The closed-end fund as a vehicle for collective investment schemes in Malta : a critical evaluation

Abstract

The current Maltese practice offers a number of legal structures for a fund promoter looking to set up a Closed-Ended Fund. One of these structures is the INVCO. However, this structure currently offers few advantages and is very restrictive. This has led Maltese practitioners to find a different solution for the CEF, in the form of carefully construed SICAVs. If SICAVs are set up in such a way as to include a lock-in period to tie the investors' money in the fund for the necessary period, this would allow the fund manager to have the security of CEFs, whilst benefitting from the flexibility of the SICAV (eg. may be set up as an umbrella fund). However, this excessive use of the SICAV, set-up as a vehicle for CEFs, has effectively resulted in a very weak legislative structure on pure CEFs (that is, the INVCO or normal limited liability companies set up as closed-ended Collective Investment Schemes). What has seemingly been overlooked, or at least set aside, is the fact that the SICAV set-up eliminates the benefit of passporting, among other advantages. The Prospectus Directive caters for passporting rights of prospectuses of CEFs, but excludes such passporting rights in the case of typical open-ended structures such as SICAVs. Indeed a SICAV cannot be passported in other EU Member States unless it qualifies as a UCITS, and therefore benefits from the UCITS Directive. Since a CEF may not be a UCITS, a SICAV of closed-ended nature may neither benefit from the passporting rights under the UCITS Directive, nor the Prospectus Directive. Consequently, investors may not find Malta an attractive destination to establish their CEFs. Furthermore, foreign investors may well prefer to have a pure CEF set-up, rather than the more complex hybrid set-up that is normally used in Malta. 15 The jurisdiction of Guernsey is one that has proved to be a very popular destination for the establishment of CEFs. This, despite the fact that CEFs set up in Guernsey would not benefit from the passporting advantages that EU Member States would have to offer. This seems to indicate that there are overriding reasons as to Guernsey's popularity. Whether such reasons are tradition based or advantages offered by the specific legislation on CEFs is something that this thesis will set out to reveal. What exactly are Closed-Ended Funds? What are the various structures currently available under Maltese Legislation that may be used to set up CEFs? How are CISs, and more specifically CEFs, regulated under the current local system? What is this Prospectus Directive and how is it relevant when discussing CEFs? Where are CEFs popular and why are they popular in these jurisdictions? These and other queries it will be sought to answer, mainly by shedding light on the inadequacies which prevail in our system of CISs, and more specifically CEFs, and by suggesting proposals for a possible new regime, which may seem more adequate in light of the ever changing market conditions. This attempt to provide adequate proposals for a new regime of laws on CEFs will be based on numerous factors, not least conclusions drawn through comparative law and an in-depth analysis of the current practical short-comings in local legislation. The ultimate aim of the thesis would be to encourage the introduction of the CEF in its purest form, to add to the financial products already available on the expanding local market, in order to attract foreign (together with local) investors in this currently obscure branch of financial services.