Quick viewing(Text Mode)

Alternative Investment Funds June 2012

Alternative Investment Funds June 2012

hedgeweek guide to setting up Alternative Investment Funds June 2012

Focus Report: BVI • • • • Ireland • • • Contents In this issue… 03 Introduction By Sunil Gopalan, Global Fund Media 04 British : Jurisdiction information 05 : Overview By Ross Munro, Harneys 09 Cayman Islands: Jurisdiction information 11 Cayman Islands: Overview By Marco Martins and Patrick Colegrave, Harneys 15 Gibraltar: Jurisdiction information 17 Gibraltar: Overview By James Lasry, 20 Guernsey: Jurisdiction information 22 Guernsey: Overview By Paul Wilkes, group partner, Collas Crill 25 Ireland: Jurisdiction information 28 Ireland: Overview By Dillon Eustace 35 Jersey: Jurisdiction information 37 Jersey: Overview By Ashley Le Feuvre, senior manager Funds/SPV Group, Volaw Trust & Corporate Services Limited 43 Luxembourg: Jurisdiction information 45 Luxembourg: Overview By Rémi Chevalier and Olivier Sciales, Chevalier & Sciales 54 Malta: Jurisdiction information 56 Malta: Overview By Malta Authority

Publisher

Special Reports Editor: Simon Gray, [email protected] News Editor: James Williams, [email protected] Sales Managers: Simon Broch, [email protected]; Malcolm Dunn, [email protected] Publisher & Editorial Director: Sunil Gopalan, [email protected] Graphic Design: Siobhan Brownlow, [email protected] Published by: GFM Limited, 1st Floor, Liberation Station, St Helier, Jersey JE2 3AS, Channel Islands Tel: +44 (0)1534 719780 Website: www.globalfundmedia.com

©Copyright 2012 GFM Limited. All rights reserved. No part of this publication be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher.

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 2 Introduction Introduction

The Hedgeweek Guide to Setting up Alternative Investment Funds 2012 is the fifth edition of this unique online publication being made available to the 50,000-strong audience of investment managers, institutional investors and fund service providers that read Hedgeweek and its family of investment management newswires daily.

The focus of the Guide is to help managers, promoters and their advisers decide where best to list their alternative investment funds and complements the daily news, special reports and fund data delivered through our specialised investment management portals (see below for compete list).

This edition of the Guide draws together in one volume all the major current regulations covering the establishment of alternative investment funds in a comprehensive treatment of the subject covering the following major jurisdictions – BVI, Cayman Islands, Gibraltar, Guernsey, Ireland, Jersey, Luxembourg and Malta.

The Guide goes from strength to strength with the support of leading law firms and service providers and in this regard we would like to thank Hassans, Harneys, Volaw Trust & Corporate Services, Collas Crill, Chevalier & Sciales, Dillon Eustace, and Malta Financial Services Authority for their invaluable time and assistance in preparing a comprehensive overview of each jurisdiction in this edition.

We look forward to your feedback and participation in forthcoming editions of this Guide.

Sunil Gopalan Publisher GFM Limited globalfundmedia.com

Hedgeweek.com Institutionalassetmanager.co.uk Wealthadviser.co Privateequitywire.co.uk Propertyfundsworld.com Etfexpress.com Globalfunddata.com

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 3 British Virgin Islands

Authorised representatives:...... 45 license holders Investment managers:...... 536 SIBA license holders Custodians:...... 6 licensed Corporate service providers:...... 128 licensed Tortola Accountants/auditors:...... 7 international firms Trustees:...... 84 Class I Trust license holders Insolvency Practitioners:...... 22 licensed Local stock exchange: No Local fund industry body: BVI Investment Funds Association, PO Box 71, , Tortola, VG 1110, BVI Promotion agency for funds/financial sector: BVI International Finance Centre, Haycraft Building, 1 Pasea Estate, Road Town, Tortola VG1120, BVI. Email: [email protected]; Tel: +1 284 468 4335; Fax: +1 284 468 1002

Tax information exchange agreements ; ; China; ; ; Faroe Islands; ; ; ; ; ; ; Ireland; ; Netherlands ; ; ; ; ; UK; USA

