There are approximately 1,477 funds serviced in Jersey dealing with i) private equity ii) real estate iii) distressed debt and iv) infrastructure sectors. The value of assets administered and serviced by the Jersey funds sector amounts to £200 billion.
An increasingly common trend is the migration of manager teams to Jersey.
- Funds in Jersey are typically established as: i) Companies (single class, multi-class, umbrella or protected cell or incorporated cell) ii) Limited partnerships (including incorporated limited partnerships (ILPs) and separate limited partnerships (SLPs)) iii) Unit trusts and iv) Hedge funds (usually prefer a corporate structure, except where another vehicle is used to achieve tax transparency from the perspective of one or more onshore jurisdictions);
- A fund of any legal structure can be open-ended or closed-ended;
- Recognized funds must be structured as companies or unit trusts;
- These structures are approved by the JFSC under COBO and are not regulated by the JFSC on an ongoing basis;
- For companies, there are no further requirements after the establishment of the fund vehicle, which can be incorporated on a “same day” basis. For a unit trust or limited partnership, the required JFSC consent is generally obtained by letter within a few days and without the need to submit documents.
- In recent years, the Companies (Jersey) Law 1991 has been modified to accommodate improvements for the funds industry (particularly companies with a fluctuating membership), such as:
- Introducing no par value companies (that is, companies the shares of which do not have a nominal value).
- Allowing companies to hold treasury shares.
- Simplifying the making of income and capital distributions, generally permitting them from any source, subject to the company’s solvency.
- The use of corporate directors.
- The abolition of financial assistance restrictions.
- Permitting the merger of companies and the migration of companies to Jersey from other jurisdictions.
- Investors’ interests can be represented by shares (which can be traded uncertificated) or by depository receipts or certificates.
- All companies formed under Jersey law have separate legal personality. Management and control is vested in a board of directors although, particularly in the case of open-ended companies, it is often the case that investment management will be delegated to a management company;
- Jersey fund companies which are resident for tax purposes in Jersey will be subject to income tax in Jersey at a rate of zero per cent;
- Dividends on shares and redemption proceeds may be paid by the fund company without withholding or deduction for or on account of Jersey income tax, and holders of shares (other than residents of Jersey) will not be subject to any tax in Jersey in respect of the holding, sale or other disposition of such shares;
- For special purpose companies established in Jersey, exemptions are usually available for general partners and trustees, and a number of exemptions are available for investment managers, including both for “connected companies” and where the fund is a “professional investor regulated scheme”, which requires only that the investor sign a simple specified form of investment warning and either i) qualify as a “professional investor” (which includes “a person whose ordinary activities involve the person in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of the person’s business or who it is reasonable to expect will acquire, hold, arrange or dispose of investments (as principal or agent) for the purposes of that business) or ii) make a minimum investment of £250,000 or currency equivalent.
- These are companies which can create cells separate from themselves, each of which can hold separate assets (and liabilities):
- Protected cell companies (PCCs) – a “second generation” protected cell company that represents the first significant advance from the PCC model used in other jurisdictions (for example, a cell in a Jersey PCC can invest in other cells within the same PCC) – the PCC and its cells together form a single company, but the Companies Law provides for the legal segregation of the assets of the PCC and of each of its cells;
- Incorporated cell companies (ICCs) – a true innovation which provides unmatched segregation of liabilities and flexibility. Each cell of an ICC is a separate company;
- The ICC and the PCC have found favour as fund vehicles. Statute clearly provides for the segregated nature of the cellular structure, giving legal certainty. Over 400 protected cells and 250 incorporated cells have now been registered. Given their ring-fenced structure, PCCs and ICCs are particularly suitable as hedge fund vehicles;
- The cells all share the same registered office and company secretary, but can have different boards of directors, different capital structures and different articles of association;
- PCCs and ICCs can offer significant advantages and recently introduced changes further increase their flexibility, while maintaining the “bankruptcy remoteness” of each cell.
- Limited partnerships are established under the Limited Partnerships (Jersey) Law 1994 (LP Law);
- The liability of limited partners for the debts of the partnership cannot extend beyond their agreed capital contributions, provided their activity does not constitute management under the LP Law. The LP Law provides a safe harbour for certain activities that would otherwise constitute management and permits the limited partner a greater degree of involvement in the management of a limited partnership than some other jurisdictions;
- Both ILPs and SLPs (introduced in Jersey in 2011 by the Incorporated Limited Partnerships (Jersey) Law 2011 and the Separate Limited Partnerships (Jersey) Law 2011 respectively) have separate legal personalities (allowing each form of limited partnership, for example, to own assets, and sue and be sued in its own name). An ILP is also a body corporate (SLPs do not have this status). These entities provide greater flexibility for fund managers in structuring their fund’s general partner and carried interest vehicle, particularly where the fund is an English limited partnership;
- Limited partnerships (“LPs”) are now the favoured vehicles for closed-ended private equity funds and can be established in three ways:
- “Traditional” Jersey LPs (“JLPs”), which are similar to English LPs, are established under the Limited Partnerships (Jersey) Law 1994;
- “Separate” LPs (“SLPs”), which have separate legal personality and are therefore similar to Scottish LPs, are established under the Separate Limited Partnerships (Jersey) Law 2011;
- “Incorporated” LPs (“ILPs”), which have separate legal personality and are bodies corporate, are established under the Incorporated Limited Partnerships (Jersey) Law 2011.
