Malta Fund Corporate Governance

Chetcuti Cauchi | 07 Sep 2015

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Malta Fund Corporate Governance: Introduction

The global financial crisis of 2007-09 caused severe dislocations in the funds industry, with many participants of the fund industry deeming that directors of investment funds generally failed to react properly to such crisis. The Malta Financial Services Authority (“MFSA”) considers the role of directors to be vital to the proper operation of an investment fund and accordingly issued a corporate governance manual for investment funds (the “Manual”) in 2013. The aim of the Manual is to provide guidance to directors on how to implement good corporate governance practices in the context of an investment fund. the Manual is not intended to be an exhaustive rule set, instead, it establishes a set of best practices. Prospective applicants looking to set up funds businesses in Malta should however be aware that MFSA can require them to demonstrate adherence to practices established in the manual or to provide suitably robust alternate arrangements. In particular we have seen an increased emphasis on the inclusion of a sufficient number of 'independent directors' on the board.

The Role of the Director of a Malta Fund

The fund board ("the Board"), is limited to monitoring the implementation of the fund’s investment and operational strategy as set by the investment manager and set out to investors in the fund’s offering documents. Hence, the traditional role of management is shared between the investment manager and the other service providers. Directors are not employees of the fund and, upon enlisting service providers to perform their monitoring functions the directors are to clearly delineate what was delegated to them.  

Appointment as a Director and Board Size

Due diligence should be conducted by the investment manager on all directors to be appointed to the Board, which should be composed of three or more directors. The acceptance and appointment of a director is to be made in writing. The directors should also conduct due diligence on the investment manager they seek to appoint. Such due diligence may include:

  1. Internet searches on the investment manager or sponsor and its principals and major shareholders;
  2. Review of marketing materials and website of the investment manager; and
  3. Know Your Client (“KYC”) and Anti-Money Laundering (“AML”) checks on the investment manager and its principals and shareholders if applicable.

Board Composition

The individual directors are to have the required skills to enable the Board to understand the mechanisms of the fund and its operations, which skills should also allow the directors to understand and supervise the activities performed by the fund’s service providers, including portfolio and risk management. The appointed directors should have experience directly related to the fund industry and should see that other directors have the ability to properly discharge their fiduciary duties to the fund. Due to the ever-changing nature of the fund industry, directors should avail themselves of on-going training to keep up with new developments.

It is considered good corporate governance for there to be independent directors on the Board. Executive directors may sit on the Board and owe their fiduciary duties to the fund. Executive directors appointed by the manager are not independent directors. In accordance with the principles of good corporate governance, non-independent directors are to be limited to a minority of the Board.

Board Meetings and Board Structure

Board meetings are held for the purpose of reviewing the performance and operations of the fund and good corporate governance necessitates that they are to be held on at least a quarterly cycle. Moreover, it is considered good practice to attend all Board meetings and notices of Board meetings are to be given to the directors in accordance with the provisions of the Memorandum and Articles of Association.

The Board is to appoint a Chairman, who will be responsible for the running of Board meetings and for communicating between the investment manager and/or investors and the Board. He is to ascertain that the information pack for Board meetings would contain all the information necessary and required by the Board and that it is delivered prior to the meeting to allow directors sufficient time to properly review its contents.

Investment Management Report

It is deemed good practice that the investment manager periodically provides an Investment Management Report, ("the Report") in writing outlining the activities of the fund. Such Report must provide the information necessary that will enable the Board to understand and oversee the portfolio from a performance, risk, liquidity and compliance perspective. Additional information that can be included in the Report, such as:

  1. The period covered by the report – the end of this period should be as close as possible to the date of the Board meeting during which the report will be reviewed;
  2. Description of portfolio positions of the fund including five largest positions; and
  3. Description of investment manager’s (or investment advisor’s where applicable) views of economic and market conditions and how the fund’s portfolio is positioned to take advantage of such market conditions.

Audit Report

The auditors should present the fund’s audit plan to the Board for review and approval once it is agreed with the fund’s investment manager. The Board should have at least one in camera session with the auditors for the purpose of understanding the audit and the directors are to ensure that the audited financial statements of the fund accurately reflect its financial situation.

Anti-Money Laundering and Combating Financing of Terrorism

Investment funds marketing their shares are subject to anti-money laundering and combating financing of terrorism legislation and it is the Board of directors which is ultimately responsible for compliance with all applicable legislation. If the investment fund does not have a physical operational set up in Malta, it may delegate the implementation of the aforementioned legislative obligations to an administrator.

Crisis Management

The fund board should anticipate potential crises that could affect the fund. Since not all crisis events can be predicted, it is incumbent upon the Board to be prepared to handle such eventualities should they materialise.

Resignation by a Director

In certain circumstances, a director could consider it best to resign from the Board as in the case of serious disagreement with the investment manager of the fund or the knowledge or suspicion of illegal or improper activities being conducted by a service provider to the fund.

Termination of a Fund

The Board needs to be actively involved in the on-going monitoring of the fund’s solvency and the planning and implementation of liquidation once it has been decided to terminate the fund.

Issues Common to All Directors

The MFSA assesses directors in terms of their fitness, integrity and probity as part of the approval process. A person’s knowledge of the industry is also important to the MFSA. To enable a director to cover everything he should or could do, fund directors need to ensure: (a) that sufficient time is provided to them by the other service providers to enable them to review and analyse all information received, (b) that sufficient information is provided to enable them to review and analyse the specific matter being considered, (c) that they have sufficient resources to enable them to discharge their duties to the fund.

Fund boards should encourage individual directors to undergo periodical self-assessment exercises of their respective performance as fund directors. In addition, a fund board may choose to implement a formal Board evaluation program.

Malta Fund Corporate Governance: how we can help

Our firm has assisted various funds and fund managers with the set up of their local operations. As such we can assist with respect to various fund governance matters, including:

  • Identification and appointment of suitably qualified fund directors
  • Legal support during board meetings
  • Transition management including the removal, addition and substitution of fund directors
  • Preparation of investment committee terms of reference and management of relations between the Board and the Investment Committee
  • Organization of board meetings
  • Preparation and maintenance of governance policies

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