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Investment Funds Regime in Guernsey 21 July 2016

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Mariana Enevoldsen, Director, Heritage International Fund Managers Limited, discusses the structures available and the regulatory requirements applicable in Guernsey to Funds and Licensees.

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Investment Funds Regime in Guernsey 21 July 2016

  1. 1. The Investment Funds Regime in Guernsey Mariana Enevoldsen
  2. 2. 2 Contents  The Investments Fund Regime in Guernsey  Types of Funds  Authorised and Registered Funds  Open-Ended and Closed-Ended Funds  Non-Guernsey Schemes  Licensees  Fast Track Regime  Qualifying Investor Funds  Registered Collective Investment Schemes  Licensees  AIFMD  AIFMD’s Dual Regime  Manager Led Product  Future developments
  3. 3. 3 The Investment Funds Regime in Guernsey  The Guernsey Financial Services Commission (“GFSC”) regulates the investment sector pursuant to The Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended (“POI”) and a number of rules and regulations made thereunder  This means that funds as well as those providing services to funds (e.g. investment manages, administrators, etc.) are required to be licensed by the GFSC under POI.
  4. 4. 4 The Investment Funds Regime in Guernsey  The applicable rules are:  AIFMD (Marketing) Rules 2013  Authorised Closed-Ended Investment Schemes Rules 2008  Authorised Collective Investment Schemes (Class A) Rules 2008  Collective Investment Schemes (Qualifying Professional Investor Funds) (Class Q) Rules 1998  Licensees (Conduct of Business and Notification) (Non-Guernsey Schemes) Rules 1994  Prospectus Rules 2008  Registered Collective Investment Scheme Rules 2015  Authorised Collective Investment Schemes (Class B) Rules, 2013 (The Class B Rules)  The Licensees (Conduct of Business) Rules 2014  The Licensees (Capital Adequacy) Rules 2010
  5. 5. 5 Types of Funds AUTHORISED FUNDS REGISTERED FUNDS CLOSED-ENDED OPEN-ENDED Authorised Closed- Ended Scheme Rules Class A Rules Class B Rules Class Q Rules CLOSED-ENDED OPEN-ENDED Registered Collective Investment Schemes Rules Prospectus Rules
  6. 6. 6 Types of Funds Authorised or Registered  Authorised Funds Subject to on-going supervision by the GFSC , or  Registered Funds Not authorised and subject to a lighter touch regime Guernsey funds, whether authorised or registered can be either: Open or Closed-Ended  Open-Ended Funds A vehicle that allows investors to have their holdings redeemed or repurchased at a price that relates to the value of the underlying assets  Closed-Ended Funds Investors are not entitled to redeem at a price related to the value of the underlying assets
  7. 7. 7 Types of Funds Authorised funds AUTHORISED FUNDS CLOSED-ENDED OPEN-ENDED Authorised Closed- Ended Scheme Rules Class A Rules Class B Rules Class Q Rules
  8. 8. 8 Types of Funds Authorised funds  May be open-ended or closed-ended  Applicable Rules  Class A, B or Q Rules  Authorised Closed-Ended Investment Scheme Rules 2008  Funds are authorised and subject to the continuing supervision of the GFSC  Funds must be established with the objective of spreading risk  Offering Document disclosures in accordance with the applicable Rules  Provisions for immediate and periodic notifications to the GFSC
  9. 9. 9 Types of Funds Registered funds REGISTERED FUNDS CLOSED-ENDED OPEN-ENDED Registered Collective Investment Schemes Rules Prospectus Rules
  10. 10. 10 Types of Funds Registered funds  May be open-ended or closed-ended  Applicable Rules  Prospectus Rules 2008  Registered Collective Investment Schemes Rules 2015  Funds are not authorised and are subject to a lighter touch regulatory regime benefiting from a fast track registration process  Funds must be established with the objective of spreading risk  Offering Document disclosures in accordance with the Prospectus Rules  Provisions for immediate and periodic notifications to the GFSC  May now be offered to the public in Guernsey
  11. 11. 11 Types of Funds Non-Guernsey Schemes  The Licensees (Conduct of Business and Notification) (Non- Guernsey Schemes) Rules 1994 require Guernsey licensed service providers wishing to undertake the restricted activities of management, administration or custody to open-ended funds not requiring registration or authorisation under POI to provide prior written notice to the GFSC of such proposal  The GFSC must give specific approval to a local licensee before the commencement of the service to the scheme  Thereafter, non-Guernsey Schemes are subject to on-going notification requirements  A two day fast track approval process (subject to warranties) is available in addition to the traditional approach