- A JLP/SLP/ILP is usually created by a written partnership agreement which is signed after the LP has been issued with a certificate of registration. A JLP/SLP/ILP consists of one or more general partners who are jointly and severally liable for all the debts of the partnership and one or more limited partners, who are not liable for any debts of the partnership beyond the amounts they contribute or agree to contribute;
- Among the features which make these Jersey limited partnerships attractive to fund promoters as fund vehicles, GP vehicles and carried interest vehicles, are the following:
- JLPs are treated as transparent for all UK tax purposes and counsel’s advice is that SLPs and ILPs will receive the same treatment;
- Jersey LPs are “stackable” – a JLP/SLP/ILP can act as a general partner or limited partner to another JLP/SLP/ILP (or any foreign LP) without prejudicing the limited liability of its limited partners. This makes them ideal for carried interest and other profit distribution structures;
- A JLP/SLP/ILP can distribute both capital and profits without formality provided that it is solvent before and after the distribution;
- The names of the limited partners do not appear on any register which is open to public inspection (public information is limited to the limited partnership’s name and registered office, the general partner’s place of incorporation and registered/principal office and the term, if any, for which the LP is to exist);
- Subject to any requirements of the LP’s regulatory category no Jersey service-providers are required; the general partner is not required to be a Jersey company, be resident in Jersey or have Jersey directors; there is no on-going registration charge, no requirement to file any annual return or accounts and no audit requirement (where the LP is regulated its accounts must be audited but do not need to comply with any GAAP);
- A limited partner may have greater involvement in management than in some other jurisdictions. There is no limit on the number of limited partners who may be members of a limited partnership. The general partner need not make any capital contribution to the limited partnership;
- There is great flexibility in defining the extent of the limited partners’ rights (including rights of redemption), any rights of any partner(s) to receive carried interest, profit share and/or other payments and the scope of any restrictions on the general partner’s discretion;
- For SLPs and ILPs, the laws under which they are established have been tailored to reinforce the existence of separate legal personality and body corporate status (e.g. ILPs have perpetual succession and detailed winding up provisions, similar to a Jersey company).
- A unit trust is not a separate legal entity but a trust arrangement under which the legal ownership of the scheme’s assets is vested in a trustee who holds those assets on trust for the benefit of unitholders. A unit trust is constituted by an instrument of trust (in the case of an open-ended structure, the parties to the instrument are usually a manager and a trustee), which regulates:
- The appointment and retirement of the trustee and manager;
- Their respective duties;
- The distribution or accumulation of trust income;
- Investment powers;
- The applicable trusts legislation in Jersey is the Trusts (Jersey) Law 1984. In addition to preserving confidentiality, and the relative flexibility of trusts, there can be significant tax advantages i.e. funds established as unit trusts are exempt from tax on foreign income and bank interest (either automatically or, where there are Jersey resident individual unitholders, by application);
- Contracts in relation to the management and administration of the trust fund will be entered into by the manager, whereas the trustee will enter into contracts in relation to the assets themselves, such as bank deposits, borrowings and security agreements;
- There is no limit to the number of investors;
- Unitholders who are not resident for income tax purposes in Jersey are not subject to taxation in Jersey in respect of any income or gains arising in respect of units held by them (other than any Jersey source income excluding bank deposit interest);
- Subject to the requirements applicable to the fund’s regulatory category, the service providers to a Jersey fund can be (i) an established Jersey service provider; and/or (ii) a “special purpose” Jersey vehicle which is established to act as manager, investment manager/adviser, general partner or trustee to one or more Jersey or non-Jersey funds; and/or (iii) any other (Jersey or non-Jersey) person or entity.
- In particular, alternative asset classes and hedge funds have provided growth to the overall funds sector in Jersey. When combined with the relocation of hedge fund managers to Jersey and changes in international funds regulation, there is an increasing belief that this will enable Jersey to be a key destination in the hedge funds global community;
- The introduction of the unregulated funds regime in February 2008 was aimed specifically at the hedge and alternative asset funds sectors. These regimes have become particularly attractive to European fund managers and promoters;
- As new funds are launched and existing funds restructured, terms are drifting, once again, to a more investor-friendly position, including lower management fees, higher hurdle rate and no-fault divorces. Interestingly, Jersey-based litigation funds are making litigation in the UK for corporations more accessible;
- The following categories are generally used for hedge funds:
- Eligible investor funds and exchange traded funds;
- Expert funds and listed funds;
- Very private schemes;
- Other private and public funds;
- Unregulated funds;
- There are no statutory restrictions on participants redeeming their interests, but such restrictions can be imposed by fund terms. All Jersey fund vehicles have great flexibility in distributing income and returning capital to investors (through redemption or distribution), subject to the solvency of the fund;
- For transferring stake to third parties, the fund documents must make provision to prevent non-eligible investors acquiring interests in eligible investor funds or non-expert investors acquiring interests in expert funds. No other statutory restrictions apply, but more can be imposed by fund terms;
- Reform to the current legislation in relation to fund/investment managers has been proposed which enables the hedge fund managers to operate managed accounts without the need for further regulation.