Alternative fund, manager and service provider information

Types of alternative fund vehicle British Virgin Islands Open-ended or closed-ended investment company (see below), limited partnership, unit trust, common contractual Fund legislation fund, umbrella fund Securities and Investment Business Act, 2010 (SIBA) Types of Corporate Vehicle: l Company Limited by Shares, including: Number of funds – Restricted Purposes Company As at 31 March 2012 (the latest available):...... 2525 – Segregated Portfolio Company (for recognised or registered funds and licensed insurance companies Number of funds by category only) As at 31 March 2012: l Company Limited by Guarantee authorised to issue Private: ...... 681 shares; Professional:...... 1668 l Company Limited by Guarantee not authorised to Public:...... 176 issue shares; Only open ended funds are required to be registered l Unlimited Company authorised to issue shares; and or recognised under SIBA. No statistics are available for l Unlimited Company not authorised to issue shares other types of funds. There is currently no distinction in the licensing Types of regulatory fund category process between directly invested hedge funds and Public; Private; Professional funds of hedge funds and so no official figures exist for the break down. Audit requirement Domiciled and administered fund assets total: l Public Funds: Financial statements must be audited No figures currently available. by an auditor approved by the Financial Services Domiciled and administered fund assets by category: Commission (no local sign off). No figures currently available. l Private and Professional Funds: Financial statements must be audited by an auditor meeting certain Regulator prescribed criteria unless the fund is exempted Financial Services Commission, Investment Business from the audit requirement by the Financial Services Division. Contact: Broderick Penn, Director of Investment Commission (no local sign off). Business Division; Tel: +1 284-494-1324 or + 1284-494- 4190; Fax: +1 284-494-5016 Financial statement requirements Address: BVI Financial Services Commission, Pasea l Public funds: Financial statements for each financial Estate, PO Box 418, Road Town, Tortola, VG 1110, BVI year must be prepared which comply with IFRS, US, UK or Canadian GAAP or such other accounting Service providers standards as may be approved by the Financial Law firms:...... 8 multi-jurisdictional firms; Services Commission on a case by case basis...... approximately 14 other BVI commercial firms l Private and professional funds: Financial statements Administrators:...... 89 licensed for each financial year must be prepared in

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 4 British Virgin Islands

accordance with one of the prescribed financial Cost of regulatory fees (by type of fund): standards (UK, US or Canadian GAAP or IFRS) or Private and Professional:...... US$1,000 internationally recognized and generally accepted Public:...... US$1,500 accounting standards equivalent to such standards. l All funds regulated under SIBA must also submit an Overall cost of fund establishment annual return to the Financial Services Commission Private and Professional:...... From US$12,000 containing summary prudential and governance Public: ...... From US$20,000 information. Regulatory approval time From submission of complete application: Private and Professional Funds:...... 2 - 5 business days Public Fund:...... 2-3 weeks

Overall establishment time Private and Professional:...... At least 2 weeks Public Fund:...... At least 10 weeks

The British Virgin Islands By Ross Munro, Harneys

The British Virgin Islands is a leading jurisdiction for as an investment manager, administrator, investment the formation of alternative investment funds, having advisor or custodian with respect to a wide variety of approximately 2,525 funds registered or recognised under financial instruments. It includes most functionaries of the Securities and Investment Business Act 2010 (SIBA). open and closed ended funds but the precise outcome Funds recognised or registered under SIBA are regulated depends on the services provided and the structure of by the Financial Services Commission (the Commission), the fund. It is important to note, however, that non-BVI the financial regulator in the British Virgin Islands. functionaries of a BVI fund carrying on business from SIBA requires all investment funds falling within its outside the BVI will not generally need to hold a license definition of “fund” to be recognised or registered with under SIBA. the Commission. SIBA restricts the definition of “mutual fund” to open-ended funds that entitle investors to Fund vehicles demand redemption of their fund interests immediately Sponsors and fund managers considering setting up or within a period of notice. Accordingly only such funds investment funds in the British Virgin Islands may choose are regulated under SIBA. Closed ended funds are not from the following range of possible vehicles: subject to specific regulation although BVI established l BVI Business Company managers and other BVI established functionaries of l Limited Partnership closed ended funds will in many circumstances require a l Unit Trust licence under SIBA. The vast majority of British Virgin Islands investment SIBA requires any person carrying on “investment funds are established as companies limited by shares business” in or from within the BVI to hold a licence. The under the BVI Business Companies Act, 2004 or as limited activities constituting investment business include acting partnerships formed under the Partnership Act, 1996.

