The Level 2 regulations pursuant to the EU Alternative Investment Fund Managers (AIFM) Directive issued by the European Commission entered into force on April 11 2013 and will apply from July 22 2013 (for further details please see "Alternative investment funds: impact in Jersey of new EU regulations").
The UK Financial Services Authority has published a second consultation paper on implementing the directive in the United Kingdom. Of particular interest to Jersey fund managers planning to place their funds privately in the United Kingdom are the views expressed in relation to the 'letter-box entity' test. Under the test, it appears likely that where a manager delegates so much that it effectively ceases to provide the services, it will be deemed a 'letter-box entity'. This could result in an onshore adviser being characterised as the manager, resulting in a requirement for full compliance with the directive.
Jersey is well placed to satisfy the requirements of the directive, the Level 2 regulations and the authority's guidance in demonstrating that its managers are not letter-box entities for a number of reasons. These include:
- existing regulatory policies restricting the extent to which regulated entities can outsource their functions;
- high corporate governance standards imposed on fund services providers; and
- professional infrastructure and fund administration expertise.
Managers must be aware that the guidance provides that only those performing both portfolio management and risk management will constitute a 'manager' for the purposes of the directive. This is likely to lead to revisions in many cases of the basis on which management agreement terms, as well as investment advisory agreement terms, are negotiated.
The Jersey Financial Services Commission continues to work with industry in finalising revisions to existing codes of practice and related regulatory orders to accommodate the structuring of Jersey funds and Jersey managers in conjunction with marketing into the European Union beyond July 2013.
The US Foreign Account Tax Compliance Act is intended to create a new information reporting and withholding regime for payments made to certain foreign financial institutions and other 'foreign' persons. The definition of 'foreign financial institution' is very broad and includes funds. Jersey is now in the process of negotiating intergovernmental agreements with the United States - in part, this is intended to overcome the legal barriers to compliance with the act and simplify some of the requirements.
The UK government has approached Jersey to discuss the possibility of applying similar principles more widely to an exchange of information between the two countries. As part of its commitment to combat global tax evasion, the States of Jersey has accordingly announced its intention to sign an agreement with the United Kingdom aimed at furthering tax transparency. The UK agreement includes an alternative reporting arrangement for UK residents who are categorised as non-domiciled for tax purposes and a disclosure facility that will allow eligible investors with assets in Jersey to disclose their tax arrangements before information on their accounts is automatically exchanged.
The finalisation of the UK agreement will allow Jersey to move forward with finalising an intergovernmental agreement with the United States in relation to the act.
The Jersey Financial Services Commission has issued a consultation paper in relation to the regulatory treatment of managed accounts.
Under the current regulations, managers of managed accounts must be regulated for fund services business in relation to management services provided to the investment fund (referred to in the consultation paper as the 'flagship fund') and for investment business in relation to management of the managed account.
The aim of the consultation is to simplify the regime by creating a new category of fund services business (that of managing a managed account) and exempting such managers from the requirement to be regulated for investment business. One area of consultation is the extent to which a manager of a managed account would need to be a standalone entity, with reliance on such arrangements being permitted for only 12 months.
The commission has suggested a minimum account size of $5 million, although it has been argued that this presents an unnecessary barrier to entry for start-up managers.
For further information on this topic please contact Nick Kershaw, Niamh Lalor, Michael Lombardi or Tim Morgan at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email (firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com).
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