- Public funds are those offered to more than 50 people and no limit to the number of investors. Open-ended public funds can be established as i) open-ended collective investment funds (OCIFs) ii) expert funds iii) eligible investor funds. These are funds with no regulatory supervision and no investment or borrowing restrictions, which are available to 11 categories of “eligible investors”. These are not retail funds and can be used for hedge funds;
- All Jersey public funds must apply to the Commission to be issued with a fund certificate under the CIF Law. Personal questionnaires for the directors of a certified public fund vehicle should be submitted electronically to the Commission as early as practicable;
- No restrictions are imposed on public funds, except that the fund documents for expert funds and eligible investor funds must make provision to prevent non-expert investors or non-eligible investors (as the case may be) acquiring interests in the fund. Public funds often have transfer restrictions for onshore tax and/or regulatory reasons (subject to any applicable stock exchange rules on free transferability).
Open-ended retail funds
- Jersey has a large number of open-ended funds that are retail or semi-retail in nature and these represent a significant part of Jersey’s funds under management and funds under administration;
- Jersey law does not prescribe who can market retail funds. However, a distributor which carries on business (or is incorporated) in Jersey must be registered with the Commission under the FSJ Law;
- There are no applicable restrictions for marketing to non-Jersey retail investors. Investor qualification rules apply to expert funds and eligible investor funds. A Jersey distributor may be needed to market non-domiciled funds to Jersey investors, unless a non-Jersey distributor which falls within an appropriate exemption to the FSJ Law has been appointed;
- Service providers to public funds that carry on business in or are incorporated in Jersey must (unless an exemption applies) be registered under the FSJ Law and comply with the FSJ Codes of Practice, including the codes relating to:
- Investment managers;
- Investment advisers;
- The manager of a recognized fund must obtain a functionary permit under the CIF Law and comply with the provisions set out in the RF Functionary Permit Order;
- The OCIF Guide generally requires a trustee or custodian to be appointed to hold the assets of the fund. It must be:
- A company that is a member of a major banking or insurance group of companies, or any other institution which is acceptable to the Commission;
- A company incorporated and with an established place of business in Jersey, or the Jersey branch of a non-Jersey bank;
- Independently audited and have i) an issued and paid-up capital and non-distributable capital reserves of at least GB£250,000 ii) net shareholder funds of at least GB£250,000 and iii) Independent of the manager;
- Reporting requirements for these funds include at least two reports published and distributed to holders in relation to each financial year, with the annual statements audited. Holders must be notified of any changes to the offering or constitutive documents (unless there is no prejudice to the holders’ interests). The latest selling and redemption prices and NAV must be available to all holders.
- A fund, whether established as a company, unit trust or limited partnership, is not generally subject to any local Jersey tax. In particular, there is no capital gains, capital transfer, wealth or inheritance tax payable in relation to the issue or realisation of investments in a Jersey investment fund (unless the fund invests in Jersey property or buildings). In addition, no corporation tax, profits tax or stamp duty is payable. Funds structured as unit trusts and limited partnerships are fully exempt from tax; fund companies are subject to a 0% rate but can become fully exempt;
- Jersey resident administrators and custodians are generally liable to Jersey income tax at the rate of 10%. However, Jersey-administered entities, such as general partners and managers that provide services to a fund, are taxed at 0%;
- Jersey-resident investors must pay tax at up to 20% on income received from a fund. There is no capital gains tax in Jersey;
- Non-resident investors are generally not subject to Jersey tax;
- Although not in the EU, Jersey, in common with other jurisdictions, has voluntarily agreed to apply the same or equivalent measures to those in Directive 2003/48/EC on taxation of savings income in the form of interest payments (Tax Savings Directive). It has elected to implement the withholding tax option during the transitional period. However, these measures are generally not applicable to Jersey funds.
Closed-ended retail funds
- For Jersey regulatory purposes, a closed-ended fund is a fund that is not open for redemptions at the option of holders of securities. Some of the same regulatory categories apply to open-ended and closed-ended funds, and the regulatory landscape of each is therefore sometimes similar. Funds that fall within the listed fund, exchange traded fund and private placement fund categories must be closed-ended;
- There are no requirements, other than for companies to file annual audited financial statements under the Companies (Jersey) Law 1991. The requirements for OCIFs apply to CCIFs (by analogy only and with more flexibility).
