1. Alternative Investment Fund Managers Directive (AIFMD)
1.1 ESMA questions and answers on the application of the AIMD
ESMA has published Q&As on the practical application of a number of areas of the AIFMD, including remuneration, reporting, and leverage. In particular in respect of leverage, ESMA clarified that debt held by a vehicle controlled by the AIF (for example, a portfolio company or asset holding vehicle) will not be included in any calculation of the AIF's leverage, provided that the AIF does not have to bear any potential losses beyond its investment in that vehicle and the vehicle was not established in order to increase exposure at the level of the AIF.
1.2 FCA views on the application of the AIFMD to migrated partnerships
The FCA has issued guidance on the question of whether UK limited partnerships, typically having a non-EU (for example Jersey) GP, should be treated as EU AIFs. The guidance has stated that a partnership (including a UK partnership) having a principal place of business outside of the EEA will be treated as a non-EEA AIF. This guidance will be helpful in determining the application of the directive as a whole to funds of this type, and it is hoped will be combined with regulatory clarification at a Jersey level in order to resolve this long-running area of uncertainty.
1.3 FCA guidance on transparency reporting
We have seen a growing number of applications to the JFSC by AIFMs seeking to use private placement regimes under the AIFMD. Many of these structures will be marketed into the UK, and the FCA has recently issued guidance on reporting under the UK national private placement regime, which will assist in the process of compliance with the Article 42 transparency and reporting requirements.
2 Regulatory Updates
2.1 Managed Accounts
We have previously provided updates regarding the regulatory treatment of managed accounts. We identified a number of areas of concern in the previous model, including:
- the extent to which a manager of a managed account would need to be a standalone entity, with reliance on MoME arrangements only being permitted for 24 months; and
- the requirement for a manager of a managed account to comply with the full FSB Codes (rather than just the principles).
We are pleased to report that the Jersey Financial Services Commission (the JFSC) has now sought feedback on an alternative approach for regulation of managed accounts. The alternative solution provides for regulated fund managers to be exempt from the requirement to be regulated for investment business in connection with services provided to qualifying segregated managed accounts. It is good news for the hedge fund industry that such managers are not required to comply with both the FSB Codes and the Investment Business Codes (as currently), nor will they be required to establish a full presence in Jersey as a result only of advising managed accounts.
Ogier is involved in the consultation process and we will continue to update you on developments.
2.2 JFSC confirmation re LLP licensing
The JFSC has confirmed that it will consider applications to license limited liability partnerships (LLPs) to conduct certain classes of 'fund service business'. LLPs will not be restricted to acting only for Jersey expert funds, related expert funds or materially equivalent funds, and may be general partners, managers, investment managers and investment advisers of collective investment funds as defined in the Collective Investment Funds (Jersey) Law 1988.
It is worth noting that an application by an LLP to act for a Fund that is not expert or materially equivalent may take longer to process by the JFSC, and additional conditions may be included in the licence granted. The JFSC's 'four-eyes/six-eyes' approach to the span of control of 'fund service business' will apply.
Partners who participate in management of the LLP may be either a natural person or a Jersey Company with two Jersey resident directors.
2.3 Qualifying Partnerships - UK Partnership Accounts Regulations 2008
The UK Partnerships (Accounts) Regulations 2008 have been amended so that (for example) a UK limited partnership with a Jersey corporate general partner will be a "Qualifying Partnership". Qualifying Partnerships are required to prepare and make public certain financial information (unless they are included within consolidated financial statements prepared as part of group accounts).
Ogier, in conjunction with UK counsel, has assisted a number of clients in restructuring UK limited partnerships with a Jersey corporate general partner so that they fall outside the scope of these Regulations. It should be noted that any such restructuring will need to be completed before 31 December 2014 to preserve a partnership's status as non-Qualifying Partnership.
2.4 Ombudsman Scheme
The Financial Services Ombudsman (Jersey) Law 2014 has come into force and has established the Office of the Financial Services Ombudsman. The Law gives the Minister of Economic Development power by Order to exempt certain financial services from the scope of the Ombudsman. A consultation on an Order that will exclude from the scheme all funds other than Recognized Funds has recently closed, so we are hopeful that the introduction of the scheme will not have any negative impact on the funds industry.
2.5 Civil Liability for Breaches of the Codes
The JFSC is currently permitted to take regulatory action, including the revocation of an entity's registration, where a registered person breaches any Codes of Practice applicable to it. However, the JFSC is not able to impose any financial penalty for breaches of the Codes or the AML/CFT Handbook.
On 6 June 2014, draft primary legislation to provide the JFSC with the power to impose civil financial penalties for material contraventions of the Codes of Practice (including the Funds and Fund Services Business Codes) and the AML/CFT Handbook was published.
Administrators should be aware of the introduction of this penalty and the scale of penalties that the JFSC may be able to impose. For a link to our more detailed briefing on the introduction of this penalty, please go to [insert link].
2.6 Abusive Tax Schemes - Proposed Jersey Finance Guidance Notes
On 31 July 2014, the Chief Minister issued a statement setting out that Jersey has no wish, or need, to engage with those who seek to involve Jersey in abusive tax schemes to avoid UK tax. In support of Government's efforts, Jersey Finance is proposing to put in place guidance notes to help industry align with the principles advocated by Government.
2.7 PII - JFSC Guidance
The JFSC has issued a guidance note in respect of Professional Indemnity Insurance (PII) on persons registered under the Financial Services (Jersey) Law 1998 to carry on regulated business. This guidance brings some welcome clarity to fund managers and administrators regarding policy limitations, characteristics of an excess and variances to the PII requirements, including reliance on self-insurance. A copy of the guidance note is available from the JFSC's website.
2.8 Review of regulatory regime
Ogier has been engaged in groups including representatives of industry, government and the regulator in relation to an anticipated set of reforms to streamline the regulatory treatment of Jersey funds. It is anticipated that this will lead to a consultation process towards the end of 2014. We will be updating clients as this process develops.