The Malta Financial Services Authority yesterday announced that an administrative penalty of €149,821 was imposed by the Malta Financial Services Authority on Valletta Fund Management Ltd as managers of the La Valette Multi Manager Property Fund in terms of article 16A of the Investment Services Act.

VFM was found to be in breach of: Standard Licence Condition 3.03 of Part C of the Investment Services Guidelines and SLC 2.01 of Part B of the Investment Services Rules - failure to act with the level of care and diligence required of licence holders with regard to the conduct of their business.

MFSA said in a statement on its website that VFM is considered as having wrongly applied investment restriction (v) which is laid down in the Supplementary Prospectus and which prohibits the fund from investing in underlying funds that may be leveraged more than 100% of ‘net assets’ being ‘total assets less total liabilities’; SLC 1.02 of Part D of the Investment Services Guidelines and SLC 4.05 of Part B of the Investment Services Rules failure to properly monitor its delegates, Valletta Fund Services Ltd and Insight Investment Management (Global) Limited (licensed by the UK FSA), with regard to the proper application of investment restriction (v); and SLC 1.09 of Part C of the Investment Services Guidelines and SLC 1.08 of Part B of the Investment Services Rules - failure to maintain adequate records.

Moreover, also yesterday, an administrative penalty of €197,995 was imposed by the Malta Financial Services Authority on Bank of Valetta as custodian of the La Valette Multi Manager Property Fund in terms of article 16A of the Investment Services Act.

BOV was found to be in breach of: Standard Licence Condition 3.03 of Part C of the Investment Services Guidelines and SLC 2.01 of Part B of the Investment Services Rules - failure to act with the level of care and diligence required of licence holders with regards to the conduct of their business.

BOV is considered to have wrongly applied and wrongly monitored the application by others of investment restriction (v) which is laid down in the Supplementary Prospectus and which prohibits the fund from investing in underlying funds that may be leveraged more than 100% of ‘net assets’ being ‘total assets less total liabilities’; SLCs 11.06 and 11.11 of Part C of the Investment Services Guidelines, SLCs 9.06 and 9.11 of Part B of the Investment Services Rules and Regulation 16(2) of Legal Notice 240 of 1998 - failure to properly monitor compliance with investment restriction (v) described in the Supplementary Prospectus as limiting leverage risk of the underlying funds to 100% of ‘net assets’ being ‘total assets less total liabilities’ and to make accurate reporting in the fund’s annual financial reports for the period ending 30th September 2006; and years ending 30th September 2007; 30 September 2008 and 30th September 2009; and SLC 1.09 of Part C of the Investment Services Guidelines and SLC 1.08 of Part B of the Investment Services Rules - failure to maintain sufficient records.

BOV to appeal MFSA findings

In a statement, BOV said MFSA’s conclusions are based on the Authority having taken a different view from that taken by BOV, VFM and Insight Investment (Global) Management (Insight Investment) on the proper interpretation and application of the gearing restriction (Investment Restriction (v) (or IR(v)) contained in the Fund’s Prospectus. Insight Investment is one of the largest fund managers in the United Kingdom with over £100 billion under management, and was responsible for the discretionary investment management of the Fund.

The bank said that in the letter to investors dated 26 May 2011, BOV noted that the Authority and the Bank were taking differing positions on the interpretation and application of IR(v). Therefore, the determination received today, though disappointing, is not wholly unexpected. In fact, and as noted in the Bank’s communications to investors, the impact of this differing view on the investment restriction has already been fully taken into account in the Offer price of €0.75 per share extended to investors. This is because the Offer price is based on the performance of the Fund as against two independent external low geared fund reference points. Therefore, the compensatory element of €0.249 per share, included in the Offer price of €0.75 per share, has already addressed the impact of the MFSA decision concerning IR(v).

Both BOV and VFM remain firmly of the view that the conclusions of the MFSA are wrong in fact and at law, and will be filing an appeal on the MFSA decisions pursuant to the right granted to them in terms of section 19 of the Investment Services Act. In any event, BOV and VFM maintain that, even if the view of the MFSA were to be upheld, the Offer made by BOV fully compensates the investor for any loss incurred as a result of any incorrect application of the investment restriction (which is denied).

A fuller response to the findings of the Authority will follow in due course.