What is a fund?
The Guernsey Financial Services Commission ("GFSC") applies three criteria in determining whether or not an entity is a collective investment scheme or fund. These criteria are as follows:
- pooling of contributions of investors;
- third party management of the portfolio assets; and
- spread of risk.
If any of these features is lacking, the structure will not be regarded as a fund. For example, the GFSC is usually prepared to regard a structure as not requiring to be regulated as a fund where there is a limited number of investors, particularly where they are related parties, or where there is only one investment asset.
Guernsey also makes a fundamental distinction between open-ended funds and closed-ended funds. An open-ended fund is one in which the investors are entitled under the terms of the scheme to have their units redeemed or repurchased by the fund or to sell their units on an investment exchange at a price related to the value of the property to which they relate. In a closed-ended structure, there is no right to have one's shares redeemed although, usually, the fund will have a predetermined life.
A Guernsey closed-ended fund is not required to appoint a local custodian or a local manager or adviser. Unlike a closed-ended fund, every open-ended fund must appoint a Guernsey licensed custodian to hold its assets on trust. Both open-ended and closed-ended funds are required to appoint a locally licensed administrator (referred to as a "Designated Manager" both in the relevant legislation and herein). Previously, every open-ended fund also had to appoint a Guernsey licensed principal manager. This requirement was removed at the beginning of 2007 but, nonetheless, some promoters are continuing to use principal managers within their structures.
Distinction between authorised and registered funds
The Protection of Investors (Bailiwick of Guernsey) Law 1987 (as amended) (the "POI Law") divides Guernsey funds into two categories:
- authorised collective investment schemes; and
- registered collective investment schemes.
Both open-ended and closed-ended funds may be either authorised or registered schemes under the POI Law and funds may take the form of companies, limited partnerships, unit trusts or other entities.
The Fund Rules
Major changes to Guernsey's fund regime were implemented on 15 December 2008 when the GFSC implemented the following new rules:
- The Registered Collective Investment Scheme Rules 2008 – which apply to open-ended and closed-ended registered funds.
- The Authorised Closed-Ended Investment Scheme Rules 2008 – which apply, as their name suggests, to authorised closed-ended funds.
- The Prospectus Rules 2008.
The Prospectus Rules 2008 prescribe the information that must be contained in:
- a prospectus issued by a Guernsey registered fund (open-ended or closed-ended);
- a prospectus issued by any other Guernsey entity; and
- a prospectus in respect of any offer of securities made to the public in Guernsey by a Guernsey or non-Guernsey entity. The public is defined as fifty or more people in Guernsey.
There is an exemption in respect of a prospectus offering shares in a company which are to be listed on a stock exchange in an International Organisation of Securities Commissions ("IOSCO") member country. The GFSC has confirmed that both the London Stock Exchange and AIM are recognised exchanges for this purpose. It is not yet clear whether this exemption will extend to limited partnership interests which are so listed.
There has been no change to the regulations applicable to authorised open-ended schemes which continue to be governed by the Collective Investment Scheme (Class A) Rules 2002 (or the Collective Investment Scheme (Class A) Rules 2008 which are due to be implemented shortly), the Collective Investment Scheme (Class B) Rules 1990 or the Collective Investment Scheme (Class Q) Rules 1998.
Regulatory process for authorised funds
For authorised funds, a traditional three stage approval process must be followed:
(i)Outline consent: This involves providing detailed information in connection with the promoter and some general information in relation to the proposed fund.
(ii)Interim: Once the promoter has obtained outline consent, draft documentation relating to the fund structure itself is submitted to the GFSC for review. If successful, this application will result in notification that the GFSC will be minded to grant final approval upon receipt of final certified documentation.
(iii)Final: Final signed/certified documentation is lodged and the GFSC's consent is issued within forty-eight hours.
The overall timing for this process is usually in the region of four to six weeks.