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 5 British Virgin Islands

Categories of fund The Commission may recognise and accept a The three categories of regulated fund are as follows: functionary from outside the BVI and the above l Private fund. Restricted to either (a) having no more countries if it is satisfied that the country has a system than 50 investors or (b) only making an invitation to for the effective regulation of investment business, subscribe for or purchase fund interests on a private including funds. basis. l Professional fund. May only issue fund interests to No restrictions on strategy, leverage or valuation “professional investors” and the initial investment for There are no restrictions on the strategy a fund may all investors, other than exempt investors (as defined), pursue, provided it is not otherwise in breach of the may not be less than US$100,000 or equivalent in laws of the British Virgin Islands. There are no limits on another currency. leverage taken by the funds. There are currently no rules l Public fund. Greater regulation imposed as no imposed on funds as to how they value their assets. The restrictions on investors or minimum investment. Public Funds Code came into effect on 31 March 2011 Private funds and public funds must be recognised or and only applies to registered public funds. It imposes registered under SIBA before they commence business additional disclosure and governance requirements on whereas professional funds may commence business public funds (including provisions relating to valuation for a period of up to 21 days without being recognised policy and disclosure). provided that they otherwise comply with the requirements of SIBA as if they were recognised and that an application Financial statements and audit is submitted to the Commission within 14 days. Public funds: Financial statements for each financial year A professional investor is a person either (a) whose must be prepared which comply with IFRS, US, UK or ordinary business involves the acquisition or disposal Canadian GAAP or such other accounting standards as of property of the same kind as the property or a may be approved by the Financial Services Commission substantial part of the property of the fund or (b) who on a case by case basis. The financial statements must has signed a declaration that he, whether individually be audited by an auditor approved by the Financial or jointly with his spouse, has net worth in excess of Services Commission. There is no local sign off. US$1,000,000 and that he consents to be being treated as Private and professional funds: Financial statements a professional investor. for each financial year must be prepared in accordance with one of the prescribed financial standards (UK, US Functionaries / service providers or Canadian GAAP or IFRS) or internationally recognised All functionaries of funds regulated under SIBA must and generally accepted accounting standards equivalent satisfy the Commission’s “fit and proper” criteria. to such standards. The Financial statements must be Functionaries of a public fund require the prior approval audited by an auditor meeting certain prescribed criteria of the Commission. Every public fund must have a unless the fund is exempted from the audit requirement manager, administrator and custodian and each must be by the Financial Services Commission (no local sign off). independent or functionally independent of the fund and each other. Annual return Private and professional funds must generally have All funds regulated under SIBA must submit a return to a manager, administrator and custodian although an the Commission no later than 30 June in each year in exemption from the requirement to appoint a manager respect of the calendar year ending on 31 December of and/or custodian is available upon application to the the previous year. The return contains basic prudential Commission. and governance information and summary financial Functionaries of funds established and located in the information. The return does not require any information BVI or any of the following countries may be recognised on the identity of investors or the specific investments and accepted by the Commission for the purposes of within the fund’s portfolio. Such information is confidential acting as a functionary of a BVI fund: to the Commission and may only be publicly disclosed Argentina, Australia, Bahamas, , , on an aggregated basis. Brazil, , Cayman Islands, Chile, China, Curacao, Denmark, Finland, France, Germany, Gibraltar, , Fund documentation Guernsey, , Ireland, , , Japan, Public Funds: Public funds may not make an invitation Jersey, Luxembourg, Malta, , Netherlands, New to the public to subscribe for or purchase fund interests Zealand, Norway, , Portugal, , , unless the offer is contained in a prospectus which has , Sweden, , and been approved by the fund’s governing body and the of America. prospectus has been registered (i.e. approved) by the

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 6 British Virgin Islands

Commission. The prospectus is required to provide full Ongoing requirements and accurate disclosure of all information as investors Regulated funds are subject to a reasonable number would reasonably require and expect to find for the of requirements to notify the Commission either purpose of making an informed investment decision. before or after the occurrence of certain events such Additional minimum disclosure requirements for a as appointment and resignation of directors and prospectus are to be contained in the Public Funds Code functionaries and changes to documents. (currently in consultation). Private / Professional Funds: A private or professional Manager’s and administrator’s licenses fund must submit a copy of its proposed offering A licence may be granted by the Commission to a document to the Commission upon application for person proposing to carry on business in or from within recognition or provide an explanation as to why no the BVI as the functionary of funds if the Commission is offering document is to be issued. The prescribed satisfied that, inter alia: investment warning must be included in a prominent a) the applicant, its directors and senior officers and place within an offering document (or if no offering significant shareholders satisfy the Commission’s fit document is issued, provided to each investor or and proper criteria; and potential investor in a separate document) but otherwise b) the organisation, management and financial resources SIBA does not prescribe what should be included within of the applicant are, adequate for the carrying on of the offering document. Copies of offering documents the relevant investment business. issued to investors or potential investors must be filed A holder of a licence under SIBA must comply with with the Commission. The constitutional documents of the requirements of SIBA and relevant sections of the private and professional funds must contain prescribed Regulatory Code, 2009. statements referring to their status as private and professional funds respectively. AML All BVI funds, managers and administrators must comply Directors / authorised representative with the Anti- Regulations, 2008 and SIBA requires that every fund established as a company the Anti-money Laundering and Terrorist Financing have at least 2 directors. Corporate directors are Code of Practice, 2008. However, BVI funds commonly permitted for private and professional funds provided outsource the majority of their obligations under such that at least one director is an individual but are not legislation to their administrators who are then required permitted for public funds. There are no requirements to comply with the AML laws of their home jurisdictions. for local directors. However, each fund must appoint an authorised representative unless the fund has a Tax significant management presence in the BVI. The BVI funds and functionaries are exempt from BVI income authorised representative itself must be a person located tax. Furthermore, investors in BVI funds are not liable in the BVI holding a certificate from the Commission to any BVI with respect to fund interests. authorising it to act in such capacity. There are no estate, inheritance, succession or gift taxes payable in the British Virgin Islands with respect to any interests in a fund.

