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Investment Services

The Maltese jurisdiction is fast becoming a hub for a broad range of investment services. The provision of such services is regulated in Malta by the Investment Services Act (“ISA”) (Chapter 370 of the Laws of Malta), establishing the regulatory framework for two types of licences, namely the Investment Services Licences, which apply to providers of investment services and Collective Investment Schemes Licences which apply to investment funds. On its part, the Malta Financial Services Authority (“MFSA”) is the main regulator responsible for the licensing, regulation and supervision of the Investment Services Providers, Collective Investment Schemes and Regulated Markets. In recent years the MFSA has sought to protect the investors’ interests while providing license holders with the freedom to innovate and develop new products to meet the changing needs of the market hence making the Maltese jurisdiction the one it is today.

The ISA clearly states that an Investment Service in or from Malta or overseas is a licensable activity providing that “No person shall provide, or hold himself out as providing, an investment service in or from within Malta unless he is in possession of a valid investment services licence. No body corporate, unincorporated body or association, formed in accordance with or existing under the laws of Malta, shall provide or hold itself out as providing an investment service in or from within a country, territory or other place outside Malta unless it is in possession of a valid investment services licence”.

Importantly, any licence is only issued if the MFSA is satisfied that the applicant is a fit and proper person to provide the investment service concerned and that the applicant will comply with and observe any Investment Services Rules and Regulations issued under the ISA.

Investment services regulated by the Investment Services Act

In order for an investment service to be so qualified in terms of law, it must fall within any one of the services listed in the First Schedule of the ISA, as listed hereunder:

a.    Reception and transmission of orders in relation to one or more instruments;

b.    Execution of orders on behalf of other persons in relation to one or more instruments;

c.    Trade carried out on one’s own account against proprietary capital resulting in the conclusion of transactions in one or more instruments;

d.    Management of assets belonging to another person if those assets consist of or include one or more instruments or the arrangements for their management are such that the person managing or agreeing to manage those assets has a discretion to invest any of those assets in one or more instruments;

e.    Trustee, custodian or nominee services- these may be sub-categorised into three:

i.              Acting as trustee, custodian or nominee holder of an instrument, or of the assets represented by or otherwise connected with an instrument, where the person acting as trustee, custodian or nominee holder is so doing in the course of providing an investment service.

ii.            Holding an instrument or the assets represented by or otherwise connected with an instrument as nominee, where the person acting as nominee is so doing on behalf of another person who is providing any investment service or on behalf of a client of such person, and such nominee holding is carried out in relation to such investment service.

iii.           Acting as trustee or custodian in relation to a collective investment scheme.

f.     Investment advice in the form of a personal recommendation in respect of one or more transactions in relation to an instrument;

g.    Underwriting of instruments and, or placing of instruments on a firm commitment basis;

h.    Placing of instruments without a firm commitment basis;

i.      Operation of multilateral trading facility whereby multiple third party buying and selling interests in instruments are brought together in a way that results in a contract.

Instruments

The term instrument is given a very broad meaning under the Investment Services Act. The following are so considered:

a.    Transferable securities;

b.    Money market instruments, such as treasury bills, certificates of deposits and commercial papers;

c.    Units in collective investments schemes;

d.    Derivative contracts relating to securities, currencies, interest rates or yields and other derivative instruments, financial indices or financial measures which may be settled either physically or in cash;

e.    Derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties;

f.     Derivative contracts relating to commodities which can be physically settled and which are traded on a regulated market and/ or a multilateral trading facility;

g.    Derivative contracts relating to commodities that can be physically settled and are not for commercial purposes.

h.    Derivative instruments for the transfer of credit risk;

i.      Rights under a contract for differences or under any other contract the purpose of which is to secure a profit or avoid a loss by reference to fluctuations in the value or price for property of any description or in an index or other factor designated for that purpose in the contract;

j.      Derivative contracts relating to climatic variables, freight rates, emission allowances or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties;

k.    Derivative contracts relating to assets, rights, obligations, indices and measures not mentioned in the First Schedule to the Investment Services Act which have they characterises of other derivative instruments;

l.      Certificates or other instruments which confer property rights in respect of any instrument mentioned in the first Schedule;

m.   Foreign exchange acquired or held for investment purposes;

Application Process

Once an applicant wishes to provide a service falling within the list of services listed in the First Schedule of the ISA, in respect of an instrument, then an Investment Services activity is deemed to take place and hence is licensable. The ISA itself sets forth the parameters for the proper application for a licence.

