The Investment Funds Regime in GuernseyMariana Enevoldsen

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Contents

The Investments Fund Regime in Guernsey Types of Funds

Authorised and Registered Funds Open-Ended and Closed-Ended Funds Non-Guernsey Schemes

Licensees Fast Track Regime

Qualifying Investor Funds Registered Collective Investment Schemes Licensees

AIFMD AIFMD’s Dual Regime Manager Led Product Future developments

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The Investment Funds Regime in Guernsey

The Guernsey Financial Services Commission (“GFSC”) regulates the investment sector pursuant to The Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended (“POI”) and a number of rules and regulations made thereunder

This means that funds as well as those providing services to funds (e.g. investment manages, administrators, etc.) are required to be licensed by the GFSC under POI.

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The Investment Funds Regime in Guernsey

The applicable rules are: AIFMD (Marketing) Rules 2013 Authorised Closed-Ended Investment Schemes Rules 2008 Authorised Collective Investment Schemes (Class A) Rules 2008 Collective Investment Schemes (Qualifying Professional Investor

Funds) (Class Q) Rules 1998 Licensees (Conduct of Business and Notification) (Non-Guernsey

Schemes) Rules 1994 Prospectus Rules 2008 Registered Collective Investment Scheme Rules 2015 Authorised Collective Investment Schemes (Class B) Rules, 2013 (The

Class B Rules) The Licensees (Conduct of Business) Rules 2014 The Licensees (Capital Adequacy) Rules 2010

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Types of Funds

AUTHORISED FUNDS REGISTERED FUNDS

CLOSED-ENDED OPEN-ENDED

Authorised Closed-Ended Scheme

RulesClass A Rules Class B Rules Class Q Rules

CLOSED-ENDED OPEN-ENDED

Registered Collective

Investment Schemes Rules

Prospectus Rules

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Types of Funds

Authorised or Registered Authorised Funds

Subject to on-going supervision by the GFSC , or

Registered FundsNot authorised and subject to a lighter touch regime

Guernsey funds, whether authorised or registered can be either:

Open or Closed-Ended Open-Ended Funds

A vehicle that allows investors to have their holdings redeemed or repurchased at a price that relates to the value of the underlying assets

Closed-Ended FundsInvestors are not entitled to redeem at a price related to the value of the underlying assets

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Types of Funds

Authorised funds

AUTHORISED FUNDS

CLOSED-ENDED OPEN-ENDED

Authorised Closed-Ended Scheme

RulesClass A Rules Class B Rules Class Q Rules

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Types of Funds

Authorised funds May be open-ended or closed-ended Applicable Rules

Class A, B or Q Rules Authorised Closed-Ended Investment Scheme Rules 2008

Funds are authorised and subject to the continuing supervision of the GFSC

Funds must be established with the objective of spreading risk Offering Document disclosures in accordance with the applicable

Rules Provisions for immediate and periodic notifications to the GFSC

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Types of Funds

Registered funds

REGISTERED FUNDS

CLOSED-ENDED OPEN-ENDED

Registered Collective

Investment Schemes Rules

Prospectus Rules

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Types of Funds

Registered funds May be open-ended or closed-ended Applicable Rules

Prospectus Rules 2008 Registered Collective Investment Schemes Rules 2015

Funds are not authorised and are subject to a lighter touch regulatory regime benefiting from a fast track registration process

Funds must be established with the objective of spreading risk Offering Document disclosures in accordance with the Prospectus

Rules Provisions for immediate and periodic notifications to the GFSC May now be offered to the public in Guernsey

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Types of Funds

Non-Guernsey Schemes The Licensees (Conduct of Business and Notification) (Non-

Guernsey Schemes) Rules 1994 require Guernsey licensed service providers wishing to undertake the restricted activities of management, administration or custody to open-ended funds not requiring registration or authorisation under POI to provide prior written notice to the GFSC of such proposal

The GFSC must give specific approval to a local licensee before the commencement of the service to the scheme

Thereafter, non-Guernsey Schemes are subject to on-going notification requirements

A two day fast track approval process (subject to warranties) is available in addition to the traditional approach

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Types of Funds

Structural considerations Capital base: closed-ended funds provide permanent capital and they

are not subject to withdrawals Dealing facilities: the Manager or Administrator must provide dealing

facilities for investors in open ended funds and bears the risks of any issues arising in the valuation which may result in investor compensation

Type of asset: illiquid assets such as property are not suitable for open-ended schemes

Target investor: certain investors may require or prefer regulated funds

Custodian: Guernsey open-ended funds require the appointment of a Guernsey custodian

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Types of Funds

Trends in Guernsey Closed-ended funds are more prevalent than open ended funds Most closed ended funds are now launched as registered funds due

to the availability of the Fast Track Regime In the open-ended sector, Class B Schemes are the most popular

choice

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Licensees

A licence is required by any person who carry one or more restricted activities in accordance with Schedule 2 of POI:

- Promotion - Management- Subscription - Registration- Dealing - Administration- Advising - Custody- Operating an investment exchange

A restricted activity may be undertaken in respect of Category 1 (collective investment schemes) or Category 2 (general securities and derivatives) controlled investments

Applications may either be traditional or Fast Track (10 business days with warranties provided by the administrator)

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Licensees

Funds may be structured with a Guernsey investment manager/licensee. Usually such licensees engage an investment advisor from another group entity based outside of Guernsey.

