Regulation: Marshall Wace

Jon May

In recent months there has been a lot of talk in the asset management industry about a trend towards alternative fund managers shifting their products onshore and away from offshore ­jurisdictions such as the Cayman Islands. Much of this talk has been just talk. But in April 2010 Marshall Wace, one of the UK’s best-known and biggest fund managers, with around $5bn (£3.2bn) in assets under management, moved all of its products to Ireland from Cayman.

The work was led by the company’s in-house legal team and general counsel Jon May, but involved the whole company. “It’s fair to say that everyone just got on with it,” May says.

Marshall Wace’s move was driven, to a large extent, by the April 2009 advent of an EU directive for ­alternative investment fund managers (AIFM). The regulation dominated headlines and caused ­consternation within the industry from the day it appeared to the day in November 2010 when it was finally passed by the European Parliament.

May agrees with most of his colleagues in the asset management industry that the first draft of the directive was “pretty bad”. As soon as it was published he got to work analysing the proposed legislation and the ­potential consequences for Marshall Wace.

Of most interest to Marshall Wace was the proposal for a European ’passport’ for alternative investment funds. As originally suggested in the European ­Commission draft, funds domiciled within the EU would be granted a marketing passport covering all member states, thus cutting out the administration needed under the present private placement regime.

At the same time, however, the directive proposed heavy restrictions on marketing funds domiciled outside the EU. The Commission’s initial report states that “the proposed directive permits AIFM to market AIFs ­located in third-country domiciles subject to strict ­controls on the performance of key functions by service providers in those jurisdictions”.

With the bulk of its funds established in Cayman, Marshall Wace was facing significant compliance requirements and costs as a result of this proposal.

As things turned out, the status quo for private ­placement has been maintained for a transitional ­period of five years. A passport will be granted under a number of conditions including ’appropriate cooperation arrangements’ between the home member state of a fund ­manager and the third country in question.

The passport will be monitored closely. The final directive states that “draft regulatory technical ­standards” will be developed to determine “the ­minimum content of the cooperation arrangements referred to in paragraph 2(a) so as to ensure that both the competent authorities of the home and the host member states receive sufficient information in order to be able to exercise their supervisory and investigatory powers under this directive”.

Passport to profit

The prospect of a passport was enough to make ­Marshall Wace consider shifting its products, even prior to agreement.

“There was clearly an attraction to us as primarily a European business to be ready for the potential ­restrictions that might come around marketing,” explains May. “To that extent the European passport was ­attractive, and a driver in our decision to move our funds from Cayman to Ireland.”

Another catalyst was client demand. “We’re ­committed to Cayman as a country but a number of investors were beginning to question whether a more regulated jurisdiction for our funds might be better,” May says, although he hastens to add that clients were not talking of redeeming their investments if the move was not made.

The process of moving the funds began with an ­examination of possible jurisdictions. There were three candidates – Ireland, Luxembourg and the UK. Ireland and Luxembourg have in recent years established themselves as viable jurisdictions for alternative funds, with knowledgeable regulators and sensible legislation.

May says the UK was knocked out of the running due to its tax rules. Investors withdrawing from funds can fall foul of stamp duty laws that impose a redemption tax of 0.5 per cent on the investment.

“It would be wonderful to see the UK emerge as a competitive jurisdiction for alternative funds,” says May. “I think it’s close but it’s not quite there yet.”

Marshall Wace seized the chance to simplify its fund structures, consolidating a number of funds into an umbrella structure. Ireland’s legislation makes it easy to set up a fund, which May says was another reason for choosing the jurisdiction.

“We’ve got to be able to be quick to market but also have a structure that’s inherently efficient,” he explains.

May praises the Irish regulator for its pragmatism and willingness to talk to organisations. In contrast, he is concerned about the way the new European ­Securities and Markets Authority will ­supervise the notoriously complicated asset ­management industry.

“We’ve got all these local regulators who know what they’re doing and are quite capable of keeping their houses in order, then we’ve got a political process that will drive a coach and horses through that,” he says.

Back in 2007 Marshall Wace was a founder member of the Hedge Funds Standards Board, which set up a ­voluntary code of practice for the industry. May says this, along with the company’s ongoing work with the Alternative Investment Management Association (AIMA), are examples of the way the company prefers to engage with regulation.

“It’s a bit of a cop-out to be a participant and to ­complain about the regulatory environment but then not to engage with policymakers and try to do ­anything to improve it,” he says.

May is currently working with AIMA and the FSA as the EU fine-tunes the details of the AIFM Directive. But Marshall Wace has also had to keep an eye on ­regulation in other parts of the world. The company has offices in the US and Hong Kong, so while the AIFM debate ­progressed May was also looking at the development of US Dodd-Frank financial reform regulation. This led the company to register with the Securities and Exchange Commission and also to carry out a gap analysis to work out how its UK and Hong Kong offices would fit with the legislation.

Despite the wave of regulation affecting the industry May thinks Marshall Wace will manage. He has faith in his in-house lawyers and compliance team to keep abreast of developments, although he says life could be trickier for smaller players.

“Smaller participants will find it more difficult as time passes if the influx of rules continues unabated,” he says. “It really is extraordinary at the moment – the sheer volume of new financial rules that are fundamentally different from the status quo.”