Jersey, Your Flexible Friend

Recent developments in Jersey

Martin Paul and Simon Hopwood, Bedell Cristin

The world of offshore funds is constantly evolving, and Jersey is evolving in order to remain a key player in this extremely competitive world. By way of background, Jersey has been a prominent player in the funds industry since the 1960s. As one of the leading offshore international financial centres, it has a level of political and economical stability, which has led the credit agencies to award Jersey with a AAA sovereign rating. Jersey is tax neutral and is also conveniently situated within the European time zone. However, Jersey is not part of the European Community so is not obliged to implement EU directives.

Jersey has more than 50 international registered banks and has a large established selection of highly experienced service providers to the funds sector. There are around 250 licensed trust and company administrators, over 100 investment managers, stockbrokers, advisers and custodians. All the big four accountancy firms are well represented in Jersey and there are also number of high quality law firms with established links with firms in the major cities around the world.

At the end of 2003, there was £98.7 billion under management in Jersey investment funds. In relation to specialist hedge funds and alternative investment funds, there were 149 single class funds and 583 umbrella sub-funds in Jersey. Hedge funds and fund of hedge funds continue to grow in number in Jersey and there are a number of administrators of hedge funds and managers of funds of hedge funds.

Recent years have seen growing demand for alternative, and more specialised, collective investment funds offering alternate investment strategies which aim to produce positive absolute returns whether the markets fall or rise, such as those strategies offered by hedge funds. The investors in such funds are institutional, high-net-worth or sophisticated investors, who demand speed, efficiency and flexibility. In order to meet the expectations of the promoters and, ultimately, investors in hedge funds, Jersey is changing.

In many respects, the essence of the change is flexibility. Whilst ensuring that Jersey maintains its valuable reputation as a well regulated international finance centre, Jersey is changing its regulation and practice in relation to investment funds in order to 'give the customers what they want' and, in particular, is providing more flexibility in its regulation and practice to encourage more hedge funds. This is manifesting itself in general terms, but also in relation to the formation, administration and listing of investment funds, including hedge funds.

It is hoped that this flexibility will act as a catalyst for further growth in the specialised hedge funds sector, to enable Jersey to compete with other major players in this sector and to gain a larger share of the hedge fund market.

General Objectives

The main elements of the various changes in Jersey can be identified as follows:
 

  • Relaxing structural and operational constraints: Restrictions that have historically been somewhat rigidly imposed on publicly offered collective investment funds (such as requirements as to the status of promoters of funds or investment or gearing restrictions) have now been replaced with a regime that is flexible.
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  • Creating certainty, but allowing derogations. Whilst Jersey still sets down certain key principles of fund regulation, it is also clear that there is scope for departure from those principles, so that if a certain proposal does not "fit the template" sensible alternatives can be accommodated.
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  • Creating a 'fast-track' for regulatory approval. The timescales for obtaining the necessary permits (whether, for example, for the establishment of a new hedge fund or the appointment of a local administrator to a non-Jersey hedge fund) have been drastically reduced.
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  • Maintaining the 'regulatory integrity' of the Island. At the same time as offering flexibility, Jersey also (for example, by conforming to IOSCO principles) has been careful to ensure that it still offers a level of sophistication of regulation and infrastructure that provides comfort to promoters and investors alike, which is seen as important in attracting quality hedge fund business, and in differentiating Jersey from other, less regulated, international finance centres.
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The influence of each of these elements is clearly apparent in the context of the formation, administration and listing of investment funds, including hedge funds.

Expert Funds

One of the primary new strings to Jersey's bow is the much-trumpeted expert funds regime. The regime provides a flexible framework for the establishment of funds targeted at 'expert investors', which includes investors who are professionals, institutional, functionaries of the particular fund, high net worth individuals (or joint net worth with spouse) or entities with assets over $1 million (excluding residence) and, more importantly, any person who is investing at least US$ 100,000.

The core requirement for this regime is the requirement that the fund appoint a Jersey-based administrator or manager with staff and a physical presence in Jersey, which is run in accordance with applicable codes of practice published by the regulator, the Jersey Financial Services Commission, from time to time. The administrator or manager will be responsible for monitoring the actions of the hedge fund's investment manager to ensure that the investment manager is adhering to the investment and borrowing policies contained in the hedge fund's offering document.

The investment manager must be established in a OECD member (or associate member) state and meet certain basic criteria as to solvency and competency and be free from criminal financial services convictions, but otherwise flexibility is the key word.

Every expert hedge fund must have adequate arrangements for the safe custody of fund property including, if applicable, prime brokerage arrangements. If the expert hedge fund is to be open-ended, the Commission will accept the appointment of a prime broker from outside Jersey which has, or is part of a group which has, a minimum credit rating of A1P1.

A particular attraction of the new expert fund regime to hedge funds is that there are no prescribed investment or gearing restrictions nor any requirements as to risk diversification strategy.

