Jersey Reviews Funds Regulation

Consultation proposes substantial changes to private funds regime

ANDREW WEAVER, APPLEBY

In the first step of a radical overhaul and rationalisation programme for Jersey fund regulation, on 1 August 2016 the Jersey Financial Services Commission (JFSC) and the States of Jersey (Government) issued a joint consultation on proposals for substantial amendment to Jersey’s private funds regulation. The changes, if implemented, are the first step in an overhaul of the universe of regulation of investment funds in Jersey. Later in the year a consultation is expected on changes to the public fund regulatory environment and the introduction of a manager led product (the JRAIF) which will not be required to adhere to the Code of Practice for Jersey Certified funds (being supervised through its Alternative Investment Fund Manager (AIFM) and complying with the applicable sections of the Alternative Investment Fund Managers Directive). Next year, the JFSC and Government plan to review the effectiveness of investment fund-related exemptions to the Financial Services (Jersey) Law 1998, as amended (FSJL) along with certain other supervisory aspects of related legislation.

Private fund simplification
The first consultation proposes the rationalisation and consolidation of Jersey’s private and unregulated fund sector with the:

  1. Introduction of a Very Private Placement Fund (VPPF) guide;
  2. Introduction of a new and universal professional investor definition;
  3. Introduction of modern regulatory powers in the Control of Borrowing (Jersey) Law 1947 (COBO Law);
  4. Phasing out COBO only funds; and
  5. Phasing out unregulated exchange traded funds.

Each of these is discussed further below.

Very Private Placement Fund Guide
(i) To date the JFSC has applied a policy that vehicles with 15 or fewer investors are characterised as Very Private Funds or Very Private Structures and has refrained from any product regulation of such vehicles save for a condition restricting offers and ownership to 15 investors. The managers of many of these vehicles have also benefitted from available exemptions from regulation under the Financial Services (Jersey) Law 1998. Little additional regulatory guidance has been publicly available. The VPPF Guide is intended to provide greater certainty with respect to the eligibility conditions and regulatory approach to the authorisation process for a Very Private Fund (to be rebranded a VPPF).
(ii) The VPPF will benefit from a fast track 48 hour approval process.
(iii) Clarity will be given in the distinction between a Very Private Fund and a Very Private Structure (which is not a fund). The JFSC will deal with all applications for consent for fund vehicles and the Jersey Companies Registry will deal with all applications for consent for non-fund vehicles.
(iv) The VPPF Guide provides a very high degree of flexibility to the structures that are in scope. This includes not only vehicles incorporated or established in Jersey but also vehicles incorporated or established in a country or territoray outside Jersey.
(v) There is no requirement for a Jersey general partner, managing partner or trustee nor is there any regulatory requirement for the VPPF’s governing body to appoint one or more Jersey resident directors.
(vi) The VPPF will (as today) not be subject to regulatory conditions or compliance obligations (save in respect of the JFSC’s sound business practice policy, as now).
(vii) Only investors who have acknowledged in writing receipt and acceptance of a prescribed investment warning may invest in the VPPF.
(viii) Only professional investors or eligible investors may invest in the VPPF. Direct investment by retail investors will be prohibited.
(ix) Where a discretionary investment manager (that is a professional investor) invests in a VPPF on behalf of retail investors, it will not be necessary to look through the professional investor to the underlying investors for the purpose of the 15 or fewer test.

(x) The following shall not be counted towards the 15 or fewer limit:

a. Persons acquiring interests carrying solely management or control rights;
b. Carried interest vehicles established for the sole purpose of sharing in the profits of the VPPF (each participant in the carried interest vehicle must be a “professional” or an “eligible” investor); and
c. A general partner of the VPPF.

(xi) The VPPF must appoint a Jersey resident designated service provider that is registered under Jersey’s financial services regulatory laws.
(xii) Regulatory consent fees will be payable that are consistent with the current Jersey Private Placement Fund Guide (note that the VPPF will not replace the Jersey Private Placement Fund).

Universal Professional Investor Definition
(i) Currently there are a number of non-retail investor definitions, applied in a variety of regulatory circumstances in Jersey.
(ii) Subject always to any application in Jersey of the “professional client” definition within the meaning of Annex II to MiFiD II for the purpose of implementation of MiFiD I, MiFiD II and AIFMD in Jersey, it is proposed that a single common Professional Investor Definition be adopted for domestic Jersey law and regulation. Initially this will be in respect of the private fund sector and, subject to further consultation, extended to the public fund environment.
(iii) The proposed definition of “Professional Investor” is based principally on that used currently for an “expert investor” in the Jersey Expert Fund Guide.
(iv) Helpful clarification is given in respect of administrative or founder interests, carry interests and involuntary acquisitions, as well as the treatment of family office and employee incentive arrangements.

Introduction of modern regulatory powers in the Control of Borrowing (Jersey) Law 1947 (COBO Law)
The COBO Law will be amended to include modern regulatory supervision, enforcement and co-operation powers in line with the powers that are available to the JFSC under the laws relating to public funds.

Phasing out COBO only funds
Demand for the traditional COBO only fund in Jersey has declined, following the introduction of more attractive alternatives including the Jersey Private Placement Fund. As a result the JFSC proposes phasing out the COBO only fund with effect from 1 January 2017.

Phasing out Unregulated Exchange Traded Funds
As with COBO only funds, figures show a decline in their popularity over recent years. New notifications for Unregulated Exchange Traded Funds will no longer be accepted from 1 January 2017.

Impact for Jersey
These proposals and those yet to be consulted upon are very welcome developments to the regulatory environment for funds in Jersey. The rationalisation and simplification of the fund regulatory options in Jersey, in the most simple terms, will boil down to very private placement funds for 15 or fewer professional investors, private placement funds for professional investors and a reduced number of public fund variants, including (a) a manager led product where regulatory observance will be the responsibility of the manager, the Jersey Registered Alternative Investment Fund (JRAIF) and (b) an improved Expert Fund. All of this will sit alongside Jersey’s AIFMD compliant regime (recently endorsed by ESMA) for funds which are to be marketed in the EU/EEA.

For start-up hedge fund managers, these changes will increase the ability to implement in Jersey a low cost initial fund offering with very limited regulatory involvement, and then as the fund grows to move sequentially through the various regulatory environments as the fund and the manager grow. Established managers will also find the changes to the product line and regulation attractive; this is clearly being demonstrated by the increase of “boots on the ground” in Jersey in the hedge fund management
sector.