Category 1a authorises the holder to receive and transmit orders in relation to one or more instrument, to provide investment advice and/or to place instruments without a firm commitment basis but not to hold or control clients’ money or customers’ assets. An investment firm holding a Category 1a Investment Services Licence is required to hold a minimum amount of initial share capital amounting to € 50,000 and the application fee is € 2,500.
Category 1b is similar to the above but applies solely for professional clients and/or eligible counterparties. An investment firm holding a Category 1b Investment Services Licence is required to hold a minimum amount of initial share capital amounting to € 20,000 or € 50,000, depending on whether the investment firm will hold a Professional Indemnity Insurance and the application fee is € 3,000.
Category 2 licence holders are authorised to provide any investment service and they can hold or control clients’ money but they cannot operate a multilateral trading facility, deal for their own account or underwrite or place instruments on a firm commitment basis. An investment firm holding a Category 2 Investment Services Licence is required to hold a minimum amount of initial share capital amounting to € 125,000 and the application fee is € 5,000.
Category 3 authorises holders to provide any investment service and to hold and control clients’ money or customers’ assets. An investment firm holding a Category 3 Investment Services Licence is required to hold a minimum amount of initial share capital amounting to € 730,000 and the application fee is € 7,000.
Category 4a covers licence holders authorised to act as trustees or custodians of all types of collective investment schemes. An investment firm holding a Category 4a Investment Services Licence is required to hold a minimum amount of initial share capital amounting to € 730,000 and the application fee is € 17,000.
Category 4b deals with licence holders authorised to act as custodians of AIFs subject to certain limitations. An investment firm holding a Category 4b Investment Services Licence is required to hold a minimum amount of initial share capital amounting to € 125,000 and the application fee is € 7,500.
We have extensive experience in assisting investment services licence holder, and our services include:
Structuring, legal and regulatory advice;
Assisting with the entire authorisation, registration or notification process;
Drafting of all internal policies and internal procedure manuals;
Reviewing and/or drafting of necessary documentation;
Liaising with the competent Maltese authorities on an ongoing basis;
Assisting with the company incorporation; and
Advising to ensure compliance with all the Anti-Money Laundering (AML) requirements and establishing effective KYC procedures.
Advisors and Brokers
Investment advice consists of giving, offering or agreeing to give, a personal recommendation to an investor or potential investor, in relation to one or more transactions with respect to financial instruments. The Investment Services Act (“ISAct”) clarifies that a personal recommendation refers to a recommendation that is considered as suitable for the investor or which is given after taking into consideration the circumstances of the investor and must constitute a recommendation to undertake one of the following:
buy, sell, subscribe for, exchange, redeem, hold or underwrite a particular instrument;
exercise or not to exercise any right conferred by a particular instrument to buy, sell, subscribe for, exchange, or redeem an instrument; and
to select one or more instruments by reference to which benefits are wholly or partly payable under a contract of insurance.
Hence this investment service should be differentiated from guidance, where in such case the client would be given information about investments rather than a specific course of action.
It is also important to note that a recommendation is not a personal recommendation if it is issued exclusively through distribution channels or to the public. Provided that they will only be providing investment advice, investment advisors require a Category 1 Investment Services Licence.
An investment broker would normally carry out the activity of reception and transmission of orders in relation to financial instruments and the licenses required for brokers range from a Category 1 to a Category 3, depending on whether such broker will be holding or controlling clients’ money or dealing on own account or whether the activities would be simply restricted to reception and transmission of orders. In this regard, the minimum share capital requirements range from € 20,000 to € 730,000 and the one-time application fee ranges from € 2,500 to € 7,000 depending on the licence required.
De Minimis AIFMs
An AIFM is considered as a De Minimis AIFM if it:
Manages portfolio of AIFs whose assets under management, including any assets acquired through use of leverage, in total do not exceed a threshold of € 100 million; or
Manages portfolios of AIFs whose assets under management in total do not exceed a threshold of € 500 million when the portfolios of AIFs consist of AIFs that are unleveraged and have no redemption rights exercisable during a period of 5 years following the date of initial investment in each AIF.
In this regard, a Company applying to be licensed as a Category 2 De Minimis AIFM is exempt from the full provisions of the AIFMD. However, certain reporting requirements would still be applicable, including those relating to investment strategies, main trading instruments, principal exposures and concentration of the funds under management. Companies which do not exceed the aforementioned thresholds may still opt to be treated as a full scope AIFM which would render applicable all obligations set under the AIFMD framework, including the use of passporting rights.
Alternative Investment Fund Managers
A Maltese licensed Alternative Investment Fund shall have a manager who is responsible for ensuring compliance with the ISAct, the Regulations and the Investment Services Rules. This manager can either be an external manager appointed by or on behalf of the AIF, also known as an AIFM or the AIF itself, if permitted. The activities of the AIFM consist of investment management including portfolio management and risk management and other ancillary activities such as administration and marketing.
A Maltese licensed AIFM shall carry out its activities from Malta and shall have in place sufficient financial resources and liquidity in order to conduct its business effectively. The minimum capital and own funds requirement of AIFM is € 125,000 but where the value of the portfolios of the AIFs managed by the AIFM exceeds € 250 million, an additional amount of own funds of 0.02% of the amount exceeding € 250 million is required. However, it is provided that the total amount of share capital and additional own funds shall not exceed € 10 million.
