24 November 2003
There have been significant recent developments in investment funds in Jersey and Guernsey and it is anticipated that these will increase further the sizeable funds business in both jurisdictions.
A new expert category of funds will shortly be introduced in Jersey, which will make it a more attractive jurisdiction for the establishment of funds aimed at institutional and high-net-worth investors. In particular, ‘expert funds’ will be subject to a light degree of regulation and will be capable of being established within a very short timescale.
In Guernsey, the Guernsey Financial Services Commission has issued guidance notes for the benefit of fund promoters and their lawyers, setting out the commission’s usual expectations for the content of offering documents and for continuing disclosure. It is a public statement which clarifies established policies and does not introduce new requirements. There is a commitment to flexibility and encouragement of informal discussion with sponsors. The guidance notes are perceived as allowing innovation while ensuring the appropriate level of regulation expected of a top division financial services centre with a £50bn fund industry.
Jersey expert funds
Expert funds will be capable of being established within a matter of days on the basis of a self-certification approach, without the requirement for any formal regulatory review of the fund or its promoter.
An investment fund will constitute an expert fund if each investor signs an investment warning and either: invests a minimum of $100,000 (£59,200); is in the business of buying or selling investments or giving investment advice; has a net worth of more than $1m (£591,900); is an entity with $1m of assets available for investment or every member or partner of which is an expert investor; or is a person connected with a functionary of the fund, such as a carried interest investor.
An expert fund will be subject to a very light degree of regulation, in that the promoter will not be subject to any regulatory review or approval and the fund will not be required to adopt any prescribed investment restrictions or risk diversification strategy. The investment manager must be: without convictions or disciplinary sanctions; solvent; regulated in an Organisation for Economic Cooperation and Development (OECD) state; have relevant asset management experience; and demonstrate an adequate span of control over its business.
The expert fund must appoint an administrator, regulated and with a physical presence in Jersey, who will be required to monitor the compliance of the investment manager with the prospectus.
All Jersey functionaries of an expert fund must be regulated in Jersey and are required to comply with applicable codes of practice, and the assets of the fund must be subject to appropriate safe custody arrangements (although there will be no requirement for a Jersey custodian). A fund established as a limited partnership or unit trust must have a Jersey general partner or trustee with at least two Jersey resident directors and the fund must appoint an auditor. The offer document must also contain certain specified information.
It will be possible to obtain derogations from the Jersey Financial Services Commission in respect of certain non-compliance – for example, a fund with an investment manager not regulated by an OECD member state may still gain approval, subject to proof of requisite investment experience.
Guernsey Financial Services Commission consultation on hedge funds
Hedge funds have been set up in Guernsey over many years and the forthcoming guidance from the Guernsey Financial Services Commission will ease the structuring of such funds.
In the hedge fund arena, prime brokers rather than custodians frequently control all of the assets of a fund, and in these circumstances custodians cannot perform their traditional role of controlling fund property. Through consultation, the commission proposes to switch the emphasis to monitoring fund assets and their use, rather than controlling them.
The commission also aims to develop a view on the main factors which should be taken into account in selecting a prime broker and on who should take responsibility for broker selection.
The commission will consult on what margins of error are acceptable where price estimation is used prior to full net asset value (NAV) and price calculations, and who should be liable to investors if the process breaks down.
Where subscription money has to be held in a segregated account until the manager or fund is in a position to deliver the shares subscribed for, the commission is considering waiving this rule to allow managers to deal on an estimated NAV and to enable active funds to invest new money before the estimated NAV has been delivered. The commission has already granted waivers of this rule when it has been persuaded that investors are aware of, and understand, the risks entailed.
Guernsey Financial Services Commission guidance notes on closed-ended investment funds
Guidance has been issued by the Guernsey Financial Services Commission under the Control of Borrowing Ordinances intended to assist sponsors of closed-ended investment funds in preparing applications for consent and to help them avoid unnecessary delay. The guidance sets out the commission’s usual expectations for the content of offering documents and for continuing disclosure.
The guidance, which was developed by a working party consisting of senior industry representatives and commission staff, was submitted for public consultation in late 2002. It takes account of the very constructive industry response to that public consultation.
The guidance is in two parts: Schedule 1 comprises minimum disclosure requirements and Schedule 2 ongoing notifications and obligations.
In applying these policies, the commission remains committed to the flexibility it has always adopted in dealing with fund applications. Cases are considered on an individual basis and the level and extent of disclosure will depend on factors such as the nature of the fund and its investments, the ultimate investor base and minimum investment levels. The commission will not apply disclosure requirements that are irrelevant to the fund in question. Equally, where a fund has special features or unusual risks, the commission will expect wider disclosure than the minimum set out in the guidance.
In order to speed up the consideration of applications, sponsors who do not believe that specific disclosure requirements should apply in any particular case are encouraged to note that fact in their initial submission. Where funds have unusual features, it will assist sponsors if they consider, before submitting an application, whether the commission is likely to require additional disclosure.
As always, the commission encourages informal discussion with sponsors. This is particularly useful to both sides where sponsors have not used Guernsey before, or where funds have novel features.
The requirements of Schedule 1 will shortly be incorporated into a revised version of Form APC (application for consent in respect of a closed-ended fund).
The requirements of Schedule 2 relating to the ongoing notifications and obligations required of closed-ended investment funds will form part of the commission’s standard letter of consent.
Nick Kershaw is a partner in the business law group at Ogier & Le Masurier. He was assisted in this article by head of investment funds Roger Le Tissier