By Ashley Le Feuvre, Volaw Fund Services Group – After a lengthy period of negotiation and development the European Union’s (the “EU”) Alternative Investment Fund Managers Directive (“AIFMD” or the “Directive”) finally comes into force on 22 July 2013. Following implementation and in order to continue marketing their funds to European investors, managers (“AIFMs”) of European domiciled investment funds must fully comply with the Directive.
Managers with funds domiciled in countries such as Jersey, which are defined in the Directive as “third countries” will, subject to certain conditions, continue being able to market their non-EU funds to European investors under the separate, private placement regimes of the individual European countries, which will remain in place until at least 2018. Utilisation of the private placement regimes will involve compliance with new transparency and disclosure requirements under the Directive but these will be significantly less onerous than maintaining full compliance with AIFMD.
In April of this year, Jersey introduced specific regulations mirroring AIFMD, to ensure Jersey will comply where relevant with all criteria set out in AIFMD. The regulations also pave the way for Jersey structures to benefit from the proposed “passporting” regime for alternative investment funds expected in July 2015, at which time European-wide marketing passports will potentially become available to non-EU based AIFMs.
The regulations enacted in April grant Jersey’s financial services regulator, the Jersey Financial Services Commission (the “JFSC”) coverage over all Jersey fund types for AIFMD purposes, including private structures, which were not previously regulated. This enabled a cooperation agreement to be signed with ESMA, the European Securities and Markets Authority on 30 May 2013. ESMA had negotiated the agreement on behalf of the 27 EU Member State securities regulators (including Croatia who acceded to the European Union after this date), as well as with the authorities from Iceland, Liechtenstein and Norway which, with the EU, forms the European Economic Area (the “EEA”). Bilateral agreements will now be put in place between Jersey and each individual EEA country.
The signing of the cooperation agreement means that after 22 July, AIFMs of Jersey domiciled funds may market their funds into those European countries with which the bilateral agreements are signed. It will be necessary though for such AIFMs to carefully consider the private placement requirements in each of the individual EEA countries from which they intend sourcing investment.
It is not yet confirmed which EEA countries have already signed cooperation agreements with Jersey. However, it has been confirmed by the JFSC that substantial inroads have been made with the execution of such agreements.
There are no changes to the Jersey regulations covering those existing or future fund products and structures that are not marketed into Europe.
Regulations for Jersey funds
The definition of an alternative investment fund (an “AIF”) under the Directive is broader than the equivalent in Jersey’s historic fund legislation, potentially covering all types of Jersey fund structure, including those that have previously been outside the scope of the JFSC’s licensing and oversight regime. Jersey’s new AIFMD-specific regulation brings such funds into scope for AIFMD purposes, meaning that the primary legislation now governing the establishment and operation of investment funds in Jersey is as follows:
• Collective Investment Funds (Jersey) Law 1988, as amended (“CIF”)
• Control of Borrowing (Jersey) Order 1958, as amended (“COBO”)
• Alternative Investment Funds (Jersey) Regulations 2012 (“AIF Regulations”)
• Financial Services (Jersey) Law 1998, as amended (the “FSJL”)
There are also a series of further orders and regulations, which will supplement the above, together with amended and new codes of practice, which are discussed in more detail below.
From 22 July new AIFs being marketed to EEA investors will be required to seek a certificate under the AIF Regulations. However, there will be an exemption for those existing AIFs already holding certificates under CIF from seeking a separate AIF certificate, provided they inform the JFSC that they intend marketing into Europe and receive a written consent. This exemption will apply to expert funds (operated under the Jersey Expert Funds Guide); Jersey Listed Funds and other unclassified funds licensed under CIF.
Additional AIFMD-specific regulations will be enacted that further define an alternative investment fund for Jersey purposes. This will capture the definition in the Directive and extend this to include those funds established under COBO and marketed into Europe. This includes very private funds (those with fifteen or fewer investors), COBO only funds (having fewer than fifty investors) and Jersey Private Placement Funds (having fewer than fifty sophisticated investors), each of which were not required previously to have a regulatory license but will now need to seek an AIF Certificate in order to market into the EEA.
Further regulation will also be put in place to provide the AIF exemption for CIF licensed funds referred to previously.
The existing CIF Codes of Practice will be updated to cross-refer to new AIF Codes of Practice (the “AIF Codes”), which will be implemented on 22 July.
Jersey unregulated funds
Jersey has historically operated two types of unregulated fund structure; i) unregulated eligible investor funds; and ii) unregulated exchange-traded funds. These funds are exempted from authorisation and supervision by the JFSC. As a result of the wide European definition of an alternative investment fund and the requirement for EEA marketed Jersey funds to be regulated by the JFSC, it will not be possible to market a Jersey unregulated fund in the EEA after 22 July.
To address this, a new form of Jersey eligible investor fund product has been created, the Jersey Eligible Investor Fund (“Jersey EIF”). In order to continue accessing European markets, existing unregulated eligible investor funds funds will be able to convert to a Jersey EIF under the Jersey Eligible Investor Fund Guide and existing unregulated exchange-traded funds may convert to a Listed Fund under the Jersey Listed Fund Guide.
The historic unregulated fund types will be retained and may still be utilised by those funds not being marketed in the EEA.
