Guernsey benefits from new regulatory pragmatism
By Peter Franks, partner, Ernst & Young Guernsey
The new Qualifying Investor Fund (QIF) regime is perhaps important less in its own right - many hedge fund promoters may not find it necessary to take advantage of a guaranteed three-day authorisation turnaround - than in what it says about Guernsey as a financial centre with a pragmatic and flexible regulatory environment.
Guernsey offers many forms of investment vehicle including unit trusts, limited partnerships, companies and protected cell companies where the assets and liabilities of each cell/sub-fund are legally separated.
Guernsey has both closed-ended funds set up under the Control of Borrowing Ordinance, while three types of open-ended fund may be set up under the Protection of Investors Law: Class A, Class B and Class Q.
Class A funds are roughly equivalent to UCITS and are designed for the retail market, while Class B and Class Q funds are hedge fund vehicles. When Class Q was launched by the GFSC in 1998, Guernsey became one of the first jurisdictions in the world to set up a qualifying investor fund structure.
The investment rules are slightly more restrictive for Class B funds, and greater definition of the investment strategy is required in the prospectus. By contrast, Class Q offers greater investment discretion, the rules focus on disclosure of risk to the investor, and there's no minimum investment.
What the QIF regime does is to put a new framework around the authorisation process for the three classes of fund where investment is limited to what are known as qualifying investors.
The concept of a qualifying investor covers the traditional professional investor who has a business trading in the market. But it also covers the experienced investor, defined as someone who has carried out transactions in derivatives, open-ended funds or closed-ended funds over the course of the past 12 months, and who thus understands the risks of the investment they are making. Anyone acting on the advice of an investment adviser may also invest in a QIF, as can a "knowledgable employee", for example an employee of a big investment bank who is fully aware of the risks of securities.
However, you must have a framework in place to ensure that in the future, only qualifying investors enter the fund. Some promoters may well prefer the flexibility of a Class B scheme unless they have a restricted group of investors to whom they want to market in the future. The control processes required for a QIF will constitute an extra burden for the fund and the administrator going forward.
For a similar reason, it may not be possible to list QIFs on a stock exchange because you can't really restrict who buys your shares.
By focusing on whether the client understands the risks they are taking on, Guernsey has gone a step further than other jurisdictions that stipulate a minimum net wealth for investors. Instead, we offer a framework that lets the manager and promoter define what they see as the minimum requirement.
The new rules should encourage institutional business in particular to come to Guernsey, and eases concern that other jurisdictions had stolen a march on the island. While it's not yet clear how much business the QIF regime will attract, it already underlines that Guernsey enjoys a flexible and pragmatic environment.
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