VALERIE ROUSE AND GAVIN FARRELL OF MOURANT OZANNES, DISCUSS THE MERITS OF GUERNSEY AS AN ATTRACTIVE OFFSHORE HEDGE FUND JURISDICTION
Guernsey is a ‘European’ offshore jurisdiction with a flexible regulatory regime which lends itself to the establishment of hedge funds. It provides a European time zone alternative to supplement the traditional Cayman Islands structure. Indeed at a time of demanding corporate governance requirements, especially in light of recent demand for greater regulatory oversight of hedge funds, control over fund assets is becoming increasingly important as well as for directors and managers who are based in Europe to attend board meetings in person in order to query, among other things, custody arrangements. Domiciling an offshore fund in a more accessible jurisdiction – allowing the investment manager and board to attend meetings more frequently and visit the administrator and custodian in that jurisdiction at the same time – could therefore prove attractive to certain European fund promoters.
Guernsey is a mature jurisdiction that has always been recognised as well, but not over, regulated with an infrastructure which lends itself to servicing clients on a full service basis.
In terms of Guernsey products, hedge funds can either be open or closed ended. The vast majority of hedge funds tend, however, to be authorised open-ended schemes, thus providing investors with a right to redeem their shares during the lifetime of the scheme, albeit restricted in practice through long redemption notice periods, redemption gates, redemption fees and/or other limited rights of redemptions.
Relatively recent reforms in Guernsey have reduced the burden of regulatory approval in the case of hedge funds, which may now be established as registered funds or qualifying investor funds. Such funds will benefit from a ‘selfcertificated’ and expedited process. In such cases, the Guernsey Financial Services Commission (GFSC) undertakes to issue appropriate fund authorisation, if the application is successful, within three working days of receipt of the relevant application documents. There is also a fast track approval regime available for the licensing of an associated management company. In circumstances where the fund does not seek to take advantage of the ‘self certificated’ regime, and prefers to go through an authorisation process and review of documentation by the regulator, the procedure continues to follow a three-stage application process. This consists of outline, interim and final stages.
Outline stage requires the completion of a form setting out the basic details of the fund’s structure and objectives together with details of all parties involved. Hedge funds require a Guernsey fund administrator who will need to have been chosen and on board at this stage. The Guernsey administrator can however, outsource administration functions outside of Guernsey, if required by the commercial terms of the structure.
Interim stage will see the filing of the near final draft prospectus with a form containing a checklist of the disclosure requirements in the Prospectus together with the application fee. The GFSC may be prepared to agree to fast track an application by combining the interim and outline stages, enabling both forms and relevant documents to be filed together.
Final stage, once the GFSC has reviewed the draft prospectus and related forms, and has obtained satisfactory responses to its queries (if any), the final prospectus, certified copies of constitutive documents and material contracts disclosed in the prospectus must be required. The granting of full approval will then be considered by the GFSC.
If the entity responsible for the fund’s establishment is not already known to the GFSC, additional documentation and time to conduct due diligence on that promoter will be required at the time of, or before, the outline stage.
All open-ended funds in Guernsey are required to appoint a Guernsey regulated custodian. The GFSC has, however, relaxed its rules for hedge funds, deeming such relaxation to be appropriate in the case of funds targeting institutional and/or expert individuals. An example of this relaxed approach is that a reputable prime broker may be appointed as the “designated” custodian and the GFSC will not require the prime broker to take on formal duties of oversight over the fund manager.
As noted above, the GFSC has introduced a registered fund regime. This offers a streamlined approval process for both open and closed-ended funds. The onus falls upon the licensed Guernsey fund administrator to conduct due diligence on the fund promoter and the fund structure and to provide certain warranties to the GFSC that the proposed fund satisfies the criteria for authorisation. The standard three stage process will therefore not be applicable. Providing the fund administrator confirms to the GFSC that the criteria are met, the GFSC will grant the required approval within three working days. These changes significantly accelerate the regulatory approval process.
As with many of the leading hedge fund jurisdictions, Guernsey plays host to a range of third party service providers including approximately 40 different entities providing fund management, administration and custodial services to the industry. Many of Guernsey’s administration firms are part of global operations that can outsource to other centres of particular expertise where necessary. In addition, Guernsey is an hour’s flight south of London and, as a result, is a more accessible jurisdiction for holding meetings for certain managers as well as satisfying prudent corporate governance and fiscal ‘arbitrage’.
Of course, the question needs to be asked about the potential effect and impact of the EU Alternative Investment Fund Managers (AIFM) Directive. Following the full implementation of the Directive, which is due to take place around June 2013, Guernsey managers of Guernsey hedge funds should be able to continue marketing those funds to professional investors in EU member states pursuant to the national private placement regimes of the relevant member states. The ability to do so will hinge upon the GFSC having entered into regulatory co-operation agreements with the regulator in each relevant member state and Guernsey remaining a co-operative jurisdiction, as assessed by the Financial Action Task Force (FATF) – both of which are conditions Guernsey expects to meet. From that time, there will be some additional disclosure and reporting obligations the manager will have to comply with under the AIFM Directive. These national private placement regimes are expected to remain available to non-EU funds until 2018/19.
From 2015, Guernsey managers should also be able to market their Guernsey funds throughout the EU on the basis of an EU-wide ‘passport’, into those member states with which Guernsey has entered into a tax information exchange agreement. Guernsey has already entered into such agreements with prominent members states including the UK, Germany, France, Sweden, The Netherlands, Ireland, Norway and Denmark. The availability of this passport will depend, however, upon the manager being authorised and fully regulated under the AIFM Directive via an EU Member State regulator ‘of reference’. Full Directive compliance will be exacting and will involve, among other things, the appointment of a duly qualified credit institution as depositary (custodian) of the fund’s assets.
From 2018/19, if EU marketing of Guernsey funds via national private placement regimes is curtailed, marketing pursuant to the AIFM Directive passport in full compliance with the Directive’s authorisation requirements will be the only means of actively marketing Guernsey funds to EU investors.
From 2013, full AIFM Directive compliance will be required by all EU managers of EU-domiciled alternative funds targeting professional investors worldwide. It should be noted that the Directive does not regulate the marketing of Guernsey funds to investors outside the EU nor passive marketing, whereby investors invest in a fund on their own initiative.