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 7 www.harneys.com

Reliability. A commitment to consistent, unconditional delivery

Delivering fast and commercial offshore legal services for more than 50 years.

British Virgin Islands • Cayman Islands • • Hong Kong • • Montevideo Cayman Islands

SERVICE PROVIDERS Law Firms: please see www.judicial.ky/home/judicial- administration/law-firms-judicial-admin for up to date information on law firms operating in Cayman. Cayman Islands Administrators:...... 127 as at 31 March 2012 Issued SIBL Licences (required for broker/dealers, securities (investment) managers, securities (investment) advisors, securities arrangers and market Georgetown makers unless classified as an excluded person under the SIBL)...... 31 as at 31 March 2012, broken down as follows (noting that an entity may have been issued a SIBL license with respect to one or more regulated activities): Broker/dealers:...... 16 Securities (investment) managers...... 19 Securities (investment) advisors...... 19 Securities arrangers...... 10 Market makers...... 3 Entities registered as excluded persons under the SIBL...... 1,860 as at 31 March 2012 Trust Companies...... 148 as at 31 March 2012 Companies Management Licensees (may include custodians)...... 191 as at 31 March 2012 Bank & Trust License Holders (may include custodians...... 233 as at 31 March 2012 Cayman Islands LOCAL STOCK EXCHANGE The Cayman Islands Stock Exchange (the “CSX”). Fund legislation Mutual Funds Law (as amended) and the Mutual Funds LOCAL FUND INDUSTRY BODY (Amendment) Law, 2011 (together, the “MFL”) and the AIMA Cayman Securities Investment Business Law (2011 Revision, the “SIBL”). PROMOTION AGENCY FOR FUNDS/FINANCIAL SECTOR NUMBER OF FUNDS l Cayman Islands Government As at 31 March 2012 l CIMA Registered...... 8,615 l AIMA Cayman Master Funds...... 837 Administered...... 419 DOUBLE TAXATION TREATIES Licensed...... 119 Not applicable. Only open ended funds are required to be registered or recognised under the MFL. No statistics are available TAX INFORMATION EXCHANGE AGREEMENTS for other types of funds. Mexico; Canada; Germany; Portugal; Aruba; Australia; There is currently no distinction in the licensing Netherlands Antillies; France; New Zealand; Netherlands; process between directly invested hedge funds and Ireland; Denmark; Faroes; Finland; Greenland; Iceland; funds of hedge funds and so no official figures exist for Norway; Sweden; and United States. the break down. TYPES OF ALTERNATIVE FUND VEHICLE DOMICILED AND ADMINISTERED FUND ASSETS Invariably either exempted companies, exempted limited TOTAL partnerships or exempted unit trusts which may be No figures currently available. structured as single investor, stand-alone, master-feeder, umbrella, open-ended or closed-ended funds with DOMICILED AND ADMINISTERED FUND ASSETS BY free range on strategy and no statutory or regulatory CATEGORY investment restrictions. No figures currently available. AVAILABLE TYPES OF CORPORATE VEHICLE REGULATOR l An exempted company, including: segregated portfolio Cayman Islands Monetary Authority (“CIMA”), nvestments companies (“SPCs”); and limited duration companies, all and Securities Division. Contact Details: of which may be limited by shares or guarantee or both. E-mail: [email protected] l An ordinary non-resident company which may be Phone: +1-345-244-1581 limited by shares or guarantee or both. Fax: +1-345-949-2532 l An ordinary company which may be limited by shares or guarantee or both.

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 9 Cayman Islands

TYPES OF REGULATORY FUND CATEGORY OVERALL ESTABLISHMENT TIME l Licensed Fund (s4(1)(a) MFL); Licensed Fund...... typically at least two months l Administered Fund (s4(1)(b) MFL); Administered Fund...... typically at least two weeks l Registered Fund (s4(3)(a)(i) MFL); Registered Fund...... typically at least two weeks l Master Fund (s4(3)(a)(iii) MFL)1; and Master Fund...... typically at least two weeks running l Exempt Fund (s4(4) MFL)2. concurrently with the establishment of the feeder fund(s)

AUDIT REQUIREMENT Local audit required for all licensed funds, administered funds and registered funds, licensed administrators and licensed managers.

