Performance Fees for Malta Funds

Performance Fees for Malta Funds

The Investment Services Act (Performance Fees) Regulations (S.L. 370.12) have been enacted in order to regulate the manner in which collective investment schemes charge their fees and how this is brought to the attention of prospective investors n an appropriate manner.

Applicability

The Regulations apply to schemes formed, set up or established in accordance with, or existing under the laws of Malta, and licensed under the Investment Services Act. Essentially this means that the Regulations are not applicable to any EEA firms that are pass-porting their MiFID rights into Malta. Moreover, the Regulations are not applicable to schemes licensed as professional investor funds, meaning that only retail schemes are affected – even though it is felt that such Regulations ought to be adopted by all types of schemes as a code of best practice.

Performace fees

A "performance fee" is defined in terms of the Regulations as a fee based on performance determined by reference to the growth in net asset value over a given period. A performance fee may only be adopted on the basis that it is:

1. fair and reasonable – this is examined on the basis of the totality of the other applicable fees that are chargeable to the scheme.
2. easy to understand and calculate;
3. clearly disclosed and explained to investors;
4. paid at a reasonable frequency; and
5. payable only in either one of the following two forms:

1. Performance fees may be payable on new high NAV per share over the life of the scheme, where the starting price is the initial offer price or any other benchmark if this is higher. In this case, no fee can be paid or accrued until the NAV per share exceeds the "water mark". The water mark is the highest of either the previous highest NAV per share on which the performance fee was paid (if any), the initial offer price, or any other benchmark. In this case, the performance fee is only paid on the increase over the water mark

Where an index exists, which is published in an appropriate manner and which is an appropriate benchmark to measure a scheme’s performance, by reference to a scheme’s investment objective and asset allocation, then such index must be used as a benchmark. In the case of such index being the water mark, the performance fee will only be payable on the amount by which the scheme out performs the index. Essentially, this means that where a relevant index exists, one should use the index as a benchmark rather than apply any other system that would otherwise have been applicable.

1. the out-performance of a relevant index. Any underperformance of the index in preceding periods since launch must be recouped before a fee becomes due in subsequent periods.

In any case, a performance fee cannot be paid in those cases where then net asset value per share is below its initial offer price.

Disclosure

The Prospectus of any scheme to which the Regulations apply, is required to make clear disclosure on the performance fee, particularly:

1. details on the calculation of the fee, including the accrual basis and details of when the fee is actually paid, the calculation period for determining the fee and the first such period;
2. a risk warning that the increase in NAV which is used as a basis for the calculation of performance fees, may be comprised both of realised gains as well as unrealised gains as at the end of the calculation period, and as a result, performance fees may be paid on unrealised gains which may subsequently never be realised by the scheme;
3. a risk warning that performance fees may encourage the manager and, or advisor to the scheme to take higher risks in its investment decisions or advice;
4. details regarding any maximum amount or percentage of NAV that a performance fee might represent in any one accounting period and appropriate warnings in case where there is no maximum;
5. worked examples showing the operation and impact of performance fees; and
6. details related to the treatment of unit holders, including:

1. reference to any method, such as equalisation, which is to be adopted by the scheme with the objective of ensuring equal treatment of unit holders, irrespective of the timing of their investment in or redemption from the scheme, as well as a description of the methodology to be used in this regard; or
2.  where no such method is to be used, disclosure to this effect, together with an explanation of the potential inequalities which could arise.

In order to ensure ongoing compliance with the Regulations, an obligation is imposed on the scheme to adopt and maintain appropriate controls and structures for the supervision of the procedures and processes in the calculation and payment of performance fees. The actual payment of such fees is then to be vetted by the custodian of the scheme in terms of both its calculation and compliance with the Regulations.