19 June 2006
The global expansion in funds has put considerable pressure on established fund centres such as Dublin, Luxembourg and the Caribbean. This has given rise to delays in fund establishment and greater selectivity by fund administrators, creating a healthy overspill to other jurisdictions which had previously been unexploited.
The government of Gibraltar has just completed a revamping of its funds legislation to boost its fast-developing fund industry.
Private funds and funds for experienced investors can now be set up in a matter of days and the retail legislation is fully compliant with the Undertakings for the Collective Investment of Transferable Securities (Ucits) directives.
High regulatory standards, combined with the flexibility of a small jurisdiction and the availability of a quality infrastructure at low cost, are making Gibraltar an increasingly attractive fund location. Gibraltar has the big names in accounting services to provide audit and other support services, as well as banks to provide custody services.
Gibraltar's location and time zone make it easier for European-based promoters to monitor administration and to attend board meetings. This is increasingly important in light of the greater scrutiny that some of the Caribbean-based funds are facing from the HM Revenue & Customs as regards their fiscal residence.
Gibraltar is part of the EU by virtue of its relationship with the UK. Gibraltar has changed all relevant EU banking, insurance and investment services directives so that its financial services sector is firmly within the integrated structured financial services system contemplated by the EU.
Passporting of banking and insurance services has been in place in Gibraltar for some years and financial services passporting came into effect in July 2003, allowing financial services firms and certain funds to offer their services and products throughout Europe on the basis of their Gibraltar licence.
The Gibraltar regulatory regime
The Financial Services (Collective Investment Schemes) Ordinance 2005, the Financial Services (Collective Investment Schemes) Regulations 2006 (which came into effect in April 2006), and the Financial Services (Experienced Investor Funds) Regulations 2005 effectively divide the types of licensing requirements on funds that may be incorporated in Gibraltar into four categories: private funds, experienced investor funds, non-Ucits retail funds and Ucits funds.
The recently passed Financial Services (Collective Investment Schemes) Regulations 2006 codify what has been industry practice in Gibraltar for several years. In effect, a fund that is promoted to a restricted category of persons whose number is less than 50 is exempt from any licensing requirements and may be promoted to that category of persons under certain conditions. In practice, as long as the investors are friends, family or close clients of the promoters, or, perhaps, employees of a firm, a fund can establish itself as private scheme.
Private funds in Gibraltar generally produce an offering document in order to ensure that the investors have sufficient information in order to evaluate the offer. Good corporate governance dictates that, in addition to the production of annual audited accounts, private schemes engage the services of fund administrators and custodians where appropriate, although there is no statutory requirement to do so.
Experienced investor funds
Arguably the most exciting and competitive innovation in the Gibraltar fund industry is the possibility to set up funds for experienced investors that are highly versatile and lightly regulated. Experienced investor funds (EIFs) under the Financial Services (Experienced Investor Funds) Regulations 2005 are funds designed for professional, high net worth or experienced investors.
Investors in these funds must have a net worth in excess of e1m (£680,000) or invest a minimum of e100,000 (£68,000). An EIF may be set up in a matter of days. For authorisation to trade it need only notify the Financial Services Commission (FSC) within 14 days of establishment. The notification is made by the administrator and is accompanied by the fund's offering documents and an opinion from counsel that the fund complies with the EIF regulations.
An EIF must have two Gibraltar-resident directors who are licensed by the FSC to act as continued #+ continued EIF directors, a custodian or broker to hold its assets and a Gibraltar-based administrator. EIFs that invest in real estate or are closed ended do not require a custodian. EIFs must also produce annual audited accounts.
This is a niche area for funds currently in Gibraltar. EIFs do not have to go through the regular procedure for regulation and licensing, but are structured to ensure adequate investor protection. The idea behind this legislation is that the regulation of the counterparties to the fund, for example the administrator, the directors and the custodian, coupled with the opinion from counsel and the eventual audit, lessens the need for regulation of the actual fund.
When compared with the alternatives of private funds, which restrict marketing, and retail funds that can take months to license, EIFs are an attractive solution for many fund promoters.
Non-Ucits retail funds and Ucits funds
The licensing procedure, which normally takes between three and six months, involves the submission of the formation documents for the fund and its prospectus to the FSC, along with application forms on the fund and the names of its directors or investment manager.
The requirements for licensing under the Financial Services Ordinances follow the provisions of the Ucits directives, with the possibility of derogations from the FSC in the case of non-Ucits funds from certain aspects, such as investment restrictions. Gibraltar Ucits funds may passport their services within the EU on the basis of their Gibraltar license. The recent fund legislation brings Gibraltar fully into line with Ucits II and III, which allow more flexibility of investment.
Protected cell companies
Gibraltar has implemented the Protected Cell Company Ordinance 2001, which allows for the incorporation of protected cell companies (PCCs). PCCs enable the statutory segregation of assets and liabilities in different cells.
The PCC legislation allows a fund to be set up so that there is segregation of assets and liabilities in an umbrella structure (that includes different sub-funds) where it is essential to ensure that there is no liability contamination between sub-funds. Instead of the client relying on a purely contractual arrangement between shareholders, the legislative regime gives statutory basis for the segregation of assets that binds third parties as well. Sub-funds or cells can be used by separate clients or by one client wishing to promote several investment strategies. PCCs may be licensed as EIFs as well.
Although Gibraltar has been used in recent years as a fund jurisdiction on a modest scale, it is actively revamping its legislation to provide competitive alternatives. The advent of the EIF regulations has given a tremendous boost to the Gibraltar funds industry as it is now possible to set up a fund, be it a hedge fund, a property fund or even a fund of funds, for professional or experienced investors quickly and efficiently. n
James Lasry is a partner at Hassans