- The same tax rules for open-ended retail funds apply;
- Resident investors will be taxed using the same rules as for open-ended retail funds;
- Non-resident investors will be taxed using the same tax rules as for open-ended retail funds.
Private placement funds
- These are funds established or managed in Jersey which are offered to fewer than 50 investors. These funds are only available to either a “sophisticated investor” or a “professional investor” (including those investing a minimum of GB£250,000). These funds fall outside the scope of regulation of a collective investment fund;
- For private placement funds, the Jersey Financial Services Commission (Commission) will grant approval on a three day fast-track basis, without applying the Promoter Policy. The Commission will instead rely upon certain written confirmations from the fund’s administrator in relation to the fund’s promoter;
- Private placement funds must comply with the Jersey Private Placement Fund Guide published by the Commission (Private Placement Guide);
- The governing body of a Jersey domiciled fund must have:
- At least two Jersey resident directors with appropriate experience;
- An appointed administrator to provide general administration and/or registered office services and support the fund’s anti-money laundering obligations. The administrator must be licensed by the Commission;
- A non-Jersey fund must have either:
- At least two Jersey resident directors with appropriate experience on the board of the governing body;
- A Jersey company appointed as the fund’s manager which has at least two Jersey resident directors with appropriate experience;
- The directors will be required to produce a private placement memorandum;
- If a proposed private placement fund does not satisfy the criteria in the Private Placement Guide, a request for derogations/regulatory consent can be made to the Commission. Applications for derogations will be considered on a case-by-case basis and will not be on a fast-track basis;
- An independent trustee or custodian is often not required;
- Investors must be provided with:
- A copy of its annual accounts;
- An auditor’s report within the time period prescribed in the fund’s private placement memorandum;
- Constitutive documents or otherwise as required by statute or regulation;
- A private placement fund must deliver to the Commission a copy of the accounts of the fund where the auditor’s report on the accounts is qualified. Details of qualification must be brought to the Commission’s attention immediately. The Commission must be notified of any material changes to the information submitted in connection with private placement funds as soon as possible (and within 28 days of the change). If the proposed change does not meet the criteria set out in the Private Placement Guide, the prior written consent of the Commission would be required. Offering documents must comply with the disclosure requirements set out in the Private Placement Guide.
JFSC Regulation Policy
- The JFSC will exercise regulation both through a preliminary review of the “promoter” behind the scheme as well as a review of the private placement memorandum prior to the issue of a COBO consent;
- The ongoing regulation of the fund will be applied through compliance with the conditions set out in the COBO consent;
- In order for the promoter to satisfy the JFSC’s promoter policy, the JFSC will need to be satisfied as to the track record, reputation and experience of the promoter as well as such issues as spread of ownership and financial resources;
- Each investor must either be a professional investor or be investing at least £250,000 and, in either case, formally acknowledges a prescribed investment warning. This gives wide flexibility as to how service providers to the scheme, which may rely on exemptions from regulation of their activities under the Financial Services (Jersey) Law, will be overseen.
Very private funds
- Offered to 15 or fewer investors, are largely unregulated and are relatively quick and easy to establish. The approval procedure includes i) an initial 10 day checklist review by the Commission followed by ii) a documentary review of the application, a documentary checklist and all material fund documents;
- It is mandatory to obtain the initial consent under COBO. There are no other requirements including
- no minimum investment or other investor qualification requirements;
- no investment or borrowing restrictions;
- no need to prepare an offering memorandum; and
- no need for Jersey directors or service-providers and no audit requirement.
- An investment manager or adviser that carries on business (or is incorporated) in or from within Jersey may need to be regulated under the FSJ Law unless a relevant exemption is available or it only advises on real estate. For example, there is an exemption available for “professional investor regulated schemes” which requires that investors are either:
- Professional investors;
- Invest or commit at least GB£250,000;
- Other exemptions are also available (for example, for connected companies); and
- Legal fund vehicles and structures.
- Jersey service providers to Very Private Structures will need to be licensed by the JFSC to conduct “trust company business” and/or “investment business” under the Financial Services Law unless they can take advantage of a relevant exemption. Established Jersey service providers generally hold these licences.
There has also been a returning trend of listed funds (on CISX or LSE’s main board, SFM or AIM). Unregulated funds have also remained a popular structure due to the flexibility of that regime. Given the global economic climate, fund and manager restructuring activity levels have remained consistently high.
- A listed fund (which is a hedge fund) must appoint a prime broker that either:
- Has a credit rating of A1/P1 or long-term equivalent;
- Is otherwise approved by the Commission;
- In relation to listed funds, the Commission operates an expedited approval procedure. This is based on the expert fund model where the Commission:
- Relies on a certification by the fund administrator;
- Aims to issue its approval within three working days from the submission of a completed application;
- Where any unusual derogations are sought from the terms of the LF Guide, it is usual to seek these in advance while the documents are being prepared. This avoids potential delays in the approval process;
- If a fund satisfies the criteria set out in the Private Placement Guide, the Commission will provide approval on three-day fast track basis. When considering the application, the Commission will not apply the Promoter Policy and will instead rely upon certain confirmations from the fund’s administrator.