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Licensees

GFSC Licensing Criteria Selectivity: the applicant must be ‘fit and proper’ which embraces

honesty, competence and solvency. High rather than minimum standards are expected

Compatibility: the specific nature of the proposed business should be compatible with the protection of the reputation of the Bailiwick

Due Diligence Checks: no adverse findings expected in relation to any parties involved

Structure: the structure of the group and the ultimate beneficial ownership must be established

Track Record: the applicant should be able to demonstrate an acceptable track record in the field in which it proposes to operate

Directors: at least one Guernsey resident director will be required and in some circumstances two resident directors. Directors are expected to be individuals rather than corporate entities

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Licensees

GFSC Licensing Criteria (continued) Four Eyes: the ‘four eyes’ principle must be satisfied by having at least

two competent professionals able to exercise control over the day to day operation of the Guernsey business. They must be either executive directors or persons granted executive powers

Delegation: any delegation of responsibilities to existing licensees or other organisations must be acceptable to the GFSC

Resources: the applicant or its delegate must have adequate human and physical resources to conduct operations, including record-keeping, compliance, internal controls and other systems

Financial Resources: the requirements within The Licensees (Capital Adequacy) Rules 2010 must be satisfied

Domicile: the applicant’s restricted activities should be conducted substantially within or from within the Bailiwick

Compliance Officer and MLRO: the Compliance Officer may be a corporate entity with a named compliance officer of its own but the MLRO must be an individual

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Fast Track Regimes

Certainty on authorisation timings 3 business days for Qualifying Investor Funds and Registered

Collective Investment Schemes 10 business days for licensees

The are 3 Fast Track Application Regimes available: Qualifying Investor Funds (“QIF”) Registered Collective Investment Schemes Licensees to QIFs and Registered Schemes

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Fast Track Regimes

Qualifying Investor Funds (“QIFs”) May be open or closed ended authorised funds (or compartments

sub-funds, cells and share classes of existing funds) Available only for Qualified Investors Qualified investors are those deemed able to:

Evaluate the risks and strategies of investing in a QIF Able to bear the economic consequences, including the possibility of any

loss arising from the investment Qualified investors can be

Professional Investors Experienced Investors Knowledgeable Employee

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Fast Track Regimes

Registered Collective Investment Schemes May be open or closed ended registered funds (or compartments sub-

funds, cells and share classes of existing funds) Administrator makes specific declarations (warranties) Administrator must have documentary evidence supporting the

warranties given and to produce the same immediately upon request Administrators may be excluded from participation in the Registered

Collective Investment Schemes self-certification programme

Licensees Only available for parties seeking to provide management services to

QIFs or Registered Collective Investment Schemes Administrator makes specific declarations (warranties)

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Alternative Investment Fund Managers Directive

A combination of the Madoff investment scandal and the financial crisis led to a raft of new regulations being introduced globally

In Europe, the Alternative Investment Fund Managers Directive (“AIFMD”) was introduced to bring managers of alternative investment funds under a harmonised regulatory umbrella in order to provide: Certainty of assets Independent verification of assets Control of the investment management process Segregation of asset management from risk management

AIFMD came into force in July 2011 with Member States having 2 years to transpose into national law

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Alternative Investment Fund Managers Directive

AIFMD covers areas such as Substance Remuneration Transparency Depositary requirements

AIFMD applies to Alternative Investment Fund Managers (“AIFMs”) established in the EU but also applies to non EU AIFMs to the extent that they manage or market funds in the EU

Small AIFMs (i.e. when the AIFM manages funds whose aggregate AUM do not exceed EUR 100m including assets acquired using leverage or do not exceed EUR 500m where the funds are unleveraged and don’t give investors a right to redeem within 5 years) may opt into the full requirements of AIFMD

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Guernsey’s Dual AIFMD Regime The AIFMD Rules, 2013 have introduced an AIFMD equivalent

regime in Guernsey which can be used by managers who, due to particular commercial reasons, need to comply with AIFMD

Managers not requiring an AIFMD compliant fund, including those using National Private Placement Regimes (“NPPRs”) or marketing outside Europe, can continue to use the existing fund structures

AIFMD originally envisaged the phasing out of NPPRs in favour of the EU-wide marketing passport for non EU AIFMs

The European Securities and Markets Authority (“ESMA”) will produce an updated opinion on the functioning of the EU passport and NPPRs in time for the planned review of AIFMD due to start in 2017

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Guernsey’s Dual AIFMD Regime In July 2015, ESMA issued positive advice to the European

Parliament, Council and Commission on the extension of the third country passport to Guernsey, Jersey and Switzerland

In its final assessment in July 2016, ESMA issued advice on 12 jurisdictions and included Guernsey in a group of 5 jurisdictions with unqualified positive assessments

Within 3 months, the Commission should adopt a delegated act specifying the date when the relevant rules become applicable in all Member States and the passport can be extended to third countries

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Manager Led Product

In April 2016 the GFSC issued a consultation paper on the Manager Led Product (“MLP”) following discussions with industry

After a short consultation period, the MLP was launched in May 2016

A similar approach has been adopted by other jurisdictions such as Luxembourg (RAIF) and Malta (NAIF)

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Manager Led Product

Main features Aimed at AIFMs seeking to market an AIF into a host country in

Europe under NPPR

Placing of regulations on the AIFM only

Avoids duplication of regulatory requirements over several entities whilst maintaining reporting requirements

Licensing within 24 hours of open or closed ended funds as well as general partners or managers formed solely for the purpose of such funds

Capital adequacy requirements apply only at AIFM level

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Future developments

The GFSC has stated its intention to develop some further investment products

A product using the same principles as the MLP but with a discrete set of rules enabling managers to target markets excluding Europe

Private funds