Contractual Funds under Maltese Law

Malta contractual funds: introduction

A contractual fund is a collective investment scheme established by means of a deed of constitution entered into for such purposes by the manager and the custodian of such a collective investment scheme. A contractual fund set up in terms of the Investment Services (Contractual Funds) Regulations, is deemed to be domiciled in Malta and as such, it is subject to the laws of Malta.

Legal personality and patrimony of Maltese contractual funds

A contractual fund does not have legal personality, however, it still has a separate patrimony. In fact, the property of a contractual fund and of each of its sub-funds, if any, constitute a separate patrimony and are separate and distinct from the property of its unit holders, manager and custodian. Therefore, the creditors of the unit holders in a contractual fund, or of the manager or of the custodian thereof, may not enforce their rights on the property of the contractual fund.

Forming a Maltese contractual fund: the deed of constitution

As relates to the form, a contractual fund may be constituted by means of a public deed or by private writing, and the provisions of the deed of constitution of a contractual fund are binding on the unit holders as if such persons had been party to the deed.

A contractual fund may be established either as an open ended collective investment scheme or as a closed ended collective investment scheme. The deed of constitution of a contractual fund must also specify:

• the name of the contractual fund;
• the duration, if any, of the contractual fund;
• the name of the management company and of the custodian;
• the investment policy of the contractual fund;
• the distribution policy, if any, of the income of the contractual fund;
• the remuneration and expenditure which the management company is empowered to charge the fund and the method of calculation of such remuneration;
• the date of the closing of the accounts of the fund;
• the dissolution of the contractual fund;
• the procedure for the amendment to the deed of constitution;
• the procedure for the removal and replacement of the manager and the custodian of the contractual fund;
• the procedure for the issue of units to participants;
• the minimum percentage of holding required to requisition a meeting;
• the procedure for the redemption of units and the conditions under which redemptions may be carried out or suspended;
• the method of valuation of the contractual fund’s assets;
• the law governing the contractual fund;
• any other matter which the MFSA may, by Investment Services Rules published for  this purpose, require.

Once the terms of the deed of constitution have been approved by the MFSA, a certified true copy thereof has to be submitted to the MFSA by the manager or the custodian or their authorised agents. The MFSA will then proceed to publish a copy of the deed of constitution of the contractual fund duly licensed on its website.

Special Investment Vehicles

A contractual fund may establish a company, formed and constituted under the laws of Malta, in order to act as a Special Investment Vehicle for the sole purpose of investing and holding assets on behalf of the fund in accordance with the fund’s deed of constitution and prospectus. The Special Investment Vehicle also needs to be licensed and regulated by the MFSA and would normally be subject to the same licence conditions of the contractual fund, although a degree of flexibility does exist.

Naturally, in the case that the MFSA suspends or cancels a licence of a contractual fund in accordance with the provisions of the applicable law, such suspension or cancellation will also extend to the relevant Special Investment Vehicle established by that contractual fund, although the MFSA also has the power to make specific provisions in such circumstances.

Where the use of a Special Investment Vehicle is envisaged, the deed of constitution and the offering memorandum of a contractual fund must clearly indicate the intention to establish such a vehicle, and any reports prepared by the contractual fund need to include such information on its Special Investment Vehicle.

Registered certificates and fractional unites

The management company of a contractual fund is obliged to issue registered certificates or contract notes representing written confirmation of entry in the register of units. Certificates issued have to be signed by the management company and by the custodian of the contractual fund.

A contractual fund, may, if so authorised by its deed of constitution, issue fractional units up to such number of decimal places, not being less than three, as is specified in the said deed and under such terms and conditions as may be specified therein. Fractional units shall be automatically consolidated into a whole unit when the fractional units held by one unit holder become equal to a whole unit.

Malta contractual funds organized as multi-class schemes

A contractual fund may be constituted as a multi class scheme if, in terms of its deed of constitution, the units which are issued by its management company are capable of being divided into different classes of units not constituting a distinct sub-fund. Moreover, a multi class contractual fund may, with the written approval of the MFSA, issue a new class or classes of units. A multi class contractual fund may not elect for the segregation of any of its assets and liabilities.