- Listed funds must appoint an administrator or a manager which has at least two Jersey-resident directors with appropriate experience, together with staff and a physical presence in Jersey. The investment manager or adviser to a listed fund should confirm in writing to the Commission whether it satisfies certain “good standing” requirements (including as to its experience and solvency) set out in the LF Guide, which the administrator or manager (as applicable) must counter-sign having undertaken appropriate due diligence. If an investment manager or adviser does not meet the criteria listed in the LF Guide, it can approach the Commission on a case-by-case basis. The distributor of the listed fund must also satisfy these requirements if it is not the investment manager/adviser or one of its associates (see above, Open-ended retail funds);
- At least two Jersey-resident directors must sit on the board of the entity responsible for supervising the fund. A private placement memorandum must also be produced;
- The same FSJ Law requirements in relation to registration apply to service providers to closed-ended public funds (see above, Open-ended retail funds);
- In relation to listed funds, there are no investment or borrowing restrictions for funds under the LF Guide, but the fund’s approach to both must be clearly disclosed in its marketing document.
These can only be marketed to “expert investors”. There are ten categories, including i) those investing or committing a minimum of US$100,000 or currency equivalent and ii) other sophisticated and high net-worth categories.
- All investors for this fund must qualify as expert investors and expressly acknowledge an investment warning, which allows a fund to qualify as an “expert fund” under the JFSC Expert Fund Guide. Expert investors include amongst other tests any person investing at least $100,000 or currency equivalent;
- An open-ended expert fund must appoint either a regulated Jersey custodian/trustee or prime broker. A closed-ended expert fund does not require a custodian/trustee, provided it has adequate safe custody arrangements (including, if applicable, prime brokerage arrangements);
- Expert funds must appoint an administrator or a manager with at least two Jersey resident directors with appropriate experience, together with staff and a physical presence in Jersey;
- For opening an expert fund, the Commission does not need to review the structure, documentation or the promoter. Instead the fund administrator certifies to the Commission that the fund complies with the EF Guide. The Commission aims to issue its approval within three working days of the submission of a completed application. The EF Guide is flexible. However, where any unusual derogations are sought from its terms, it is usual to seek these in advance while the documents are being prepared to avoid potential delay in the approval process;
- In relation to expert funds, there is no requirement for the investment manager or adviser to be incorporated or carry on business in Jersey, and the Promoter Policy does not apply. However, the investment manager or adviser should confirm in writing to the Commission whether it satisfies certain “good standing” requirements (including as to its experience and solvency) set out in the EF Guide, which the administrator, manager or trustee (as applicable) must counter-sign having undertaken appropriate due diligence. If an investment manager or adviser does not meet the criteria listed in the EF Guide, it can approach the Commission on a case-by-case basis. The distributor of the expert fund (if different from the investment manager/adviser) must also satisfy these requirements if it is not the investment manager/adviser or one of its associates. A distributor is either:
- The driving force behind the fund (that is, if the distributor were to withdraw from the proposal, the fund would not go ahead);
- The entity responsible (either directly or through its agents) for putting the majority of investors into the fund;
- Expert funds must have adequate arrangements for the safe custody of their assets (including, if applicable, prime brokerage arrangements) which must be disclosed in their offer document. The EF Guide requires a trustee or custodian to be appointed to hold the expert fund’s assets;
- A public fund’s trustee or custodian that carries on business in, or is incorporated in, Jersey must be registered under the FSJ Law and is subject to the FSJ Codes of Practice;
- In relation to expert funds, no investment or borrowing restrictions are prescribed for funds under the EF Guide. However, the fund’s approach to both must be clearly disclosed in its marketing document;
- There are no limits on the restrictions which can be imposed on issues or redemptions for expert funds;
- The OCIF Guide imposes various compulsory:
- Redemption requirements, for example, concerning i) non-cash redemption ii) period until payment iii) compulsory redemption iv) Issue requirements (for example, regarding non-cash consideration) and v) Suspension of dealings can be provided for in exceptional circumstances and having regard to the interests of holders.
Expert funds and listed funds
The same laws and regulations for retail funds apply. The three-day approval process applies to both of these categories. The short time to approval and the fair balance of regulatory oversight have proved successful selling points of the Jersey expert fund as an ideal fund structure for most promoters.