Non-Jersey domiciled funds and their functionaries
It is quite common for Jersey general partners to operate non-Jersey limited partnerships. It was initially expected that such non-Jersey funds would be required to seek a certificate under the AIF Regulations. However, the JFSC has recently confirmed that this will no longer be the case and the Jersey regulator will not take responsibility for any oversight of non-Jersey domiciled funds.
It will be necessary, however, for Jersey functionaries to such funds, including general partners and managers, to seek the new class of AIF Services Business license under the FSJL and to follow the AIF Codes.
The Position for functionaries to Jersey AIFs
Jersey-based functionaries that provide services to funds may be licenced for various categories of fund services business (“FSB”) under FSJL. A new category of “AIF Services Business” will be created for those functionaries providing services to AIFs marketing in Europe. Mirroring the CIF exemption, however, there will also be an exemption for FSB functionaries, including AIFMs, from registering also as AIF Services Businesses. There will also be an exemption for AIFMs with an AIF Services Business license from any requirement to obtain an investment business license under FSJL, as is currently the case for FSB license holders.
From 22 July 2013 a new form of the Jersey FSB Codes of Practice will be adopted, which have been updated to reflect the requirements of the Directive and to cross-refer to the new AIF Codes. Jersey-based AIFMs will have the ability to adopt in full the AIF Codes, which are designed to comply with the full passporting requirements of the AIFMD, or alternatively, until 2018 at least, they may simply adopt those parts which cover the requirements for marketing under the private placement regimes.
A new class of license is also being created to apply to those Jersey entities that provide depository services to AIFs. Provision of such services will be covered by the amended FSB Codes of Practice and the AIF Codes.
As an aside it will also be very important for Jersey-based AIFMs of AIFs to ensure that they organise themselves appropriately, to avoid being deemed a “letterbox entity” under the Directive.
What should managers of Jersey Funds do to prepare for implementation?
The marketing aspects of the Directive should not apply to those closed-ended funds that have concluded their marketing activity and have confirmed commitments. However, AIFMs will need to be mindful of the Directive’s provisions covering acquisition of investments in the EU which apply equally to EU and non-EU managers and their funds, whether EU-based or not.
Should an AIFM wish to market their fund into EU member states then the process is relatively straightforward. Initially, the AIFM will need to determine if it is a “Sub-Threshold” manager, in which case lighter provisions will apply. There is a prescribed criteria for making such determination. If the AIFM is already regulated as a FSB under FSJL, then provided it is not carrying out any additional category of FSB, the AIFM will be able to utilise the ‘grandfathering’ proposals to move and allow existing regulated AIFMs to automatically register under FSJL as conducting AIF Services Business. Therefore, the Manager merely needs to notify the JFSC that they are carrying out fund services business in relation to an AIF and the EEA countries in which they are carrying out the same and it will be automatically registered. However, this only permits the AIFM to market AIFs in those EEA countries that have entered into a cooperation agreement with Jersey.
The AIFM then needs to decide the level of compliance that meets its requirements. An AIFM is at liberty to adopt the full AIF Codes in preparation for passporting when the same comes into force or to adopt those parts of the AIF Codes, which set out the minimum requirements under the Directive for private placement.
In order to comply partially and facilitate private placement an AIFM will need to comply fully with paragraphs 1, 2.3, 3 and 4 of section 1 and all of sections 3 and 4 of the AIF Codes. These sections provide as follows:
• Section 1, Paragraph 1: Scope (Article 2 of Level 1 AIFM Directive).
• Section 1, Paragraph 2.3: Procedures for monitoring on an on-going basis the value of assets.
• Section 1, Paragraph 3: Determination of the AIFM.
• Section 1, Paragraph 4: Conditions for Conducting AIF Business (the granting of a certificate by the JFSC),
• Section 3: Transparency Requirements. This provides for an annual report to the JFSC and sets out the criteria therefore. The criteria for disclosures to investors both in the offer documents (which will require a review of the existing offering documents in order to ascertain compliance therewith) and on an on-going basis.
• Section 4: which applies to AIFMs managing certain kinds of AIF and sets out procedures in relation thereto.
In addition to an AIFM notifying the JFSC, the AIF itself will also need to inform the JFSC that it will be marketed in Europe, including which countries it is to be marketed in. The JFSC will automatically grant the relevant certificate for the funds to be an AIF and the funds themselves will then need to comply with sections 3 and 4 of the AIF Codes.
In addition to the above, it is important to note that individual EEA states may impose extra requirements upon the AIF and AIFM before they are allowed to market the AIF in that member state.
Therefore the practical steps that need to be completed prior to the implementation date are as follows:
• A compliance review of any existing or proposed funds against the relevant sections of the AIF Codes, to consider current adherence thereto and where relevant, and whether it is possible for the funds to adhere to the AIF Codes (given that derogation is unlikely to be allowed).
• A review of the offering documents against the requirements of Section 4 of the AIF Codes.
• Consider any requirement to convert or alter an existing AIF structure that is actively marketing into the EEA.
• The implementation of procedures to ensure that the reporting requirements under Section 3 of the AIF Codes can be adhered to.
• Confirmation with the Commission that a cooperation agreement has been entered into with the relevant member state.
• Obtaining legal advice in the relevant member states as to any additional requirements by such member states.