Normally an application process is dealt with in three different phases. In brief, the first phase is a preparatory exercise wherein the promoters meet representatives of the MFSA to describe the proposal and analyse which Licence Conditions should be applied. Following this preparatory stage and the approval of the Licence Conditions to be applied the MFSA will issue an approval ‘in principle’ for the issue of a licence. At this stage, the applicant would be required to finalise any outstanding matters and submit the various signed documentation. In the third phase,  dubbed the ‘Pre-Commencement of Business’ phase, the applicant will be asked to satisfy a number of post-licensing matters before actually commencing the business.

Categories of licence holders

The person or body applying for a licence for investment services shall be classified in one of four categories, according to the MFSA’s discretion, which categories determine the financial resources requirements of licence holders. The following are the categories of licence holders under Maltese Law:

a.    The first category is divided into 2 sub categories:

i.              Category 1a

This category deals with licence holders authorised to receive and transmit orders in relation to one or more instrument and, or provide investment advice and, or place instruments without a firm commitment basis but not to hold or control Clients’ Money or Customers’ Assets.

ii.            Category 1b

This category refers to licence holders authorised to receive and transmit orders, and, or provide investment advice in relation to one or more instruments and, or place instruments without a firm commitment basis solely for professional clients and/ or eligible counterparties but not to hold or control clients’ money or customers’ assets.

b.    Category 2

Under this category, licence holders are authorised to provide any Investment Service and to hold or control Clients’ Money or Customers’ Assets, but not to operate a multilateral trading facility or deal for their own account or underwrite or place instruments on a firm commitment basis.

c.    Category 3

Within this category, one finds licence holders who are authorised to provide any Investment Service and to hold and control clients’ money or customers’ assets.

d.    Category 4

Here, licence holders are authorised to act as trustees or custodians of collective investment schemes.

Exemptions

Notwithstanding the requirement to obtain a licence, the Investment Services Act (Exemption) Regulations, (Subsidiary Legislation 370.02), provides a list of persons who are exempted from such requirement, either automatically or following a request in writing to the MFSA and a subsequent determination in writing by the MFSA.

The said legislation provides for a list of persons automatically exempt from obtaining a licence, for example:

-       a liquidator or a curator in bankruptcy;

-       a person providing an investment service in an incidental manner in the course of a professional activity; or

-       a person, receiving and transmitting orders on behalf of a client, executing orders on behalf of a client, providing investment advice or placing instruments without a firm commitment basis as long as such person does not do any of the following:

i.      receive, directly or indirectly, any remuneration or other benefit for the service;

ii.    hold himself out as providing an investment service; or

iii.   solicit members of the public to take such services

-       a person authorised as a credit institution, or a person licensed the Financial Institutions Act, to the extent that, in the course of the business that the person is authorised or licenced to carry out, that person is a party to the purchase and sale of securities to third parties, in a transaction which involves the sale of securities to be repurchased or the purchase of securities to be resold, at an agreed future date and price;

On the other hand, the law also envisages persons whose exemption is not automatic but operative only after determination of exemption in writing given by the MFSA. Amongst others, such persons include:

-       persons which provide investment services exclusively for their parent companies, for their subsidiaries or for other subsidiaries of their parent undertakings;

-       a person operating a scheme or arrangement where the services provided consist of the execution of orders or the reception and transmission of orders, in terms of paragraphs 1 and 2 of the First Schedule to the Act, for its own employees, former employees, their dependents, or for employees, former employees or their dependents of companies in the same group, in instruments issued by the company or other companies in the group and any other instruments as may be approved by the competent authority;

-       a person who acts as manager, in terms of paragraph 4 of the First Schedule to the Act, of a portfolio which includes instruments belonging to him and to no other person;

-       a person who manages and, or operates the business of a regulated market or which is a regulated market in terms of the Directive, and who operates a multilateral trading facility in terms of paragraph 9 of the First Schedule to the Act, subject to the verification by the competent authority of such person’s compliance with the requirements of the Directive and with such other requirements which the competent authority may determine from time to time.


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