- The Jersey administrator, manager or trustee must monitor compliance by the investment manager with the investment restrictions and borrowing limits of the fund. A form of investor risk warning is prescribed;
- The requirements for offering documents are also the same as for retail funds. They must:
- Contain all material information in relation to the fund;
- Otherwise comply with the disclosure requirements in the EF Guide or LF Guide, as applicable;
- Each offering document must be filed within 14 days of publication. Material changes to the fund must have received Commission consent if they do not comply with the EF Guide or LF Guide. If they do comply they merely need to be notified to the Commission. The fund must file annual audited financial statements and any interim reports with the Commission when these are published. A fund which is a company must file and send to investors annual audited financial statements;
- Please note there is no requirement for the investment manager or adviser to be Jersey based. For an expert fund, the investment manager or adviser (and/or the distributor, if different) must satisfy certain requirements set out in the EF Guide. Similarly, the investment manager or adviser (and/or the distributor, if different) of a listed fund must satisfy certain requirements set out in the LF Guide (based in in an OECD state or in a jurisdiction with which the JFSC has entered into a memorandum of understanding or otherwise be approved by the JFSC);
- Expert funds and listed funds must appoint an administrator or a manager that has at least two Jersey resident directors with appropriate experience, together with staff and a physical presence in Jersey;
- Lastly, it is important that unlike expert funds, listed funds have no minimum subscription and are only available to closed-ended Jersey corporates.
These funds are structured to ensure investor protection that is at least equivalent to that afforded to investors in the UK. Recognized funds issued with a recognized fund certificate can apply to the UK Financial Services Authority (FSA) to market directly to the public in the UK (under the United Kingdom Financial Services & Markets Act 2000, taking advantage of Jersey’s designated territory status for the purpose of this legislation)and can also be marketed to the public (subject to any local requirements) in a number of other territories including Australia, Belgium, Hong Kong, The Netherlands and South Africa.
- The manager of a recognized fund must obtain a functionary permit under the CIF Law and comply with the provisions set out in the RF Functionary Permit Order. For recognized funds, there are also requirements for the protection of assets under the recognized funds legislation;
- Recognised funds are more highly regulated and provide investors with access to a statutory compensation scheme;
- Detailed investment and borrowing restrictions apply to recognized funds, depending on the nature of the fund;
- For a recognized fund, the manner, process and pricing of the issue and redemption of interests is prescribed by the RF Order. The manager is not permitted to alter these prescribed terms;
- For recognized funds the annual and half-yearly audited financial statements and portfolio statements and reports prescribed by the RF Order must be made available to investors and sent out within:
- Four months of the relevant period’s end in the case of an annual report;
- Two months of the period’s end in the case of a semi-annual report;
- Copies of the same reports distributed to the holders must be filed with the Commission.
- Unregulated funds are exempted from regulation as collective investment funds by virtue of an exemption order which specifies schemes or arrangements which have been established as either:
- an unregulated exchange-traded fund, being a scheme or arrangement established in Jersey, which is a closed-ended fund and which is listed on a stock exchange or market or which is applying for its shares or units to be granted such a listing; or
- an unregulated eligible investor fund, being a scheme or arrangement established in Jersey and in which only eligible investors may invest, being either an investor who makes a minimum initial investment of US$1 million or the currency equivalent (whether through the initial offering or by subsequent acquisition) or, alternatively, institutional investors or professional investors, as defined in the order.
- Either type of unregulated funds may take any form recognized under the laws of Jersey as being a Jersey company (including a cell structure), a Jersey limited partnership having at least one Jersey corporate general partner or a unit trust having a Jersey corporate trustee or manager. A regulated Jersey administrator must supply the registered office to that company. SPV general partners and trustees are exempt from the requirement to be regulated under the FSJ Law;
- Subject to the structure complying with the order, there is no regulatory review or oversight of the terms or conduct of such an unregulated fund and, therefore, processes for their establishment will depend only on being carried out in accordance with the exemption order;
- The offer and/or listing document of an unregulated fund must contain a prominent statement that the fund is unregulated, together with a prescribed form of investment warning;
- In order to claim exemption as an unregulated fund, a completed notice needs to be filed with the Jersey registrar of companies;
- There is no audit requirement (unless the fund is a company), no need for Jersey service-providers or Jersey directors and no investment or borrowing restrictions imposed on an Unregulated Fund. Nor is there any limitation on the number of investors such a fund may have;
- The key benefits of this regime for fund promoters are that it provides unparalleled flexibility coupled with the certainty of being able to establish the fund at any time simply by filing the required notice and without the need to obtain JFSC approval;
- An Unregulated Fund can be established as a Jersey company (including as a PCC or ICC), as a limited partnership with at least one general partner which is a Jersey company or as a unit trust with at least one trustee or manager which is a Jersey company;
- The usual application procedure for incorporating a company or registering a limited partnership will apply, each of which can often be completed on the same working day. Using a unit trust avoids even these requirements. An Unregulated Fund has no obligation to have any Jersey resident directors or any Jersey based administrator, custodian or other service providers;
- Unregulated Funds remain subject to Jersey’s anti-money laundering regulations, which meet international standards.
