This memorandum has been prepared for the assistance of clients considering establishing a fund under the laws of Guernsey. It is intended to provide only a summary of the main legal requirements and general principles applicable to establishing a fund in Guernsey and it is not intended to be comprehensive in its scope. It is recommended that a client seeks legal advice on any proposed transaction prior to taking steps to implement it.
This memorandum has been prepared on the basis of the law and practice as at 1 June 2011.
Streamlined Process Three Day Approval
Approval of Qualifying Investor Funds and the relevant consent or authorisation from the Guernsey Financial Services Commission (“GFSC”) will be forthcoming in three days. Only Qualified Investors (as defined below) are permitted to invest in a Qualifying Investor Fund.
Qualified Investor means: a Professional Investor, an Experienced Investor, or a Knowledgeable Employee as defined below.
A Professional Investor is:
- a Government, local authority, public authority or supranational body (in the Bailiwick of Guernsey or elsewhere); or
- a person, partnership or other unincorporated association or body corporate, (whether incorporated, listed or regulated in an OECD country or otherwise) whose ordinary business or professional activity includes or it is reasonable to expect that it includes, acquiring, underwriting, managing, holding or disposing of investments whether as principal or agent, or the giving of advice on investments (a ‘professional firm’); or
- an affiliate of the Qualifying Investor Fund or an associate of an affiliate of the Qualifying Investor Fund. (The terms ‘affiliate’ and ‘associate of an affiliate’ are intended to refer to financial services businesses or financial services professionals associated, directly or indirectly, with the operation of the fund in question).
- An individual investor who makes an initial investment of not less than US$100,000 or equivalent in the fund in question. Provided the initial test has been met, subsequent investments by the same investor may be of lower amounts.
An Experienced Investor is a person, partnership, or other unincorporated association or body corporate which has in any period of 12 months (whether on his own behalf or in the course of his employment by another person) so frequently entered into transactions of a particular type in connection with open-ended collective investment schemes and/or general securities and derivatives being transactions of substantial size entered into with or through the agency of reputable persons who carry on investment business, that he can reasonably be expected to understand the nature of, and the risks involved in, transactions of that description; or who provides a certificate from an appropriately qualified investment advisor confirming that the investor has obtained independent advice.
A Knowledgeable Employee is:
- a person who is (or has been within a period of three years up-to the date of application for investment in the Qualifying Investor Fund) an employee, director, general partner, consultant or shareholder of, or to, an affiliate appointed by the Qualifying Investor Fund to advise, manage or administer the investment activities of the Qualifying Investor Fund, who is acquiring an investment in the Qualifying Investor Fund as part of his remuneration or an incentive arrangement or by way of co-investment, either directly or indirectly through a personal investment vehicle, such as a trust, for or substantially for, that person; or
- any employee, director, partner or consultant to or of any professional firm or anyone who has fulfilled such a role in respect of any professional firm within a period of three years up to the date of application for investment in the Qualifying Investor Fund.
The term ‘employee’ would only cover persons who are, or have been, employed in a relevant role and would not extend to clerical, secretarial or administrative roles.
Compliance with Qualified Investor Fund status
Funds, which are approved as Qualifying Investor Funds, must have in place measures to ensure that they are only available to investors who fall within the above definitions. The GFSC expects any warranties/certificates provided by potential investors to confirm what type of Qualified Investor they consider themselves to be, that is, whether they are a Professional Investor, an Experienced Investor or a Knowledgeable Employee.
Open-ended or Closed-ended
A Qualifying Investor Fund may be either an open-ended or closed-ended Collective investment scheme authorised under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended (‘POI Law’).
Open-ended and closed-ended funds may instead follow the Registered Fund regime which is dealt with in a separate briefing.
A Qualifying Investor Fund that is:
- an authorised open-ended collective investment scheme must comply with the requirements of the appropriate rules, that is the Collective Investment Schemes (Class A) Rules 2002, the Collective Investment Schemes (Class B) Rules 1990 or the Collective Investment Schemes (Class Q) Rules 1998;
- an authorised closed-ended investment scheme must comply with the Authorised Closed-Ended Investment Scheme Rules.
