Expert evidence

The Expert Funds Guide is Jersey’s latest initiative in its attempts to attract ‘expert’ investors. Martin Paul reports

The funds sector in Jersey has experienced considerable success in recent years. The island’s aim is to set itself apart from other offshore centres as the first choice domicile for alternative investment funds, as a leading administration centre and to grow an established fund management community in Jersey.

A key part of the effort to promote its funds industry was the introduction of the Expert Funds Guide in March 2005. This offers both speed and regulatory flexibility for those wishing to domicile funds in Jersey where those funds are only sold to ‘expert’ investors. The regime has contributed to a period of accelerated growth in the Jersey funds sector. This was followed closely by the introduction of the Non-Domiciled Funds Guide, designed to make the administration of funds from Jersey simpler and more efficient, which has also contributed to recent growth.

The Jersey funds industry, regulatory authorities and government are focused on the next initiatives.

Listed Fund Guide
The most current initiative is Jersey’s Listed Fund Guide, expected to be published for consultation shortly with the aim of introduction later this year. This new guide will be similar to the Expert Fund Guide, providing a streamlined process for the authorisation of Jersey closed-ended companies that are to be listed on a recognised stock exchange or market such as AIM.

Unlike an Expert Fund, a Listed Fund will not be restricted to ‘expert investors’ – that is, shares will be freely transferable through the exchange – but must appoint an investment manager with appropriate experience, comply with certain minimum standards of corporate governance (including having a majority of independent directors) and meet certain other basic criteria. The intention is to meet more readily the clear current demand for this sort of vehicle.

Non-Jersey
A further initiative relates to the regulation of non-Jersey-domiciled funds that are managed from Jersey. Currently, Jersey law requires that a regulatory permit (a CIF permit) is required in circumstances where a non-Jersey fund is managed and controlled from Jersey – that is, when board meetings of the fund are held in Jersey. For reasons of regulation, tax and practicality, an increasing number of non- Jersey funds are managed in this way. It is planned to change the law so that a CIF permit is no longer required in respect of this activity in situations where the fund does not have an established place of business in Jersey. This is a specific initiative designed to overcome an unwanted technicality of existing law, but is noteworthy as showing how Jersey is prepared to remove unnecessary hurdles to doing business – provided this is not at the cost of its reputation as a respected offshore finance centre.

Review
A more general initiative is the ongoing consultation on further enhancements to the Expert Fund Guide. The Jersey Financial Services Commission (JFSC) is proposing changes designed to bring further clarity and robustness to the expert fund regime. In particular, the proposals include clarification aimed at facilitating stock exchange listings – provided certain criteria are met so that shares in the fund are always restricted to expert investors – and provisions making it clear that the minimum investment criteria of $100,000 (£53,000) is an initial test, not an ongoing test, and is satisfied by a minimum initial commitment (even though this may not be called for immediately).

Developments also include a broadening of the range of jurisdictions in which the investment manager of an expert fund may be established – adding to the current list territories with which the JFSC has a memorandum of understanding on securities/funds regulation. Additional provisions also provide further certainty on the issues of the transferability of interests in expert funds and the responsibilities of Jersey functionaries in respect of due diligence. Finally, it is also planned to amend the guide so as to make it clearer that the JFSC is able and prepared to be flexible in its policies, which it is anticipated will assist start-up managers in particular who may not immediately meet all of the JFSC’s normal criteria.

Consolidation
Looking further forward, the intention is to consolidate Jersey’s financial services legislation, such that funds activity will fall to be regulated alongside other financial services areas, such as investment business, rather than under separate law.

This will assist the industry in moving towards a common regulatory platform – and common standards across different financial services businesses – and should produce efficiencies. A key benefit for the funds industry will be that local administrators will not have to obtain separate authorisation in respect of the take-on of administration of each new fund, which creates an administrative continued #+ continuedburden, but will simply be able to take on new business on the basis of their being regulated as fund services businesses under the Financial Services (Jersey) Law.

Super expert funds
Serious consideration is also being given by the Jersey funds industry to a further funds approval regime targeted specifically at hedge funds. The proposals are in their early stages and are subject to discussion, consultation and regulatory approval. The broad plan is to introduce a fast-track, self-certification regime, such as the expert fund regime, allowing the rapid establishment of hedge funds in Jersey with the greatest amount of operational flexibility – including the flexibility to appoint an administrator outside Jersey.

The plan would be for such funds to only be available to ‘super expert’ investors and/or a minimum initial investment requirement of $500,000 (£265,200). Prominent investment warnings would be required in the offering document emphasising that the fund is marketed on a ‘caveat emptor’ basis and subject to no (or minimal) regulatory scrutiny. We shall wait and see what form these plans eventually take, but it again serves to demonstrate the Jersey funds industry’s desire to develop new products and services in order to maintain Jersey at the forefront of the offshore funds world.

It is hoped that these initiatives will provide continued impetus for Jersey’s funds industry. Although not all may come to fruition in the precise form currently under discussion, the process of regulatory and legal development, and the direction and focus of the sector, augurs well for the future of funds and fund services in Jersey. While, the expert fund regime remains the main engine for Jersey’s funds industry, the island’s legal and taxation engineers are busily lighting the afterburners. nMartin Paul is a partner a Bedell Cristin