It is important to note that each class of shares in a multi class contractual fund may be denominated in a different currency provided that a class of units may be denominated only in one currency. A multi class scheme having its units denominated in different currencies may draw up its annual accounts in any one of such currencies. This also applies to the drawing up of any other reports or financial statements which may be required by the MFSA.

Malta contractual funds organized as multi-fund schemes

A contractual fund may be constituted as a multi fund scheme where, in terms of its deed of constitution, its property is - or is capable of being - divided into different groups of units where one group would constitute a distinct sub-fund of the contractual fund. A multi fund scheme may, with the written approval of the MFSA, create and issue a new group of units which may constitute a new sub-fund or be comprised in any existing sub-fund of the contractual fund.

As opposed to a sub-class, a sub-fund may in terms of the deed of constitution constitute a distinct group of units to which are allocated assets and liabilities distinct from other assets and liabilities allocated to the other sub-funds in the same contractual fund. Having said this, the manager of a contractual fund is obliged to maintain proper accounting records of the assets and liabilities of each sub-fund in the base currency of any group of units constituting that sub-fund. Naturally, segregation will not apply to such proportion of the liabilities of a multi fund scheme which, by virtue of the deed of constitution of such a scheme, or by virtue of the terms of issue of the units constituting a sub-fund are, or are to be attributable to, one or more sub-funds in the proportion established therein. As to the other liabilities, these are to be paid out of the assets forming part of its patrimony and the creditors in respect thereof have no claim or right of action against the other assets forming part of the multi fund scheme.

A group of units constituting a sub-fund in a multi class scheme fund may be denominated in a different currency provided that a group of units may be denominated in only one currency. A contractual fund having its units denominated in different currencies has to draw up its annual accounts in any one of such currencies. This also applies to the drawing up of any other reports or financial statements which may be required by the MFSA.

Changes in the Offering Memorandum

Decisions affecting the rights of unit holders are to be taken by the manager of the contractual fund in agreement with the custodian of such fund. However, it is important to note that material changes to the investment policies and restrictions of the scheme have to be notified to investors in advance of the change. Moreover, in the case of a change in the investment objectives of the scheme, these are subject to the prior approval of the unit holders of the Scheme, and the change will only become effective after all pending redemptions linked to the change in the investment objectives have been satisfied. Any applicable redemption fees would also need to be waived accordingly.

The Fund’s Manager and Custodian

The legislator has also introduced a number of provisions that determine the manner in which a fund manager or the custodian may retire. These relate to:

1. the voluntary withdrawal of the management company, provided that the MFSA has approved such withdrawal;
2. the voluntary withdrawal of the custodian or of its removal by the management company;
3. where the MFSA cancels the licence issued to the management company or to the custodian;
4. where the MFSA removes the management company or the custodian or suspends their appointment;
5. where the authorisation of the management company or of the custodian is withdrawn;
6. where the management company or the custodian has been declared bankrupt, has entered into a compromise with creditors, has obtained a suspension of payment, or has been dissolved;
7. in other cases provided for in the deed of constitution:

In the cases where the functions of a manager or of a custodian of a contractual fund cease, then:

1. the custodian or manager must be replaced within two months of its removal or such longer period as may be authorized in writing by the MFSA; and
2. during the intervening period, the custodian or the manager, whichever remains in office, shall take all necessary steps for safeguarding the interests of unit holders.

Dissolution of a Maltese contractual fund

A contractual fund shall be dissolved:

1. upon the expiry of the period, if any, fixed by the deed of constitution of the said contractual fund;
2. in the event of bankruptcy or cessation of duties by the management company or by the custodian, if these are not replaced within two months.
3. with the consent of the unit holders in the contractual fund as may be specified in the deed of constitution;
4. in other circumstances as indicated in the deed of constitution.

As soon as the event giving rise to the dissolution of the contractual fund occurs, the issue of units shall be prohibited, on penalty of nullity. The redemption of units, where applicable, shall remain possible, provided the equal treatment of unit holders is ensured.