FINANCIAL STATEMENT REQUIREMENTS All licensed funds, administered funds and registered funds must submit a fund annual return and audited financial statements to CIMA within 6 months of each financial year end. CIMA have no restrictions on the type of accounting standards chosen by funds provided they are in accordance with those specified in the offering documents of the fund and that CIMA is aware at all times of the accounting standards in use. However, CIMA has published guidelines on the authorisation of auditors which require Partners signing off on audit engagements, or any member of the firm with authority to sign off the audit, to possess an internationally recognised accounting qualification. For the purposes of this policy, the following are considered internationally recognised accounting bodies: The Institute of Chartered Accountants in and , The Institute of Chartered Accountants in Ireland, The Institute of Chartered Accountants of , The Canadian Institute of Chartered Accountants, The Association of Chartered Certified Accountants, The American Institute of Certified Public Accountants, or any other Professional Body or Institute approved by CIMA. In practice therefore, financial statements are generally prepared in accordance with IFRS, US, UK or Canadian GAAP.

COST OF REGULATORY FEES 1. A Master fund is required to be registered with CIMA if it has one or Licensed Fund...... US$3,660 per annum3 more CIMA regulated feeder funds (being a CIMA regulated mutual 4 fund that conducts more than 51% of its investing through another Administered Fund...... US$3,660 per annum mutual fund). 5 Registered Fund...... US$3,660 per annum 2. An Exempted Fund is a category of fund provided for in the MFL which Master Fund...... US$3,000 per annum6 is not required to register with CIMA and as such is unregulated. 3. For Cayman SPCs there is an additional regulatory fee of US$305 per OVERALL COST OF REGULATED FUND segregated portfolio (“SP”) up to a maximum of US$7622 (25 SPs). 4. For Cayman SPCs there is an additional regulatory fee of US$305 per 7 ESTABLISHMENT segregated portfolio (“SP”) up to a maximum of US$7622 (25 SPs). Exempted Company 5. For Cayman SPCs there is an additional regulatory fee of US$305 per (not established as an SPC)...... US$6,9128 segregated portfolio (“SP”) up to a maximum of US$7622 (25 SPs). Exempted Company Master Fund...... US$6,2529 6. For Cayman SPCs there is an additional regulatory fee of US$305 per 10 segregated portfolio (“SP”) up to a maximum of US$7622 (25 SPs). Exempted Company (established as an SPC).... US$7,826 7. Government disbursement costs only. Legal fees, legal disbursements 11 Exempted Limited Partnership...... US$7,332 and registered office fees will be a matter of negotiation with the Exempted Limited Partnership Master Fund...... US$6,67212 service provider(s) concerned. Unit Trust...... US$5,49013 8. Includes a government tax undertaking costing US$1830 and assumes a share capital of US$50,000 with an express incorporation costing an additional US$500. REGULATORY APPROVAL TIME 9. Includes a government tax undertaking costing US$1830 and assumes Licensed Fund...... 4 – 6 weeks a share capital of US$50,000 with an express incorporation costing an Administered Fund...... 5 days additional US$500. Registered Fund...... 5 days 10. Includes a government tax undertaking costing US$1830 and assumes a share capital of US$50,000 with an express incorporation costing an Master Fund...... 5 days additional US$500 and one initial segregated portfolio. 11. Includes a government tax undertaking costing US$1830 and assumes an express registration costing an additional US$500. 12. Includes a government tax undertaking costing US$1830 and assumes an express registration costing an additional US$500. 13. Includes a government tax undertaking costing US$1830.

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 10 CAYMAN ISLANDS The Cayman Islands By Marco Martins and Patrick Colegrave, Harneys

