By Caroline Chan, Ogier – With 40 years’ experience, Guernsey has developed into a leading jurisdiction for the establishment of investment funds. For example, Guernsey remains the leader in non-UK listings on the London Stock Exchange, in terms of the number of its companies listed/traded on the LSE markets. At the end of last year Guernsey had 122 vehicles listed on the combined markets of the LSE.
Significant growth in the local funds industry has also been achieved in recent years. This can be attributed in part to the policies of the Guernsey authorities and the flexibility of the regulatory system, together with the high quality of services available in Guernsey in relation to fund management, administration and custody and strong legal, tax and accounting expertise.
The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended (POI Law) sets up a modern statutory structure for the regulation and administration of investment funds in Guernsey. It provides a framework for investor protection whilst retaining the flexibility to adapt quickly to market conditions. The Guernsey Financial Services Commission (GFSC) is always willing to entertain applications from promoters of the first rank who have a demonstrable and favourable track record in the establishment and/or management of investment funds.
Funds and persons providing services to funds in Guernsey are regulated by the POI Law. Funds established in Guernsey (whether open-ended or closed-ended) must be authorised or registered before issuing shares, units or limited partnership interests. Fund service providers carrying on their business in Guernsey require a licence.
Rules made under the POI Law govern disclosure requirements and the operation of the various types and classes of investment funds. Save in respect of Class A authorised open-ended schemes, the Guernsey rules are relatively non-prescriptive, relying instead on disclosure. For example, they do not contain any valuation rules, nor do they prescribe any specific investment or leverage parameters. Further, licensee conduct of business rules and capital adequacy rules apply to fund service providers.
Type of fund structures available
The types of investment vehicle most often used in Guernsey are closed-ended and open-ended investment companies, unit trusts and closed-ended limited partnerships. A company in Guernsey may also be established as a protected cell company, which offers legal segregation at cell level; or as an incorporated cell company, with one or more incorporated cells, which are each companies.
Types and classes of fund
An investment fund may be established as open-ended or closed-ended. An open-ended fund is essentially one where investors are entitled to redeem their holdings at a price related to net asset value. A closed-ended fund is one where investors do not have such entitlement, although redemptions may be made at the discretion of the fund entity.
All Guernsey funds require a Guernsey administrator (designated manager). All open-ended funds also require a Guernsey custodian (designated custodian), save that for hedge funds, a prime broker, regulated in an acceptable jurisdiction and having substantial net worth, may be appointed, subject to certain conditions.
An open-ended fund will be authorised under one of three categories: Class A, Class B or Class Q; or be registered. A closed-ended fund may be either authorised or registered.
Authorised (i.e. regulated) funds are subject to ongoing supervision by the GFSC. Registered funds are subject to a lighter touch regulatory regime.
The Guernsey regime is flexible enough to cater for all types of investment fund and there is no need for specific fund products in terms of the potential number of investors. There are, however, minimum investment or investor qualification restrictions in relation to Class Q schemes or authorised funds established as QIFs (Qualifying Investor Funds), as explained further below.
An open-ended authorised fund may be established as Class A, Class B or Class Q.
Class A schemes, which may be marketed more widely in certain jurisdictions, are subject to a higher level of regulation in their operations than Class B or Class Q schemes and are aimed at the retail end of the market.
The rules that govern Class B schemes are designed to be relatively flexible, with reliance placed on disclosure. The GFSC may derogate from any of the requirements of the Class B scheme rules if they are satisfied that investor protection will not be compromised. Because of their flexibility, Class B schemes have proved to be the most popular and are utilised for various purposes, including hedge funds.
Class Q schemes are available to ‘qualified professional investors’ (which definition includes a public authority or person satisfying the relevant minimum net assets or net worth criteria). The Class Q scheme rules may be similarly derogated from and greater discretion is permitted, with the emphasis again on disclosure.
An authorised closed-ended fund is subject to certain specified disclosure requirements, but is not required to appoint a Guernsey resident custodian. The Authorised Closed-ended Investment Schemes Rules 2008 apply.