Unregulated Funds: Funds Services Business and special purpose managers
- Jersey service providers to Unregulated Funds must be licensed by the JFSC to conduct “fund services business” under the Financial Services (Jersey) Law 1998 (the “Financial Services Law”): this includes administrators, custodians, distributors, fund managers, investment advisers/managers, general partners and trustees. Established Jersey service providers will already hold these licences;
- A simplified licensing regime exists for “special purpose” Jersey vehicles which are established to act as manager or investment manager/adviser to one or more Unregulated Funds (exemptions are in place for general partners or trustees of Unregulated Funds);
- The following is summary of the requirements for a “special purpose” Jersey service provider (“SPSP”) vehicle:
- The SPSP will need to be administered by a regulated Jersey administrator, which will assume a responsible role for regulatory purposes, including providing one or more directors as well as the Money Laundering Compliance and Reporting Officers. Regulatory approval will be subject to the Licensing Policy published by the JFSC;
- The SPSP will be required to comply with the Codes of Practice for Fund Services Business. These contain detailed requirements, including as to capitalisation and corporate governance (including a requirement that the board of the SPSP is appropriately experienced). Where the SPSP only provides services to Unregulated Funds and/or Expert Funds, the SPSP will be able to elect for a reduced level of compliance with the Codes;
- Each director of the SPSP and each beneficial owner of the SPSP with a 10% or greater interest will (if not already approved by the JFSC) be required to submit a personal questionnaire (see Appendix) to seek approval from the JFSC. As international regulatory checks often take four to six weeks to complete, these should be completed and submitted as early as possible.
- Registration under the Financial Services Law typically takes 3 weeks.
Eligible Investor Funds
An unregulated eligible investor fund may be open or closed and transfers of interests are only possible to other eligible investors. Stock exchange listings for unregulated eligible investor funds will be possible subject to transfer restrictions, as referred to above, still applying.
- These can be open or closed-ended and are restricted to sophisticated investors (including those investing US$1 million);
- These funds can be held by an unlimited number of “eligible investors”;
- These funds are restricted to 11 categories of “eligible investor”, which include:
- those investing at least US$1 million;
- whose ordinary business or professional activity includes dealing in, managing, underwriting or giving advice on investments (or an employee, director, consultant or shareholder of such a person);
- who is an individual with a net worth of over US $10,000,000 or equivalent (calculated alone or jointly with their spouse and excluding a principal place of residence);
- which is a company, limited partnership, trust or other unincorporated association and which either (i) has a market value of US $10,000,000 or equivalent (calculated either alone or together with its associates), or (ii) has only “eligible investors” as members, partners or beneficiaries;
- which is, or acts for, a public sector body;
- which is the trustee of a trust which either i) was established by an “eligible investor”, or ii) is established for the benefit of one or more eligible investors; or
- which is, or is an associate of, a service-provider to the fund (or an employee, director, consultant or shareholder of such a service-provider or associate and who acquires the investment as remuneration or reward).
- These funds are not required to produce audited accounts unless they are incorporated as a company;
- There is no need for Jersey service-providers or for any Jersey directors on the fund company, the trustee or the general partner;
- There are no investment or borrowing restrictions for the investors;
- These may be listed, provided that the exchange permits transfer restrictions (to ensure that only eligible investors are allowed to invest in the fund); and
- It is important to obtain a written acknowledgement from each investor confirming their acceptance of the risks involved in the fund (typically dealt with on the application form);
- The regime also expressly recognises that a discretionary investment manager may make investments on behalf of investors who do not qualify as “eligible investors”, provided that it is satisfied that the investment is suitable for the underlying investors and they are able to bear the economic consequences of the investment.
Exchange traded fund
- These must be closed-ended and listed on an approved stock exchange. Consequently, these funds will be subject to the exchanges on which they are listed;
- These funds will not be required to produce audited accounts (unless the fund is a company);
- There is no need for Jersey service-providers;
- There is no minimum investment level or other investor qualification requirements. Also, there is no limit on the maximum number of investors; and
- The funds must include a specified investment warning in its offer documents notifying investors that the fund is not regulated in Jersey;
- Unregulated Exchange Traded Funds can be attractive, where a “technical” listing is not overly onerous to achieve and may expand the fund’s potential investor base;span>
- The 50 pre-approved exchanges include:
- Euronext; and
- To the extent that a fund is to be offered to more than 50 investors or to be listed and the fund is not able to fall under the expedited regulatory approach offered under either the Expert Fund Guide or the Listed Fund Guide, a collective investment fund may be regulated as an unclassified fund;
- In this situation the JFSC will regulate the fund in accordance with its policy, which will need to include compliance by the promoter of the fund with the JFSC’s promoter policy. This will include
- an evaluation of the track record;
- experience and reputation of the promoter of the fund as well as of the financial resources; and
- spread of ownership of the promoter.
