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Jersey aims to challenge Cayman with unregulated funds regime

Amid strong competition among jurisdictions across Europe to offer more lightly regulated regimes for alternative funds, Jersey is seeking to set itself apart from the crowd with the launch of a new Unregulated Funds regime that simply requires eligible funds to notify the Jersey Financial Services Commission of their launch, not to seek approval.

According to Geoff Cook, chief executive of the island's financial industry promotional body Jersey Finance, the regime was drawn up on the basis of feedback from fund sponsors that 'simplicity, certainty and speed' was paramount in establishing alternative funds aimed at the most sophisticated investors.

'This is a significant step forwards for the funds industry in Jersey and is seen as a natural progression in our goal to become the European jurisdiction of choice for the alternative funds sector,' Cook says.

'Promoters of funds for high net worth individuals, sophisticated investors and institutions will have greater flexibility when choosing Jersey and will be able to structure their funds to suit both commercial and tax requirements.'

Cook believes that the unregulated fund regime will allow Jersey to challenge for some of the business that currently goers to the Cayman Islands, home to at least half of the world's hedge funds. 'We can offer an alternative to Cayman that offers the same ease of establishment but that is more convenient for European fund promoters,' he says.

The Unregulated Funds regime is expected to be introduced at the beginning of next year as part of a comprehensive revamp of Jersey's regulatory legislation governing funds, some of which dates back almost half as century.

At the end of June Jersey serviced fund assets totalling GBP210.4bn, just under half of which is in traditional long-only vehicles. It also had 234 private equity and venture capital funds with assets of GBP16bn, 134 property funds with GBP31.5bn, 378 hedge and absolute funds with GBP50.9bn in assets, and 98 other specialist funds including securitisation and derivatives vehicles with GBP11.5bn.

The regime will comprise two categories, Unregulated Eligible Investor Funds, which will carry a minimum initial investment of USD1m, and Unregulated Exchange Traded Funds, is designed for funds that are regulated through listing on a stock exchange and for which additional supervision in Jersey is therefore deemed superfluous.

Fund industry professionals in Jersey believe the new categories will appeal to promoters including hedge fund managers and financial institutions for which an unregulated product is attractive, often because speed in bringing the product to market is essential.

The new regime was drawn up by the Jersey Finance Working Group, chaired by Rupert Walker, who says: 'Fro the feedback we received, we found that there were many factors involved in the decision on a fund's domicile, of which regulation is only one. Also important is familiarity with the establishment process, as well as the proximity of the domicile to the sponsor and functionaries.

'The clients said that Jersey had room for improvement in terms of certainty, speed and simplicity. One option was to do nothing, but we concluded that there was a gap in the market for an unregulated fund product.'

Walker added: 'There is a lot of movement right now at the lightly regulated end of the market, and it made no sense to offer an even more lightly regulated vehicle. We decided it was more honest to offer products that are unregulated and openly advertise that fact.'

There is no requirement on unregulated funds to use a Jersey-based administrator, directors or custodian, although Walker points out that there is no reason not to, given the depth of expertise on the island in administering complex and sophisticated fund products. 'Using a Jersey administrator would also establish a stronger connection with the islands when determining the jurisdiction of courts abroad over a fund,' he says.

Richard Thomas, a partner at law firm Ogier, chairman of the Jersey Funds Association and another member of the working party, says: 'We have been taking note of the regulatory changes that have been introduced in other jurisdictions, and following extensive consultation with the JFSC are now ready with a new element which has been missing from the Jersey product range in the form of unregulated funds.'

The Unregulated Eligible Investor Fund carries a minimum investment criterion of USD1m, which can be waived for a sophisticated investor. Both closed-ended and open-ended funds are eligible for the regime, and they can be structured using companies, unit trusts and limited partnerships.

Unlike Cayman-domiciled mutual funds, there is no requirement for a local audit sign-off. Open-ended Unregulated Eligible Investor Funds are permitted to seek a listing, but only on stock exchanges that allow transfer restrictions. Unregulated Exchange Traded Funds have a free choice of exchanges on which to list. There are no restrictions on the type of investor that may buy shares in these funds, although they will come with a risk warning.

Thomas says the new category is designed to complement Jersey's existing range of regulated funds including Expert Funds, introduced by the commission in 2004 to kick-start the island's alternative investment services industry, and Listed Funds.

Unregulated Funds will be only suitable for professional and expert investors or those who have taken appropriate professional advice. Investment warnings will be prominent to indicate that these funds are unregulated, and existing funds will not be able to transfer to the new regime.

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