  12. 12. 12 Types of Funds  Structural considerations  Capital base: closed-ended funds provide permanent capital and they are not subject to withdrawals  Dealing facilities: the Manager or Administrator must provide dealing facilities for investors in open ended funds and bears the risks of any issues arising in the valuation which may result in investor compensation  Type of asset: illiquid assets such as property are not suitable for open-ended schemes  Target investor: certain investors may require or prefer regulated funds  Custodian: Guernsey open-ended funds require the appointment of a Guernsey custodian
  13. 13. 13 Types of Funds  Trends in Guernsey  Closed-ended funds are more prevalent than open ended funds  Most closed ended funds are now launched as registered funds due to the availability of the Fast Track Regime  In the open-ended sector, Class B Schemes are the most popular choice
  14. 14. 14 Licensees  A licence is required by any person who carry one or more restricted activities in accordance with Schedule 2 of POI: - Promotion - Management - Subscription - Registration - Dealing - Administration - Advising - Custody - Operating an investment exchange  A restricted activity may be undertaken in respect of Category 1 (collective investment schemes) or Category 2 (general securities and derivatives) controlled investments  Applications may either be traditional or Fast Track (10 business days with warranties provided by the administrator)
  15. 15. 15 Licensees  Funds may be structured with a Guernsey investment manager/licensee. Usually such licensees engage an investment advisor from another group entity based outside of Guernsey.
  16. 16. 16 Licensees  GFSC Licensing Criteria  Selectivity: the applicant must be ‘fit and proper’ which embraces honesty, competence and solvency. High rather than minimum standards are expected  Compatibility: the specific nature of the proposed business should be compatible with the protection of the reputation of the Bailiwick  Due Diligence Checks: no adverse findings expected in relation to any parties involved  Structure: the structure of the group and the ultimate beneficial ownership must be established  Track Record: the applicant should be able to demonstrate an acceptable track record in the field in which it proposes to operate  Directors: at least one Guernsey resident director will be required and in some circumstances two resident directors. Directors are expected to be individuals rather than corporate entities
  17. 17. 17 Licensees  GFSC Licensing Criteria (continued)  Four Eyes: the ‘four eyes’ principle must be satisfied by having at least two competent professionals able to exercise control over the day to day operation of the Guernsey business. They must be either executive directors or persons granted executive powers  Delegation: any delegation of responsibilities to existing licensees or other organisations must be acceptable to the GFSC  Resources: the applicant or its delegate must have adequate human and physical resources to conduct operations, including record- keeping, compliance, internal controls and other systems  Financial Resources: the requirements within The Licensees (Capital Adequacy) Rules 2010 must be satisfied  Domicile: the applicant’s restricted activities should be conducted substantially within or from within the Bailiwick  Compliance Officer and MLRO: the Compliance Officer may be a corporate entity with a named compliance officer of its own but the MLRO must be an individual
  18. 18. 18 Fast Track Regimes  Certainty on authorisation timings  3 business days for Qualifying Investor Funds and Registered Collective Investment Schemes  10 business days for licensees  The are 3 Fast Track Application Regimes available:  Qualifying Investor Funds (“QIF”)  Registered Collective Investment Schemes  Licensees to QIFs and Registered Schemes
  19. 19. 19 Fast Track Regimes  Qualifying Investor Funds (“QIFs”)  May be open or closed ended authorised funds (or compartments sub-funds, cells and share classes of existing funds)  Available only for Qualified Investors  Qualified investors are those deemed able to:  Evaluate the risks and strategies of investing in a QIF  Able to bear the economic consequences, including the possibility of any loss arising from the investment  Qualified investors can be  Professional Investors  Experienced Investors  Knowledgeable Employee
