On 30th October 2012 the MFSA had issued a circular dealing with the possibility of amending the Investment Services Rules for Professional Investor Funds (PIF Rules) to include provisions on Cross Sub-Fund Investments.
The circular invited compliance officers of professional funds to advise the MFSA on whether cross sub-fund investment was being carried out in their respective operations or not. One respondent sent the MFSA some comments whilst two compliance officers replied stating that their professional investor funds do not carry out cross sub-fund investment.
The MFSA agreed with the comments submitted by the abovementioned respondent who argued that Article 84(6) of the Companies Act seems to mandate the automatic cancellation of any purchase by the SICAV. The respondent argued that as the law currently stands this automatic cancellation takes place both where repurchases are made following a request by investors and where the SICAV purchases such shares for the purpose of cross sub-fund investments; this leads to significant uncertainty in this regard.
The MFSA has therefore proposed to amend Regulation 7 of the Companies Act (Investment Companies with Variable Share Capital) Regulations which deals with multi fund companies, to the effect that it disapplies article 84(6) of the Companies Act.
Article 7(5):
A multi-fund company opting for the segregation of assets and liabilities in terms of regulation 9 of these Regulations, may, in specific circumstances as shall be prescribed by the Authority in the Investment Services Rules and subject to specific and appropriate disclosure in the constitutional documents and the Offering Memorandum or Prospectus of the said Scheme, on behalf of any of its sub-funds and whether by subscription or transfer, acquire for consideration any shares of any of its other sub-funds, and the provisions of article 84(6) of the Act shall not apply.
Article 7 (6):
Multi-fund companies performing the activities prescribed in sub-regulation (5) prior to the coming into force thereof shall take all necessary measures to comply with the requirements prescribed therein within 6 months from the date of publication thereof in the Government Gazette.
Article 7 (7):
For the better carrying out of sub-regulation (5), the Competent Authority may issue Investment Services Rules in terms of Article 6(2)(b) of the Investment Services Act.”
The Respondent also commented that cross sub-fund investment should not only be limited to qualifying and extraordinary investor funds but should however extend to UCITS and other types of collective investment schemes.
The MFSA has however confirmed that the derogation shall be limited to qualifying and extraordinary investors; the MFSA does not exclude the derogation extending further in the future following a study on the impact of introducing a similar rule on cross sub-fund investments for retail schemes and Experienced Investor Fund; a circular in that respect would be issued for the industry for comments in due course.
A further point made by the respondent and which was agreed to by the MFSA was that the distinct patrimony between sub-funds of a multi-fund SICAV as provided for in Regulation 9(1) of the SICAV Regulations should afford a cross-investing sub-fund a similar legal and economic effect to an investment by that sub-fund in another fund altogether.
To this effect, the MFSA have proposed a rule on cross sub-fund investments whereby a requirement providing that the investment company should in its memorandum of association elect to have the assets and liabilities of each sub-fund comprised in that company treated as a patrimony separate from the assets and liabilities of each other sub-fund of such company in terms of Regulation 9 of the SICAV Regulations.
The Respondent also argued that there should’t be a restriction on the percentage of cross sub-fund investment. The MFSA is however of the opinion that maximum percentage is required in order to ensure a certain degree of investment diversification. A maximum percentage will also preclude the situation of one sub-fun investing all its assets in another sub-fund resulting in a master – feeder structure. Whilst the MFSA will not remove the maximum percentage, it has raised the percentage threshold to 50%.
A proposal by the responded to remove the requirement for both the memorandum and articles of association as well as the offering documents to expressly include the fact that cross sub-fund investment is possible was shot down by the MFSA.
In view of the above, the Authority will be including the following Rule in Parts BII and BIII of the PIF Rulebook:
“A sub-fund may invest in units of one or more sub-funds within the same scheme, subject to this being permitted in the constitutional documents and the Offering Memorandum of the said Scheme and subject to the following:
(a) the investment company should in its memorandum of association elect to have the assets and liabilities of each sub-fund comprised in that company treated as a patrimony separate from the assets and liabilities of each other sub-fund of such company in terms of Regulation 9 of the Companies Act (Investment Companies with Variable Share Capital) Regulations;
(b) the sub-fund is allowed to invest up to 50% of its assets into another sub-fund or sub-funds within the same scheme;
(c) the target sub-fund/s may not themselves invest in the sub-fund which is to invest in the target sub-fund/s;
(d) 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;
(e) for the purposes of ensuring compliance with any applicable capital requirements, cross-investments will be counted once;
(f) any voting rights acquired by the sub-fund from the acquisition of the units in the target sub-fund shall be disapplied as appropriate.”
The MFSA has advised that the proposed Rule above will come into force once the Companies Act (Investment Companies with Variable Share Capital) Amendment Regulations have been published in the Government Gazette.