The Cayman Islands is the leading jurisdiction for of a Cayman Islands domiciled investment fund carrying the formation of alternative investment funds, having on business from outside the Cayman Islands will not approximately 9,990 registered, administered and licensed generally be required to hold any of the abovementioned funds under the Mutual Funds Law (as amended) of the licences. In addition, barring certain audit and registered Cayman Islands (the “MFL”) as at 31 March 2012. office / resident agent requirements, a Cayman Islands The MFL requires all investment funds falling within its domiciled fund is not required to have any service definition of a “mutual fund” to be registered, administered providers resident in the Cayman Islands. or licensed with CIMA, unless such mutual fund is an “excluded fund”, being a mutual fund that is not a master Fund vehicles fund domiciled in the Cayman Islands and having 15 or Sponsors and fund managers considering setting up less investors, the majority in number whom can appoint investment funds in the Cayman Islands may choose and remove the fund directors, general partner(s) and from the following range of possible vehicles: trustee(s). The MFL restricts the definition of “mutual l Exempted company (includes a segregated portfolio fund” to open-ended funds that entitle investors to company and a limited duration company); redeem or repurchase their equity interests at their option. l Ordinary non-resident company; Accordingly, only such funds are regulated under the MFL. l Exempted limited partnership; and Closed ended funds are not subject to specific regulation l Exempted unit trust. although Cayman Islands established or registered In practice, Cayman Islands investment funds are managers and other Cayman Islands established or typically established as exempted companies limited by registered functionaries of closed ended funds may in shares under the Companies Law (as amended) of the many circumstances require a license issued by CIMA Cayman Islands, exempted limited partnerships under the under the relevant Cayman Islands legislation. For the Exempted Limited Partnership Law (as amended) of the purposes of this article, mutual funds will refer generically Cayman Islands or as exempted unit trusts registered as to investment funds when used in the context of the MFL such under the Trusts Law (as amended) of the Cayman and unless the context otherwise requires. Islands. The Securities Investment Business Law (as amended) of the Cayman Islands (the “SIBL”) requires any person, Categories of fund as defined in the SIBL, carrying on or purporting to carry Mutual funds fall into 5 categories under the MFL (note on “investment business” to hold a licence granted under the MFL does not cover closed-ended investment funds the SIBL, unless such person is exempt from holding i.e. investment funds where investors have no voluntary such a licence. The activities constituting investment redemption rights): business include dealing in securities, arranging deals l Licensed Mutual Funds – regulated by CIMA, no in securities, managing securities and advising on minimum investment requirement. Mutual funds securities, encompassing broker / dealers, investment holding a Mutual Funds Licence under Section 4(1) managers, investment advisors, securities arrangers of the MFL. All mutual funds are required to be and market makers. SIBL provides an exemption from licensed unless registered with CIMA in accordance licensing where the foregoing qualify as “excluded with Section 4(3) of the MFL or exempted under persons” under the fourth schedule of the SIBL. In Section 4(4) of the MFL or a licensed mutual fund addition to SIBL, certain fund service providers may administrator is providing principal office services to be required to hold a licence under the Companies the mutual fund in the Cayman Islands in accordance Management Law (as amended) and the Banks and with section 4(1)(b) of the MFL (such mutual fund Trust Companies Law (as amended) of the Cayman being an “Administered Mutual Fund”); Islands. Unless acting with, and in accordance with, l Administered Mutual Funds – regulated by CIMA, the authorisation of CIMA, mutual fund administrators no minimum investment requirement. Mutual funds, established or registered in the Cayman Islands are the principal office of which is provided by a CIMA- required to be licensed under the MFL. It is important licensed mutual fund administrator in the Cayman to note, however, that non-Cayman Islands functionaries Islands;

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 11 CAYMAN ISLANDS

l Registered Mutual Funds – regulated by CIMA, if listed custodian and any sub-custodian, prime broker, legal on a CIMA-recognised stock exchange no minimum advisers and any other persons having significant investment requirement. Mutual funds registered under involvement in the affairs of the licensed mutual fund in Section 4(3)(i) or (ii) of the MFL, being mutual funds in the offering document of the licensed mutual fund. which the minimum aggregate interest purchasable by An administered mutual fund is required to have a prospective investor is US$100,000 (or its equivalent a CIMA licensed administrator authorised to provide in any other currency, such amount referring to the principal office services to the administered mutual initial investment made by a prospective investor) or fund within the Cayman Islands. The administrator must the equity interests are listed on a CIMA-recognised satisfy itself as to the sound reputation of the Promoter, stock exchange; as to the sound reputation and expertise of the person l Registered Master Funds – regulated by CIMA, the undertaking the administration of the administered mutual minimum investment requirement is the same as a fund and that the business of the administered mutual Registered Mutual fund. Mutual funds registered in fund and any offering of equity interests will be carried accordance with Section 4(3)(iii) of the MFL, being out in a proper way. mutual funds incorporated or established in the If established as an exempted limited partnership, Cayman Islands that hold investments and conduct at least one general partner must be resident in the trading activities and have one or more feeder funds Cayman Islands (either physically or by virtue of regulated by CIMA; and incorporation or registration). Local audit sign-off of l Exempted Mutual Funds – not regulated by CIMA. annual financial statements is required for all regulated Mutual funds that are exempt from licensing or mutual funds. registration under Section 4(4) of the MFL, being As a matter of policy, CIMA requires that regulated mutual funds that are not master funds and which mutual funds established as corporates have at least have 15 or less investors, the majority in number of two directors, neither of which need to be resident in which can remove the directors, general partner(s) or the Cayman Islands nor independent. Note however that trustee(s) of such mutual funds. given market practice it is typical to find independent The vast majority of mutual funds regulated by CIMA directors sitting on the boards of such mutual funds are registered mutual funds or registered master funds. and there is a well established and experienced Requirements for registration include filing an offering independent director services industry in the Cayman document along with the prescribed registration form, Islands. Corporate directors are permissible, provided that incorporation / registration certificate, auditor and they themselves have a board made up of at least two administrator consent letters and prescribed fee with individual directors. CIMA. Mutual funds must be registered with CIMA before Regulated mutual funds are required to have an they commence business. Provided all requirements for administrator but such administrator does not need to be registration are met, the registration of a mutual fund resident in the Cayman Islands nor independent of the is dated the date that the application for registration is fund or other service providers, although market practice submitted to CIMA. is trending towards independence of the administrator. For purposes of compliance with anti-money laundering Functionaries / Service providers Regulations (as defined below), if the AML obligations of There are no pre-approval procedures required for the a mutual fund are to be outsourced to an administrator, appointment of functionaries to regulated mutual funds, as they typically are, such administrator must located in provided such functionaries are properly registered one of the listed Schedule 3 Jurisdictions. or licensed in the Cayman Islands, where required. A There are no statutory or regulatory requirements for regulated mutual fund must have a registered office in regulated funds to have a prime broker or custodian, the Cayman Islands. however this may be implied in the case of licensed The MFL requires that a person causing the mutual funds by virtue of the disclosure requirements for preparation or distribution of the offering document of the offering document and in the case of other regulated a licensed mutual fund (the “Promoter”) is of sound mutual funds, lack of a prime broker or custodian may reputation. In addition, administration of a licensed well raise queries from CIMA. mutual fund must be undertaken by persons with Aside from any requirement for the provision of sufficient experience in fund administration with directors, principal office services, the need for a registered office, managers or officers, as the case may be, who are fit a resident general partner (if applicable) and local audit and proper to be in their respective positions. CIMA sign-off on annual financial statements, there is no also requires disclosure of the licensed mutual fund’s requirement for regulated mutual funds to have local investment advisor / manager, auditor, administrator, service providers.

