Guernsey introduces Qualifying Investor Funds

Guernsey introduces Qualifying Investor Funds

Roger Le Tissier, Partner, Ogier

A new approval process for Qualifying Investor Funds (QIFs) has been introduced by the Guernsey Financial Services Commission which brings Guernsey in line with the professional fund regimes in Jersey and Cayman. The new process will bring particular benefits to those fund managers wishing to set up hedge funds in Guernsey. At the same time, the structural requirements for open-ended hedge funds in Guernsey have been simplified, by the removal of the need for a custodian, together with other technical rule changes.

The ability to gain approval in three days will also enable promoters to complete negotiations with investors before finalising the approval for the fund. It will permit first closing dates to be settled in a more flexible manner without concern as to a lengthy application process.

The new three-day approval process also sits well alongside the responsive Channel Island Stock Exchange which approves listing in a number of days. These developments and the recent FSA approval of the CISX as a designated exchange and the UK Inland Revenue enabling CISX listed securities to be available for ISAs and SIPPs mean that Guernsey remains an attractive one-stop shop in which to organise and list funds.

The new QIF guidelines mean that Guernsey and Jersey are again similar in their regulation of funds and, together with Cayman, provide excellent facilities for the organisation of funds. The change of process has ensured that there is little to choose between the jurisdictions when looking for a place to locate a fund.

There are relatively few differences between the Guernsey and Jersey professional fund regimes, but one thing that differentiates the two islands’ approach is that for a Jersey fund to qualify as an expert fund the promoter should be regulated in an OECD member country. Because Guernsey does not have such requirements in place, it is opening up to a bigger potential market.

Further more, it may be that an investment manager will not require regulation in the country where it provides the service, which may make it easier to establish a fund in Guernsey. The Jersey Financial Services Commission (JFSC) will also entertain applications in these circumstances but there is no guarantee that there will not be further hurdles to jump prior to approval.

Nowadays Guernsey’s fund business tends towards institutional funds rather than retail funds and all institutional funds are likely to qualify for consideration as Qualifying Investor Funds. The new regime will be particularly attractive to the promoters of hedge funds, private equity funds and property funds.

A major advantage of both the Jersey and Guernsey schemes is that they do not require the promoter of a fund to be approved by their respective Financial Services Commissions. It was this process that was time-consuming – often a period of many weeks – when a promoter came to the islands, because the Commissions carried out considerable due diligence, which included consultation with regulators in other jurisdictions.

Guernsey’s QIF regime may be playing catch up, with itsintroduction a year after the launch of Jersey’s Expert Funds, but the reality is that Guernsey has not lost out in the meantime. Jersey has undoubtedly benefited from an increase in business as a result of its Expert Funds but, interestingly, the other pre-eminent jurisdictions have not suffered any downturn as a consequence. Guernsey has proven to be a popular jurisdiction for funds of hedge funds, in particular.

In Cayman last year’s growth rate of 107 per cent resulted in the number of supervised funds now exceeding 5,900.

At the close of 2004, the total value of Guernsey domiciled investment funds under administration reached a new record high of £56.6bn., an increase in that year of £14.8bn., or 35 per cent. In addition, many open-ended funds domiciled in other jurisdictions came to Guernsey for either administration or custody services and at the close of 2004 these totalled a further £17bn, up £2.4bn or 16 per cent. The vast majority of this is new funds and not an increase in net asset values.

Notwithstanding the continued growth of fund business in Guernsey throughout 2004, it has been suggested that, in the area of perception only, the lack of an expert funds type regime may previously have been viewed negatively by some promoters.

The Guernsey Commission released guidance notes in 2004 which set out the proposed regime. Final details were released in February setting out how the process will operate.

The QIF process will permit the efficient approval of new funds, with the relevant consent or authorisation from the Commission forthcoming in three days. Only Qualified Investors (as defined below) are permitted to invest in a Qualifying Investor Fund and in order to gain the necessary approval, various matters must be certified by the fund’s administrator.

A Qualifying Investor Fund may be either an open-ended collective investment scheme, authorised under the Protection of Investors (Bailiwick of Guernsey) Law (“POI Law”), 1987, as amended or a closed-ended investment fund for which consent has been granted under the Control of Borrowing (Bailiwick of Guernsey) Ordinances, 1959 to 2003 (“COBO”).

A Qualifying Investor Fund that is an open-ended collective investment scheme must comply with the requirements of the appropriate rules, that is the Collective Investment Schemes (Class A) Rules 2002, the Collective Investment Schemes (Class B) Rules 1990 or the Collective Investment Schemes (Class Q) Rules 1998.

