Jersey signs regulatory co-operation agreement
We reported in our December 2012 briefing that, with the release of the AIFMD Level 2 regulations, we were optimistic that eligible Third Countries (such as Jersey) would be able to continue to market their funds to professional investors within the EU after July 2013.
Since then, we have been closely monitoring developments on AIFMD and have advised a number of clients how to prepare their businesses to best to meet the challenges under the Directive. This update looks at:
- How Jersey funds can be marketed in the EU after July.
- Letter box entity risk.
- Transitional provisions.
- AIFMs in Jersey
From July 2013 onwards, managers of EU funds will need to comply fully with the Directive in order to market to investors in the EU. The Directive will bring with it significant and costly additional regulatory obligations in relation to depository requirements, capital adequacy, leverage restrictions, valuations and manager remuneration restrictions.
However, fund managers based in eligible "Third Countries" (such as Jersey) are expected to be able to continue to market Third Country funds to professional investors in EU Member States by using the existing private placement rules, subject to the following conditions:
- A supervisory co-operation agreement must be in place between the regulator of the EU Member State in which the fund is to be marketed and the JFSC.
Building on the positive relationship built up between the JFSC and the European Securities and Markets Authority (ESMA), on 30 May Jersey entered into a co-operation agreement with the regulators of the EEA Member States co-ordinated by ESMA, which will enable Jersey funds to be marketed in the EU from July 2013.
- The Jersey fund complying with certain transparency and reporting requirements set out in the Directive.
Jersey will satisfy this condition by enabling Jersey funds to opt into new codes, a draft of which is expected to be released this month (AIF Codes). Ogier has been fully involved on the AIFMD working group and will be well placed to advise on the new AIF Codes.
The AIF Codes will contain a number of requirements, but managers privately placing their funds in the EU will be required to comply only with those elements of the Directive necessary for private placement and not the more detailed provisions relating to full passporting.
- Jersey remaining off the Financial Action Task Force blacklist.
The impact on Jersey funds is expected to be as follows:
- Expert funds will continue to comply with the existing codes and will simply opt into the transparency and reporting requirements contained in the AIF Codes. There will be no change in the regulation of managers of expert funds.
- COBO funds will adhere to the transparency and reporting requirements contained in the new AIF Codes. Managers of COBO funds will be licensed for AIF services business on what is hoped to be a fast-track approval process.
- Unregulated funds will become subject to the existing Fund Codes and the AIF Codes, although they will continue to benefit from minimum prospectus content requirement and will be able to use a fast-track approval process for their directors. Managers of unregulated funds will need to be regulated for fund services business and to comply with the FSB Codes.
- Non-domiciled funds being marketed in the EU will be granted an AIF certificate and will be required to comply with the AIF Codes. There will be no change in the regulation of managers of non-domiciled funds.
The AIF Regulations introduced in response to the Directive will not only enable continued marketing into Europe, but have been drafted with sufficient flexibility to ensure that their provisions will not apply unless a fund is marketed into Europe. This means that there will be no change for rest of world business.
- Letter-box entities
The Level 2 regulations explain what could lead to an AIFM being deemed a "letterbox entity". Where an AIFM no longer retains the necessary expertise and resources to supervise a delegated task, or no longer has the power to take decisions in key areas or delegates the performance of more investment management functions than it retains, then the AIFM may be deemed to be a letterbox entity.
The Financial Conduct Authority (previously the FSA), in a recent consultation paper, confirmed that it will take account of the criteria set out in the Level 2 regulations and will also undertake a qualitative assessment as to whether any proposed delegation arrangement would lead to a "letter box entity".
There are a number of steps that fund managers can take to avoid characterisation as a letterbox entity, including:
- Including in the fund documents an undertaking from the AIFM that it will continue to oversee and control any delegate and an acknowledgement from the delegate as to the limits of its role.
- Ensuring the AIFM's operational policies and procedures are sufficiently robust, for example, by including a requirement for frequent oversight meetings by the AIFM of decisions made by any delegates.
- Considering whether the AIFM needs its own permanent establishment in Jersey with its own employees and premises from which to carry out operations. This is an effective method of demonstrating sufficient resources and expertise for the AIFM to perform senior management functions in relation to the implementation of an AIF's investment strategy.
- Transitional provisions
On 29 April, HM Treasury published a Q&A on the transposition of the Directive into UK law confirming its intention to extend the one year transitional arrangements to Third Country AIFMs marketing into Europe after July 2013.
This means that Jersey AIFMs who have been managing a fund before 22 July 2013 will be able to continue to market AIFs in the UK from 22 July 2013 for up to 12 months without having to comply with the transparency and reporting requirements set out in the Directive.
This is welcome news given the UK's importance as a market for Jersey AIFMs, although fund managers should be aware that member states other than the UK may choose to implement the transitional provision more restrictively.
Passive marketing (or reverse solicitation as it is also known) does not fall within the scope of the Directive. If a fund is not actively marketed, then its manager is not required to take any further action in connection with Directive.
The Directive defines marketing as the ‘direct or indirect offering or placement at the initiative of the AIFM, or on behalf of the AIFM, of units or shares of an AIF it manages to or with investors domiciled or with a registered office in the Union’.
It appears from recent draft guidance that the term "passive marketing" will be narrowly construed by the FCA and will apply only to communications specifically solicited by investors. Indications are that UK regulations will be amended so that the marketing restrictions will apply only to offering or placement made at the initiative of, or on behalf of, the AIFM.