INVESTMENT SERVICES ACT (PERFORMANCE FEES) REGULATIONS (performancefees)

INVESTMENT SERVICES ACT (PERFORMANCE FEES)

SUBSIDIARY LEGISLATION 370.12

INVESTMENT SERVICES ACT

(PERFORMANCE FEES) REGULATIONS

13th October, 2006

LEGAL NOTICE 239 of 2006, as amended by Legal Notice 426 of 2013.

The title of these regulations is the Investment Services

Act (Performance Fees) Regulations.

(1)

In these regulations, unless the context otherwise

requires

"the Act" means the Investment Services Act;

"accounting period" means the financial period determined by

reference to the accounting reference date, this being a specified

date in a calendar year;

"alternative investment fund or AIF" means a collective investment

scheme, including subfunds thereof, which raises capital from a

number of investors, with a view to investing it in accordance with a

defined investment policy for the benefit of those investors, and which

does not qualify as a UCITS Scheme in terms of the UCITS Directive;

"the competent authority" means the Malta Financial Services

Authority appointed under article 2A of the Act;

"equalisation" means an accounting method designed to ensure

the equal treatment of unit holders irrespective of the timing of

their investment;

"NAV" means the net asset value;

"performance fee" means a fee based on performance determined

by reference to the growth in net asset value over a given period;

"professional investor" shall have the meaning assigned to

"professional client" in the Investment Services Rules or an investor

who has opted to be treated as a professional client in terms of said

Rules;

"professional investor fund" means a collective investment

scheme formed in accordance with, or existing under the laws of

Malta, duly licensed by the competent authority as a professional

investor fund;

"relevant index" means an index 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;

"scheme" means a collective investment scheme;

"UCITS Directive" means Directive 2009/65/EC of the European

Parliament and of the Council of 13 July 2009 on the coordination of

laws, regulations and administrative provisions relating to

undertakings for collective investment in transferable securities

INVESTMENT SERVICES ACT (PERFORMANCE FEES)

(UCITS) (recast), as amended from time to time, and includes any

implementing measures that have been or may be issued thereunder.

(2) Words and expressions which are also used in the Act shall

in these regulations have the same meaning as in the Act.

These regulations shall apply to schemes formed, set up or

established in accordance with, or existing under the laws of Malta,

whether formed, set up or established before or after the coming

into force of these regulations and licensed under the Act

Provided that these regulations shall not apply to schemes

licensed as professional investor funds and to schemes licensed as

alternative investment funds which are to be marketed solely to

professional investors as defined in regulation 2(1).

A performance fee may only be adopted on the basis that it

is

(a) fair and reasonable; in determining the reasonableness

of such fee, consideration should be made to the other

applicable fees to a scheme;

(b) easy to understand and calculate;

(c) clearly disclosed and explained to investors;

(d) paid at a reasonable frequency; and

(e) payable only in the form specified in regulation 5.

(1)

Performance fees may be payable on

(a) 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, or

(b) the out-performance of a relevant index.

(2)

In the event of subregulation (1)(a)

(a) no performance fee shall be paid or accrued until the

NAV per share exceeds the "water mark", that 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. The

performance fee shall only be payable on the increase

over the "water mark"; and

(b) where a relevant index exists, such index should be

used as a benchmark as is referred to in paragraph (a)

of this subregulation. In the case of such index being

the "water mark", the performance fee shall only be

payable on the amount by which the scheme out

performs the index.

(3) In the event of subregulation (1)(b), the index must be

relevant to the scheme. The performance fee shall only be payable

on the amount by which the scheme out performs the index. Any

underperformance of the index in preceding periods since launch

shall be recouped before a fee becomes due in subsequent periods

Provided that a performance fee shall not be payable if its

INVESTMENT SERVICES ACT (PERFORMANCE FEES)

NAV per share is below its initial offer price.

The prospectus shall contain clear disclosure on the

performance fee, particularly

(a) details on the calculation of the performance 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;

(b) 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;

(c) a risk warning that performance fees may incentivise

the manager and, or advisor to the scheme to take

higher risks in its investment decisions or advice;

(d) 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;

(e) worked examples showing the operation and impact of

performance fees; and

(f) details related to the treatment of unit holders,

including

(i) 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

(ii) where no such method is to be used, disclosure

to this effect, together with an explanation of the

potential inequalities which could arise.

(1) The scheme or its manager or administrator as

applicable, shall adopt appropriate controls and structures for the

on-going supervision of the procedures and processes in the

calculation and payment of performance fees.

(2) The custodian of a scheme shall ensure that performance

fees are payable in accordance with regulation 5 and shall also

verify the calculation of the performance fee.

The competent authority may from time to time issue

Investment Services Rules in terms of article 6 of the Act for the

better carrying out of the provisions of these regulations.

Schemes which at the time of publication of these

regulations have a performance fee structure in place, shall be

required to comply with these regulations as from the accounting

INVESTMENT SERVICES ACT (PERFORMANCE FEES)

period commencing following their coming into force

Provided that schemes whose next accounting period

commences within a period of less than eight weeks from the date

of coming into force of these regulations, shall be required to

comply with these regulations as from the commencement of the

subsequent accounting period.