Under the registered fund regime, responsibility for ensuring that the promoter of the fund is fit and proper and that the fund documentation complies with the relevant regulatory requirements lies with the Designated Manager of the fund. The Designated Manager must provide warranties to the GFSC verifying those matters and in reliance upon those warranties, the GFSC will issue the necessary registration within three working days. This new process has moved responsibility for compliance on to the Designated Managers and leaves the GFSC free to inspect, investigate and audit those Designated Managers to ensure that the warranties being provided to it, and upon which it will rely in granting the approvals, are accurate and backed up by the necessary documentation.
The one restriction on registered funds is that they must not be marketed directly to the public in Guernsey. However, they can be offered to Guernsey residents through licensed intermediaries and, by exception, to the directors of the relevant fund.
The most significant advantage that registered schemes have over authorised schemes is the fast-track three day approval process for the fund and the fast-track ten day approval process for service providers (see below). Authorised funds, on the other hand, are generally subject to a lengthier approval process.
Qualifying investor funds
However, a faster approval route is available to certain authorised funds, known as the qualifying investor fund ("QIF") process. This enables approval to be obtained within three working days.
The QIF approval process is only available to qualifying investors who are professional investors, experienced investors and/or knowledgeable employees. An individual investor investing US$100,000 or more is automatically deemed to be a qualifying investor. QIFs can only be marketed to such individuals and warranties must be given by the fund's Guernsey administrator that the requirements have been complied with.
Authorised or registered?
The policy of the GFSC is to subject authorised investment schemes to closer supervision than registered schemes. In the case of closed-ended schemes, there is little of substance to distinguish between the two categories, other than the fast-track approval process for registered funds. However, in relation to open-ended funds, the registered regime provides a lighter touch than the authorised category which, until the recent changes, was the only form of regulation available to an open-ended fund in Guernsey.
A person who provides services in Guernsey to a closed-ended or open-ended fund must hold a licence under the POI Law (a "POI Licence"). This applies to fund administrators who must be licensed under the POI Law to provide administration services to fund entities. It also means that, for example, an investment adviser providing services in Guernsey to a Guernsey fund or the general partner of a Guernsey limited partnership which is a fund must also be licensed under the POI Law.
Notably, property is not a controlled investment under the POI Law. Accordingly, the provision of services in connection with property is not caught by the POI Law and does not require a POI Licence.
Often, the investment adviser to a fund will be a UK regulated entity. Provided that no activities are being conducted by that adviser in Guernsey, then there should be no Guernsey regulatory obstacles to this.
It is important to note that the fund approval processes described above do not encompass the obtaining of a POI Licence for any adviser, manager or administrator. Traditionally, the obtaining of a POI Licence could take around four to six weeks.
However, a new process has been introduced under which the GFSC will consider the application for a POI Licence within ten business days of the receipt by it of a fully completed application together with warranties from the Designated Manager that they have conducted due diligence on the beneficial owners of the applicant, and that the application is complete in all respects.
Notably, the fast-track process only applies to applicants who are seeking to provide services to QIFs or registered investment funds. Accordingly, we would anticipate that the new POI Licence process will result in even more fund applications using the registered or authorised QIF routes rather than the traditional authorised fund approval process.
It is common for private equity funds to accept commitments from investors comprising, in part, a capital contribution and, in part, a loan commitment. At the time of writing, it is also necessary for such a private equity fund to obtain an additional regulatory consent under the Control of Borrowing (Bailiwick of Guernsey) Ordinance, 1959 (as amended) for the borrowing which it is obtaining from its limited partners. This regulatory requirement is a hangover from the old regime and it is hoped that it will be dispensed with in the near future.
Funds are required to submit quarterly statistical information and file their annual report and accounts. The first annual return for registered funds must be made within twelve months of the registration being granted. Previously, Guernsey fund administrators were required to submit returns relating to all of the funds which they administered at the end of each year, but now each fund has its own individual twelve month period commencing on the day it was first registered.
It is possible for the holder of a POI Licence, such as a fund administrator, to outsource certain of its functions to an entity outside of Guernsey. However, such delegation of activities must be done in compliance with the outsourcing guidelines issued by the GFSC. In particular, it is worth noting that the licensee must retain sufficient expertise to oversee any such delegated functions.