Open-ended funds that qualify as QIFs are most likely to be Class B or Class Q schemes. Both types of scheme are ideal for hedge funds. There are no restrictions on investment policy other than a requirement to spread risk. Valuation policy and dealing is not restricted and the fund may adopt what it wishes.

The GFSC will continue to accept applications for derogations from the Class B Rules or Class Q Rules. Requests for modifications should be made at least three working days in advance of the submission of the formal application for the approval of the fund.

The promoter and/or investment manager should be an institution regulated and in good standing, or, if conducting activities which do not require regulation, otherwise in good standing. It must also be fit and proper.

The Commission’s view is that good standing would imply that the institution had not during the past five years been the subject of material disciplinary action by a regulator or professional body, or subject to any conviction for fraud, dishonesty or related offences of a financial nature.

All Guernsey incorporated hedge funds must have a Guernsey administrator. The administrator must certify to the Commission that it has performed sufficient due diligence to be satisfied that the promoter is fit and proper.

Applications on behalf of newly formed promoters will be considered. The certifying administrator will need to consider the track record and experience of the controllers, directors and management of such entities, taking into account their previous employment history. This should demonstrate that the individuals possess relevant experience in relation to managing or advising on investors’ funds using similar investment strategies to those that will be adopted by the Qualifying Investor Fund.

Promoters including their controllers and senior managers must be fit and proper and this must be certified by the administrator. This is defined as being a requirement for integrity, competence and solvency. Promoters should be of a high reputation and standing. Poor reputation would be considered to be a negative factor.

The promoter must carry on its business with prudence, professional skill and honesty. In the case of promoters with a limited history, due to the fact that they are newly or recently established, the integrity of the controllers, directors and management should be assessed in the light of previous employment and experience. It would be expected that the administrator would make direct contact with relevant individuals’ previous employers as part of the necessary due diligence enquiries.

Also, promoters would be expected to deal openly and honestly with the Commission and any other regulatory authority to whose regulation they are subject (either on a consolidated basis or directly).

Promoters should be solvent. A firm regulated in another jurisdiction should also comply with the solvency, capital adequacy or financial resources requirement laid down by the relevant regulatory body to which it is accountable. A promoter that is not regulated would be expected to maintain a surplus of shareholders’ funds as disclosed in its audited financial statements. Past performance in this respect should also be considered to ensure that relevant requirements have been consistently met in the past.

Further, promoters would be expected to maintain adequate net liquid assets such that they are able to settle their debts when they fall due. In the case of promoters with a limited history, due to the fact that they are newly or recently established (that is, not being able to produce audited annual financial statements for a period of at least 24 months), it will be necessary for the administrator to consider financial projections relating to the proposal under consideration. It will also be necessary to consider whether the controllers, directors and management of such promoters have previously been responsible for considering the solvency of an entity (for example, if they held a director role or financial control function).

A promoter should be able to demonstrate an acceptable complaints history. In the case of promoters and/or investment managers with a limited history, it will be necessary for the administrator to consider whether the controllers, directors and management of such entities have been subject to significant complaints whilst employed by other firms.

Promoters and/or investment managers should have staff of adequate skills, knowledge and experience to undertake and fulfil their duties efficiently and effectively. In addition to certifying that the promoter/investment manager is fit and proper, the administrator must also certify that the fund is a Qualifying Investor Fund which means that it will be restricted to qualified investors. A Qualified Investor is deemed able to evaluate the risks and strategy of investing in a Qualifying Investor Fund and to bear the economic consequences of investment in the Qualifying Investor Fund including the possibility of any loss arising from the investment.

A Qualified Investor is defined as a professional investor, an experienced investor, or a knowledgeable employee, each of which is further defined in the guidelines. Further details are available at www.ogier.com/pdf/client-briefing/CB-GSY-GsyFunds.pdf

Professional investors are generally defined as a government or public authority, a professional firm (such as an IFA) or an affiliate of the fund. Experienced investors are those who have experience in investment or those who produce a certificate from an investment adviser that the investor has received advice. Knowledgeable investors include employees of professional firms.

Should the promoter of a Qualifying Investor Fund require the establishment of a Guernsey incorporated management company it will be necessary for such company to be licensed under the POI Law before the relevant authorisation or consent can be issued in respect of the fund. The application process relating to the issue of a licence under the POI Law will normally take longer than the three working days.

Ogier is a leading offshore legal and fiduciary services firm, providing ready access to three of the world’s leading offshore centres: Cayman, Guernsey and Jersey. Ogier has some 400 people with offices in Cayman, Guernsey, Jersey and London and an associated trust company in New Zealand.