  20. 20. 20 Fast Track Regimes  Registered Collective Investment Schemes  May be open or closed ended registered funds (or compartments sub-funds, cells and share classes of existing funds)  Administrator makes specific declarations (warranties)  Administrator must have documentary evidence supporting the warranties given and to produce the same immediately upon request  Administrators may be excluded from participation in the Registered Collective Investment Schemes self-certification programme  Licensees  Only available for parties seeking to provide management services to QIFs or Registered Collective Investment Schemes  Administrator makes specific declarations (warranties)
  21. 21. 21 Alternative Investment Fund Managers Directive  A combination of the Madoff investment scandal and the financial crisis led to a raft of new regulations being introduced globally  In Europe, the Alternative Investment Fund Managers Directive (“AIFMD”) was introduced to bring managers of alternative investment funds under a harmonised regulatory umbrella in order to provide:  Certainty of assets  Independent verification of assets  Control of the investment management process  Segregation of asset management from risk management  AIFMD came into force in July 2011 with Member States having 2 years to transpose into national law
  22. 22. 22 Alternative Investment Fund Managers Directive  AIFMD covers areas such as  Substance  Remuneration  Transparency  Depositary requirements  AIFMD applies to Alternative Investment Fund Managers (“AIFMs”) established in the EU but also applies to non EU AIFMs to the extent that they manage or market funds in the EU  Small AIFMs (i.e. when the AIFM manages funds whose aggregate AUM do not exceed EUR 100m including assets acquired using leverage or do not exceed EUR 500m where the funds are unleveraged and don’t give investors a right to redeem within 5 years) may opt into the full requirements of AIFMD
  23. 23. 23 Guernsey’s Dual AIFMD Regime  The AIFMD Rules, 2013 have introduced an AIFMD equivalent regime in Guernsey which can be used by managers who, due to particular commercial reasons, need to comply with AIFMD  Managers not requiring an AIFMD compliant fund, including those using National Private Placement Regimes (“NPPRs”) or marketing outside Europe, can continue to use the existing fund structures  AIFMD originally envisaged the phasing out of NPPRs in favour of the EU-wide marketing passport for non EU AIFMs  The European Securities and Markets Authority (“ESMA”) will produce an updated opinion on the functioning of the EU passport and NPPRs in time for the planned review of AIFMD due to start in 2017
  24. 24. 24 Guernsey’s Dual AIFMD Regime  In July 2015, ESMA issued positive advice to the European Parliament, Council and Commission on the extension of the third country passport to Guernsey, Jersey and Switzerland  In its final assessment in July 2016, ESMA issued advice on 12 jurisdictions and included Guernsey in a group of 5 jurisdictions with unqualified positive assessments  Within 3 months, the Commission should adopt a delegated act specifying the date when the relevant rules become applicable in all Member States and the passport can be extended to third countries
  25. 25. 25 Manager Led Product  In April 2016 the GFSC issued a consultation paper on the Manager Led Product (“MLP”) following discussions with industry  After a short consultation period, the MLP was launched in May 2016  A similar approach has been adopted by other jurisdictions such as Luxembourg (RAIF) and Malta (NAIF)
  26. 26. 26 Manager Led Product  Main features  Aimed at AIFMs seeking to market an AIF into a host country in Europe under NPPR  Placing of regulations on the AIFM only  Avoids duplication of regulatory requirements over several entities whilst maintaining reporting requirements  Licensing within 24 hours of open or closed ended funds as well as general partners or managers formed solely for the purpose of such funds  Capital adequacy requirements apply only at AIFM level
  27. 27. 27 Future developments  The GFSC has stated its intention to develop some further investment products  A product using the same principles as the MLP but with a discrete set of rules enabling managers to target markets excluding Europe  Private funds

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