The published Jersey Expert Fund Guide sets out the requirements which apply in relation to the offering document and as a matter of the regulator's evolving policy derogations from the standard requirements are possible. Generally, the offering document must set out clearly and fully all material information that a prospective investor would reasonably require or expect to be brought to their attention in respect of the hedge fund for the purposes of making an informed judgement about the merits of participating in the hedge fund and the risks accepted by participating. The offering document must also contain a prominent investment warning in prescribed form, which each expert investor must acknowledge they have received and accepted before investing in the hedge fund. As long as investors are given all information which they could reasonably expect to have, then the regime presents plenty of scope to ensure compliance with the requirements without needing to compromise on a promoter's objectives.

The expert funds regime has the benefit of a 'fast-track' for regulatory approval. The regime allows the manager or administrator to 'self-certify' compliance with Jersey's regulatory requirements and in reliance on that the Jersey regulator aims to approve the establishment of a fund within a target timescale of three days.

Non-Jersey Domiciled Funds

The Non-Jersey Domiciled Fund Guide, which was published in June, 2004, is another new string to Jersey's bow. The guide complements the Expert Fund Guide, and introduces a streamlined process for obtaining regulatory authorisation for those wishing to act as an administrator (or to provide other functions) to non-Jersey domiciled funds. This will allow, and 'open the doors' for, promoters of hedge funds domiciled in, for instance, the Cayman Islands, to have access to experienced and established administrators and other fund service providers in Jersey.

Where a non-Jersey domiciled hedge fund is materially equivalent (in terms of characteristics) to a Jersey expert fund, a Jersey entity wishing to provide a function to that hedge fund (such as administration) will be able to obtain regulatory approval to do so within a matter of days on a 'fast-track' basis. If responsibility for the management of that non-domiciled hedge fund is to be assumed by a Jersey based functionary the Commission will treat the hedge fund for authorisation purposes as if it were a hedge fund established in Jersey. Similarly, where a Jersey registrar or distributor is to be appointed to a non-Jersey fund that is UCITS compliant, then a "fast-track" will apply. In addition, in all other cases the regulator is committing to faster approval timescales.

The Jersey Financial Services Commission

Alongside the two more 'tangible' developments referred to above, of more general note is the increasingly flexible and responsive attitude of the Jersey regulator, the Jersey Financial Services Commission. To an extent, the success of Jersey's funds industry depends upon the ability of the regulatory regime and the regulator to offer an appropriate degree of flexibility in order to accommodate the needs of those wishing to use the services that Jersey has to offer. Following a number of years of evolution at the Commission in terms of its status and functions, and a necessary process of development of the legal infrastructure through which the Commission operates (including in particular, the expansion of its regulatory responsibility to new areas), there is now renewed commitment to support the Island's investment funds industry. Certainly, the authorisation division of the Commission does now seem to be going out of its way to be pro-active and helpful in order to assist on fund matters, which can only be good news for Jersey.

The Channel Islands Stock Exchange

An additional positive development for Jersey is the increasing reputation of the Channel Islands Stock Exchange, both in terms of user perception and in the eyes of overseas regulators. The CISX has since its inception worked hard to provide a service that is pragmatic, responsive and approachable, and to provide the speed and consistency of response, as well as competitive pricing, that users demand. For instance, there are daily meetings at the CISX to consider listing applications. This service-led ethos has won the CISX many friends. In addition, the adherence by the CISX to international standards for stock exchanges has led to various endorsements of the CISX: including the CISX being designated as a Recognized Stock Exchange by the UK Inland Revenue, as a Designated Investment Exchange by the UK Financial Services Authority and as a Designated Offshore Market by the US Securities and Exchange Commission. The CISX has also been accepted as an affiliate member of IOSCO. As such, the CISX provides a further reason for the Channel Islands, and Jersey, to be at the forefront of the minds of hedge fund promoters who may wish to list their hedge funds on a recognised stock exchange.

Conclusion

As will be appreciated, the changes takingplace in Jersey are very much designed, amongst other things, to meet the needs of hedge fund promoters and investors, and are intended to provide a boost to Jersey in it's competition with other jurisdictions for the formation, administration and listing of hedge funds. In relation to each of these aspects, the relevant regime provides a considerable degree of flexibility as well as user-friendly, swift and cost-efficient processes for obtaining the necessary regulatory approvals. Jersey has long been attractive as a jurisdiction on the basis of the quality of its professional services, including legal, accountancy and administrative infrastructure, its time zone and tax neutrality and certainty. In addition to these enduring qualities, it is hoped that the recent developments will make the argument more compelling as to why, in relation to hedge funds, Jersey should be your 'flexible friend'.

Further information on the formation, administration and listing of investment funds in Jersey can be obtained from the authors: martin.paul@bedellcristin.com or simon.hopwood@bedellcristin.com

This article is intended to provide a brief commentary in relation to the subject named. It is not intended to be comprehensive nor to provide legal advice and should not be acted or relied upon as so doing. Professional advice appropriate to the specific situation should always be obtained. If further information or specific advice is required, please contact Bedell Cristin.