Derogations from the B Rules or Q Rules
The GFSC will continue to accept applications for derogations from the Class B Rules or Class Q Rules. Requests for modifications should be made at least three working days in advance of the submission of the formal application for the approval of the fund.
The promoter and/or investment manager should be an institution regulated and of good standing, or, if conducting activities which do not require regulation, otherwise in good standing. It must also be fit and proper.
The GFSC’s view is that good standing would imply that the institution, its directors, controllers and senior managers had not during the past five years been the subject of material disciplinary action by a regulator or professional body, or subject to any conviction for fraud, dishonesty or related offences of a financial nature.
Fit and Proper
Promoters and their directors, controllers and senior managers must be fit and proper and this must be certified by the administrator. This is defined as being a requirement for integrity, competence and solvency.
Promoters (which term should be taken to include their controllers, directors and management) must be of a high reputation and standing. Poor reputation would be considered to be a negative factor. The promoter must carry on its business with prudence, professional skill and honesty.
In the case of promoters with a limited history, due to the fact that they are newly or recently established, the integrity of the controllers, directors and management should be assessed in the light of previous employment and experience. Such previous employment history should demonstrate that the individuals possess relevant experience in relation to managing or advising on investors’ funds using similar investment strategies to those that will be adopted by the Qualifying Investor Fund. The Administrator is expected to make direct contact with relevant individuals’ previous employers as part of the necessary due diligence enquiries.
Promoters must be solvent. A firm regulated in another jurisdiction must also comply with the solvency, capital adequacy or financial resources requirement (as appropriate) laid down by the relevant regulatory body to which it is accountable. Past performance should be considered to ensure that relevant requirements have been consistently met in the past.
In the case of promoters which are newly or recently established (and cannot produce audited annual financial statements for a period of at least 24 months), it will be necessary for the administrator to consider financial projections relating to the proposal under consideration. It will also be necessary to consider whether the controllers, directors and management of such promoters have previously been responsible for considering the solvency of an entity (for example, if they held a director role or financial control function). Where individuals have been directors or held relevant positions at entities that have gone into liquidation or suffered financial loss, it will be necessary to consider the role undertaken by the relevant individual in such situations.
The most obvious way to demonstrate competence is to have established a favourable track record, in a business similar to that to be conducted in Guernsey.
A promoter must be able to demonstrate an acceptable complaints history. In the case of promoters which are newly or recently established, it will be necessary for the administrator to consider whether the controllers, directors and management of such entities have been subject to significant complaints whilst employed by other firms.
Promoters should have staff of adequate skills, knowledge and experience to undertake and fulfil their duties efficiently and effectively.
All Guernsey incorporated funds must have a Guernsey resident administrator. This requirement also applies to funds incorporated elsewhere and administered in Guernsey.
An application form must be submitted by the administrator containing:
- Confirmations to the GFSC from the proposed administrator that it has performed sufficient due diligence to be satisfied that the promoter and associated parties are fit and proper, effective procedures are in place to ensure restriction of the fund in question to only Qualified Investors, as defined, and the economic rationale for the proposed fund and any attendant risks are clearly disclosed;
- Submission of the relevant GFSC forms and any lawyers’ or managers’ certificates;
- Payment of the application fee required; and
- Submission of certified complete final copies of scheme particulars, prospectus, offering document or equivalent; the application form, subscription agreement or equivalent; constitutive documents, such as the memorandum and articles of association, trust deed or limited partnership agreement; and all material agreements entered into by the fund.
Three Day Approval
The GFSC will issue the necessary authorisation under the Protection of Investors Law or consent under the Control of Borrowing within three working days of receipt of the above.
Licence applications for new managers
Although not a requirement, if the promoter requires the establishment of a Guernsey management company, that company must be licensed under the POI Law before the authorisation or consent can be issued in respect of the fund. The application process relating to the issue of a licence under the POI Law will normally take longer than the three working days.
However, the GFSC have published proposals to provide for formal consideration of any licence within 10 days of receipt of the relevant documentation. The proposals will require the Guernsey licensed administrator to perform similar due diligence in respect of the beneficial owners or controllers of the manager and to confirm that the application is complete and accurate.