- The JFSC will review the prospectus, constitutional documents and material agreements relating to the fund. The fund operation and investment and borrowing restrictions will need to comply with certain established standards against which the JFSC will evaluate funds of this type. The extent of compliance with regulatory guidelines will depend on the minimum investment level and whether the fund is open-ended (more tightly regulated) or closed-ended;
- Structures of an unclassified fund will, for an open-ended fund, require a Jersey resident manager and custodian. For a closed-ended fund, no separate custodian is required;
- Please note the lower the minimum investment requirement, the more closely the JFSC will regulate a fund of this type.
- An investment vehicle will not be regulated as a fund in Jersey unless it is a scheme or arrangement for the investment of money which
- has as its object or one of its objects the collective investment of capital; and
- the fund operates on the principle of risk spreading, or units are to be bought back or redeemed continuously or in blocks at short intervals upon the request of the holder and out of the assets of the fund, or units will be issued continuously or in blocks at short intervals.
- Vehicles which hold a single asset or which carry on a business (such as property development) may not fall within Jersey’s funds regulations.
Fund Service Providers
- An expedited approval process exists allowing licensing in around two weeks with the support of a local administrator. A “special purpose” Jersey vehicle can be established to act a manager, investment manager/adviser, general partner or trustee to one or more Jersey or non-Jersey funds;
- Jersey fund service providers (including administrators, custodians, fund managers, general partners and trustees) must be licensed by the JFSC. Exemptions exist for Very Private Structures and for general partners and trustees of Unregulated Funds;
- No person from outside Jersey may provide investment advice, investment dealing services or discretionary investment management from within Jersey without a licence;
- The acceptance of subscription monies from prospective investors is subject to international standard “know your customer” regulations.
Jersey Funds and the EU
In legal terms, Jersey is a “third country” for the purposes of the EU single market, despite the fact that, in practice, its finance industry has a long history of providing financial services in the EU market, particularly in London.
- As EU member states prepare to formally implement Directive 2011/61/EU on alternative investment fund managers (AIFMD), as a “third country” non-EU jurisdiction, Jersey has been working hard to ensure it can continue to offer professionals a blend of stability and flexibility;
- Jersey is committed to:
- Continuing to facilitate funds business within the EU through national private placement regimes until at least 2018;
- Introducing the option of a fully AIFMD-compliant regime and obtaining an EU-wide passport by 2015 (as soon as is possible for non-EU ‘third countries’);
- As a non-EU jurisdiction, Jersey can offer investors the choice of maintaining a separate regime that lies outside the scope of AIFMD, for managers who do not wish to access EU capital or operate in the EU;
- Combined, this range of options means that Jersey will continue to operate its existing fund regime whilst at the same time offering an option that is fully compliant with AIFMD, providing managers with the flexibility to market to investors both inside and outside the EU.
- Jersey already regulates and authorizes alternative fund managers in accordance with IOSCO standards, and tax information exchange agreements (TIEAs) will be in place with each member state where alternative funds are to be marketed from 2015, including TIEAs or double taxation agreements (DTAs) with 13 EU member states;
- In addition, Jersey is able to comply with all required international reporting and transparency requirements, and is more compliant with Financial Action Task Force (FATF) recommendations than many onshore asset management jurisdictions. With this in mind, Jersey is confident that it will be able to satisfy the criteria needed to comply with AIFMD.
Regulatory framework and bodies
The Commission authorizes and supervises regulated investment funds as the principal regulatory authority in Jersey. In addition to its statutory regulation of the financial services sector, the Commission also publishes guidelines and codes of practice for the different industry sectors including
- The identity of the promoter and other entities involved in a fund (whether based in Jersey or not) is an important factor for the Commission in deciding whether to grant regulatory approval. The promoter is described as the driving force behind the scheme. The criteria for Promoter approval by the JFSC includes i) track record and relevant experience ii) reputation iii) financial resources and iv) spread of ultimate ownership.
- The applicable regulatory laws for funds are as follows:
- The Collective Investment Funds (Jersey) Law 1988, as amended (CIF Law), which regulates public funds and recognized funds;
- The Collective Investment Funds (Certified Funds – Prospectuses) (Jersey) Order 2012, regulates the contents of prospectuses for certified funds;
- The Financial Services (Jersey) Law 1998 (FSJ Law), which regulates fund service providers operating or incorporated in Jersey; and
- The legislation that applies to eligible investor funds and exchange traded funds is the Collective Investment Funds (Unregulated Funds) (Jersey) Order 2008 (UF Order).
Funds and their Jersey service providers must comply with the following legislation, which applies international standards:
- Proceeds of Crime (Jersey) Law 1999, as amended;
- Money Laundering (Jersey) Order 2008, as amended;
- Terrorism (Jersey) Law 2002, as amended;
- Proceeds of Crime (Supervisory Bodies) (Jersey) Law 2008;
- Drug Trafficking Offences (Jersey) Law 1988, as amended; and
- Criminal Justice (International Co-operation) (Jersey) Law 2001, as amended.