional information it deems appropriate for the purposes of determining whether it should grant recognition or otherwise.
In the case that a License Holder under the Investment Services Act, the Financial Institutions Act or under the Banking Act is desirous of applying for a recognition to act as a Fund Administrator, the documentation to be submitted is less voluminous. This in view of the fact that such entities would already be known to the MFSA.
Continuing requirements
A Fund Administrator is required to commence the provision of its services within twelve months of the date of issue of the Recognition Certificate by MFSA. If, for any reason this does not happen, a notification should be sent to the MFSA in writing setting out the reason for such a delay together with an updated business plan indicating the proposed date of commencement of business. On the basis of the information provided and the circumstances of the case, the MFSA may decide to suspend or cancel the Recognition Certificate.
A Fund Administrator is expected to take reasonable steps to ensure on an ongoing basis a degree of continuity and regularity in the performance of its services. In this respect, it is expected to employ appropriate and proportionate systems, resources and procedures.
A Fund Administrator is obliged to maintain decision-making procedures and an organizational structure which clearly specifies reporting lines and allocates functions and responsibilities. There should also be established adequate internal control mechanisms and internal reporting lines in order to secure compliance with decisions and procedures at all levels of the Fund Administrator. This apart from the obligation to maintain adequate and orderly records of the business activities. In so doing, a Fund Administrator needs to consider the nature, scale, range and complexity of its business. On the client-facing side, a Fund Administrator is required to establish procedures in order to safeguard the security, integrity and confidentiality of information as well as to ensure an adequate business continuity process in the case of an interruption to its systems and procedures. The systems, process and mechanisms listed above need to be reviewed from time to time in order to take appropriate measures to address any deficiencies that might arise.
On the conduct-of-business side, a Fund Administrator is expected to conduct its business relating to a scheme by means of a written agreement. Such an agreement should set out the basis on which any services are to be provided, and it may be entered into either with the scheme or alternatively with the Manager of such scheme. Nothing precludes the provision of fund administration services by a Fund Administrator acting as a delegate of another Fund Administrator, pursuant to an outsourcing agreement entered into between the parties.
The Fund Administrator is required to determine the Net Asset Value of a scheme in respect of which it acts as Fund Administrator in accordance with the Constitutional Documents or Prospectus of such scheme. A Fund Administrator is bound to notify the MFSA of any material valuation errors (>0.5% of Net Asset Value) relating to a scheme in respect of which it acts as Fund Administrator on becoming aware of such error.
Any subscription or redemption instructions received by a Fund Administrator in respect of a scheme in relation to which it acts as Fund Administrator are to be addressed directly to the scheme and under no circumstances shall such instructions be addressed directly to the Fund Administrator.
As is the case with every other regulated entity, a Fund Administrator is required to appoint an auditor to audit its annual financial statements. The Fund Administrator is then required to submit its annual audited financial statements to the MFSA and such other information, returns and reports as the MFSA may from time to time request. The Annual Report is to be accompanied by:
- a letter from the Board of Directors of the Fund Administrator listing the names and domiciles of the schemes it provided Fund Administration Services to (either by appointment by the schemes directly or by the schemes` Manager) during the relevant financial period; and
- a report from the auditor to the MFSA, confirming whether in its opinion and further to the information available to it during the course of its audit, the activities of the Fund Administrator were, during the relevant accounting period, restricted to fund administration and did not involve licensable activity in terms of the Investment Services Act.
Outsourcing
In principle, a Fund Administrator is permitted to outsource certain of its functions. In so doing, a Fund Administrator is required to exercise due skill, care and diligence when entering into, managing or terminating any such arrangement. In particular, it must ensure that the service provider is able and has the capacity and any authorisation required by law to perform the outsourced functions, reliably and professionally. This should be accompanied by regular supervision and risk-management processes in order to ensure proper performance of duties and business continuity.
In this respect, when relying on a third party for the performance of operational functions which are critical for the provision and quality of its service, the Fund Administrator should take reasonable steps to avoid undue additional operational risk. An operational function is regarded as critical or important if a defect or failure in its performance would materially impair the continuing compliance of a Fund Administrator with the conditions and obligations of its recognition or its other obligations under the law, or its financial performance, or the soundness or the continuity of its Fund Administration business. The MFSA has issued guidance over this point, highlighting certain activities which are deemed not to be critical or important:
- the provision to the Fund Administrator of advisory services, and other services which do not form part of the core fund administration services provided by the Fund Administrator, including the provision of legal advice to the Fund Administrator, the training of the Fund Administrator’s personnel, billing services and the security of the Fund Administrator’s premises and personnel;
- the purchase of standardised services, including market information services.
Outsourcing cannot be conducted in a way as to impair materially the quality of the Fund Administrator’s internal control. Such should also not restrict the ability of the MFSA to monitor the Fund Administrator’s compliance with all its obligations. In any case, whenever there is the outsourcing of any function, whether critical or important or otherwise, the Fund Administrator remains fully responsible for discharging all of its obligations under the law and towards clients.
Compliance and AML Function
Every Fund Administrator is required to have at all times a Compliance Officer. The Compliance Officer’s responsibility extends to all aspects of compliance and for acting as the main point of contact with the MFSA. Nonetheless, responsibility for the compliance obligations of the Fund Administrator rests with the Board of Directors of the same Fund Administrator, and the same applies for the Fund Administrator’s obligations with respect to prevention of money laundering obligations.