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 12 Cayman islands

No restrictions on strategy, leverage or valuation equity interests in al material respects and contain such There are no restrictions on the strategy a fund may other information as is necessary to enable a prospective pursue, provided it is not otherwise in breach of the investor in the mutual fund to make an informed decision laws of the Cayman Islands. There are no limits on the as to whether or not to subscribe for or purchase the leverage taken by funds or any required investment equity interests. restrictions. There are currently no rules imposed on If established as an exempted company, exempted funds as to how they value their assets. limited partnership or exempted unit trust, no offering may be made to the public in the Cayman Islands unless Financial statements audit and annual return the securities of such entity are listed on the Cayman All regulated mutual funds are required to prepare annual Stock Exchange. The prevailing view is that an exempted financial statements, such financial statements to be company, exempted limited partnership or exempted unit subject to local audit sign-off by an auditor approved by trust may invest in another exempted company, exempted CIMA. Audited financial statements must be filed with limited partnership or exempted unit trust provided that CIMA within 6 months of the financial year end of a such entity mainly conducts its business in the Cayman regulated mutual fund (unless an extension is granted Islands, does not have its central management and by CIMA) and are filed electronically, accompanied by an control in the Cayman Islands and is not owned by annual return. Cayman Islands’ residents. CIMA have no restrictions on the type of accounting standards chosen by funds provided they are in Directors / Registered office accordance with those specified in the offering As mentioned previously, CIMA requires that every documents of the fund and that CIMA is aware at all regulated mutual fund established as a corporate have times of the accounting standards in use. However, at least two directors. Corporate directors are permitted, CIMA has published guidelines on the authorisation provided that they themselves have at least two individual of auditors which require Partners signing off on audit directors. There are no requirements for local directors. engagements, or any member of the firm with authority Every entity domiciled in the Cayman Islands or a foreign to sign off the audit, to possess an internationally company registered in the Cayman Islands must have a recognised accounting qualification. For the purposes of registered office or resident agent in the Cayman Islands. this policy, the following are considered internationally recognised accounting bodies: The Institute of Chartered Ongoing requirements Accountants in England and Wales, The Institute of Regulated mutual funds are subject to a reasonable Chartered Accountants in Ireland, The Institute of number of requirements to notify CIMA after the Chartered Accountants of Scotland, The Canadian occurrence of certain events such as appointment and Institute of Chartered Accountants, The Association of resignation of directors and functionaries and changes Chartered Certified Accountants, The American Institute to the offering document and to file either a revised of Certified Public Accountants, or any other Professional offering document or a supplement thereto and, where Body or Institute approved by CIMA. In practice appropriate, an amended and restated regulatory filing therefore, financial statements are generally prepared form with CIMA. in accordance with IFRS, US, UK or Canadian GAAP or such other financial standards as may be approved by Manager’s and administrator’s licenses CIMA on a case by case basis. Investment managers are required to hold a licence The annual return contains basic prudential and granted under the SIBL, unless such persons are exempt governance information and summary financial from holding such a licence. Investment managers information. The annual return does not require any managing investment funds open to investment by information on the identity of investors or the specific high net worth or sophisticated persons only or to investments within a regulated mutual fund’s portfolio. other investment funds which themselves are open to Such information is confidential to CIMA and may only investment by high net worth or sophisticated persons be publically disclosed on an aggregated basis. Filing is only are exempt from having to hold a license granted typically done by the auditor. under the SIBL, but do have to make an annual filing with CIMA along with a prescribed annual fee. Fund documentation Unless acting with, and in accordance with, the All regulated mutual funds are required to have an authorisation of CIMA, mutual fund administrators offering document. Aside from licensed mutual funds, established or registered in the Cayman Islands are there are no stipulated contents for offering documents required to be licensed under the MFL. except that such offering documents must describe the