Besides the general organisation requirements, AIFMs are also subject to the following requirements:
Remuneration: The AIFM shall have remuneration policies and practices for those categories of staff, including senior management, whose professional activities have a material impact on the risk profile of the AIFM or the AIF and that are consistent with and promote sound and effective risk management and do not encourage risk taking which is inconsistent with the risk profiles, fund rules or instruments of incorporation of the AIFs it manages;
Conflict of Interest: The AIFM shall have in place conflict of interest rules in order to prevent them from adversely affecting the interests of the AIFs and their investors and to ensure that the AIFs it manages are fairly treated;
Risk Management: The risk management function shall be separated from the investment management function. Furthermore, the AIFM shall have in place risk management policies relevant to each alternative investment fund investment strategy to which each alternative investment fund is or may be exposed to; and
Liquidity Management: For each AIF it manages which is not an unleveraged closed-ended AIF, the AIFM shall employ an appropriate liquidity management system and adopt procedures which enable the Licence Holder to monitor the liquidity risk of the AIF.
As the name implies, UCITS Managers undertake the management of an UCITS normally in the form of investment companies and whose activity includes investment management, administration and marketing.
The Licence Holder shall not engage in activities other than the management of UCITS, with the exception of the additional management of other schemes which are not UCITS but the units of which cannot be marketed in other Member States or supervision.
Organised Trading Facilities
An Organised Trading Facility (“OTF”) which has been introduced by means of MiFID II, means a multilateral system which is not a regulated market or an MTF, and in which multiple third-party buyers and sellers are able to interact in the system in a way that results in a contract.
By contrast with the operation of an MTF, only bonds, structured finance products, emission allowances or derivatives are allowed to be traded on an OTF. Furthermore, since the order execution is carried out on a discretionary basis, this discretion must be exercised in either of, or both, of the following:
the placing/retracting of client orders, or
matching of client orders.
In doing so, the operator must comply with established criteria in relation to investor protection, including those relating to information to clients, efficient execution and best execution. To operate an OTF, the applicant requires a Category 3 Investment Services Licence which is subject to a minimum initial share capital of € 730,000 and a one-time application fee of a minimum € 7,000.
A systematic internaliser is a Maltese investment firm which, on an organised, frequent and systematic and substantial basis, deals on own account when executing client orders outside a regulated market, a Multilateral Trading Facility (“MTF”) or an OTF and which is not an MTF.
The frequent and systematic basis shall be measured by the number of Over the Counter (“OTC”) trades in financial instruments carried out by the Maltese investment firm on own account when executing client orders. The substantial basis is measured by the size of the OTC trading carried out by the investment firm in relation to the total trading of such firm in a specific financial instrument. In terms of Maltese law, the definition of systematic internaliser shall only apply where the pre-set limits for a frequent and systematic basis and for a substantial basis are both crossed or where the investment firm chooses to opt-in under the systematic internaliser regime.
It shall be noted that the systematic internaliser is a counterparty and not a trading venue. This means that the systematic internaliser operates a bilateral system and is not allowed to bring together third party buying and selling interests in the same manner as an MTF. In this regard, in order to act as a systematic internaliser, a Category 3 Licence is required. This is subject to a minimum initial share capital of € 730,000 and a one-time application fee of a minimum € 7,000.
Placing of Financial Instruments
Placing of financial instruments refers to the activity of marketing and making available, to specified persons or to existing holders, newly-issued financial instruments or instruments that are issued but not listed on any trading venue.
In terms of the ISAct, in order to carry out the activity of ‘placing of financial instruments with or without a firm commitment basis’, an investment firm needs to apply to the Malta Financial Services Authority (“MFSA”) to obtain an Investment Services Licence. In this regard, either a Category 1 or 3 Investment Services Licence is required depending on whether the investment firm will only be placing the financial instruments or whether it will also be holding and controlling clients’ money or customers’ assets.
It is important to note that the term ‘without a firm commitment basis’ implies that such activity is done without any obligation on the investment firm to purchase from the issuer some or all the financial instrument that it may not succeed in placing with third parties. The placing of financial instruments may relate to different financial instruments, including transferable securities, units in collective investment schemes, money market instruments and derivative instruments.
The Investment Services Act (Tied Agents) Regulations describe a Tied Agent as a natural or legal person who under the full and unconditional responsibility of only one Investment Services Licence Holder or European Investment Firm and on whose behalf it acts, promotes investment and/or ancillary services to clients or prospective clients, receives and transmits instructions or orders from the client in respect of investment services or instruments, places instruments and/or provides investment advice to clients or prospective clients in respect of those instruments or services.
The investment firm wishing to appoint a Tied Agent to carry out business in Malta or elsewhere shall apply to the MFSA for registration of such Tied Agent and shall provide a confirmation that the Tied Agent is of good repute and has the competence to deliver the services and to communicate accurately all relevant information regarding the proposed service to the potential clients.
Introducer means a person who enters into an arrangement with an Investment Services Licence Holder, whereby such person introduces a potential customer to the Licence Holder. As a consequence of this introduction, the Licence Holder may remunerate the introducer by means of commission.
A license from the MFSA is not required for persons acting as Introducers, however the Investment Services Licence Holder would still need to notify the MFSA for the it to undertake its due diligence process and provide the applicant with a recognition. Introducers are restricted from carrying out certain functions. In fact, they can only act for one Licence Holder and in no circumstances can the Introducer give investment advice, promote a certain product or undertake any Investment Services licensable activity. Receipt of funds or assistance in completing the documentation required is also prohibited.
Passporting is the exercise by a company of its rights to carry on activities and services regulated under EU legislation in another EEA State on the basis of authorisation or registration in its home EEA State. The activities may be carried on through an establishment of a branch in the host state (establishment passport) or on a cross-border services without using an establishment in the host state (service passport). Typically, a notification letter must be provided to the MFSA prior to carrying out any activities or services in the host state, however different licences may have different passporting requirements and therefore it is paramount that advice is sought prior to passporting any activities.