Qualifying Investor Funds
A fund may be established as a QIF (for example, a Class B QIF or an authorised closed-ended QIF), enabling the promoter to take advantage of a fast track application process (see further below). Certain conditions apply. Principally, the investors in the fund are restricted to categories of persons deemed to be able to evaluate the risks involved, including certain public bodies, knowledgeable employees and experienced investors. In practice, the easiest way to qualify is by imposing a minimum investment of USD100,000.
As an alternative to an authorised fund, open-ended and closed-ended funds may be registered. A 3 business day fast track application process applies. Registered funds are subject to the Registered Collective Investment Scheme Rules 2008 and the Prospectus Rules 2008, which contain the relevant disclosure requirements.
As noted, a Guernsey resident administrator is required for all Guernsey registered funds. A registered open-ended fund also requires a Guernsey licensed custodian.
Although registered funds may not be offered to the public in Guernsey, they may be offered to appropriately licensed Guernsey entities.
Fund application process
A standard application process applies for authorised funds, unless established as a QIF. This involves three stages: outline authorisation, interim authorisation and formal authorisation. It is important to note that the relevant Guernsey service providers (administrator and custodian, as applicable) must be on board at the outset, as they will be required to support the application. In addition, if the promoter is not known to the GFSC, a preliminary due diligence stage will need to be completed by the GFSC (the New Promoter process), before a formal fund application is submitted. If this process is undertaken this may shorten the timeframe for the fund application process itself.
At outline authorisation stage the GFSC will consider basic information regarding the structure of the fund, its investment activities and the parties involved. At the interim stage, the application fee is paid and the GFSC reviews a copy of the draft fund offer document, which must meet the applicable disclosure requirements. Final versions of the offer document, constitutive documents and material agreements are then filed at the final stage in order for formal authorisation to be granted. The whole process can typically take around 6 to 8 weeks.
A fast track application process applies for registered funds. Registration will be granted 3 business days after filing completed application documents with the GFSC. Instead of reviewing the fund documentation, the GFSC relies on certain warranties to be given by the fund administrator, which conducts appropriate due diligence and confirms certain matters to the GFSC, including in relation to the propriety and track record of the fund promoter.
A similar fast track application process applies for a fund to be established as a QIF.
Fund directors, together with directors, managers and controllers of a promoter, are each required to complete a personal questionnaire form (Form PQ) or update information already held by the GFSC by a Form PD.
The Guernsey service providers to be appointed will normally already hold the necessary licence. A Guernsey resident investment manager is not a requirement for a Guernsey investment fund. However, if a new manager (including, for example, a general partner) is to be established in Guernsey by the fund promoter, it too will require a licence under the POI Law. A licence application process may be run concurrently with a fund application and the process typically takes between 3 to 4 weeks to complete. However, the GFSC will entertain a fast track POI Law licence application for a general partner or an entity proposing to carry out management services in Guernsey, in relation to a fast track fund application (for registered funds or QIFs). The GFSC is expected to issue a licence using the fast track process within 10 business days from submission of all requisite documents.
Stock Exchange listings
Investment funds established in Guernsey are eligible for listing on many of the major international stock exchanges. They may also be listed on the Channel Islands Stock Exchange. A stock exchange listing will add further disclosure requirements.
With certain exceptions, all Guernsey companies now pay a standard rate of 0% income tax on their profits. A Guernsey investment fund continues to be eligible to apply for exempt tax status, which may be renewed annually upon payment of £600. There is no capital gains tax in Guernsey, nor is there any corporation tax or stamp duty payable on the transfer of shares or units in an investment fund.
Alternative Investment Fund Manager Directive (AIFMD)
Various steps have been taken to ensure that business in Guernsey may continue as usual following transposition of the AIFMD into EU member state national law in July 2013. The GFSC has announced that it will operate a dual regime. The existing investment funds regulatory regime will continue unchanged. However, it will be supplemented by an AIFMD compliant opt-in regime for those funds and managers finding themselves within scope of AIFMD.
On 30 May 2013 the European Securities and Markets Authority (ESMA) announced that it had approved the cooperation arrangements on behalf of securities regulators from the 27 EU member states, Croatia and the wider European Area (Iceland, Liechtenstein and Norway) to be put in place with their counterparts in 34 Third Countries, including the GFSC. This means that the GFSC may now take steps to sign up a bilateral agreement with each of the individual EU securities regulators, so that Guernsey funds may be marketed in that country post July 2013.