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 13 Cayman Islands

AML commonly outsource their anti-money laundering All Cayman Islands investment funds, managers obligations under the Regulations to their administrators and administrators must comply with the anti-money who are then required to comply with the anti-money laundering regulations of the Cayman Islands as set laundering rules of their home jurisdictions. out in the Proceeds of Crime Law (as amended) of the Cayman Islands and the Money Laundering Regulations Tax (as amended) of the Cayman Islands (together the There are no taxes in the nature of income tax, “Regulations”). corporation tax, nor In the context of investment funds, compliance with payable in the Cayman Islands. the Regulations is the responsibility of the Exempted companies, exempted unit trusts and investment fund and the investment fund’s directors (or exempted limited partnerships may apply for an the general partner if the investment fund is an exempted undertaking from the of the Cayman Islands limited partnership or the trustee if the investment fund that they will be exempt from local tax (should any is a trust). This includes designating an employee at be introduced) for up to 20 years (in the case of managerial level to be a compliance officer, having in exempted companies) and for up to 50 years (in the place procedures for identifying and reporting suspicious case of exempted unit trusts and exempted limited activity and identifying an appropriate person to receive partnerships). n internal suspicion reports. However, investment funds

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 14 GIBRALTAR

Regulator The Financial Services Commission (“FSC”) Contact: Financial Services Commission, PO Box 940, Suite 3, Ground Floor, Atlantic Suites, , Gibraltar. Tel: +350 200 40283; Fax: +350 200 40282. Website: www.fsc.gi General e-mail: [email protected]

Service providers Gibraltar’s Service providers to alternative funds in the funds and investments community are categorised as: Law firms...... 5 Administrators...... 9 Custodians...... 8 Accountants/auditors...... 15 Brokers...... 2 Investment Advisers...... 19 Trustees / prime brokers / placement agents...... N/A Local stock exchange: Gibraltar does not have a local stock exchange. Local fund industry body: Gibraltar Funds and Investments Association (“GFIA”). Contact: [email protected] Promotion agency for funds/financial sector: The Gibraltar Finance Centre including the funds industry as well as the Private Client, Insurance and Banking sectors are promoted by the Finance Centre which is a department within the Government Department of Gibraltar Trade and Industry. James Tipping is the Finance Centre Director and can be contacted as follows: Finance Centre, Suite 761A Europort Fund legislation Tel: +350 20050011 l Financial Services (Collective Investment Schemes) Email: [email protected] Act 2011 l Financial Services (Collective Investment Schemes) Double taxation treaties Regulations 2011 Gibraltar has no bilateral double taxation treaties l Financial Services (Experienced Investor Funds) although it is currently investigating the feasibility of Regulations 2012 their implementation. Gibraltar funds can make use of the European Parent Subsidiary Directive from many Number of funds jurisdictions such as Luxembourg. The number of funds in Gibraltar currently stands at 96 Experienced Investor Funds (“EIFs”) and Non-UCITS Tax information exchange agreements Funds. As there is no register of Private Funds, it Tax information exchange agreements with Gibraltar are is difficult to ascertain exact numbers. It is estimated that listed below by country, with date signed: there are another 50-75 Private Funds. Many EIFs are The Netherlands – Gibraltar...... signed 23 April 2010 protected cell companies which allow for the creation Norway – Gibraltar...... signed 16 December 2009 of sub-funds which are statutorily segregated from each Belgium – Gibraltar...... signed 16 December 2009 other including the various cells in the PCCs there are Iceland – Gibraltar...... signed 16 December 2009 about 191 fund strategies in Gibraltar. Sweden – Gibraltar...... signed 16 December 2009 Faroe Islands – Gibraltar...... signed 20 October 2009 Number of funds by category Finland – Gibraltar...... signed 20 October 2009 Information on the number of funds by category, i.e. Greenland – Gibraltar...... signed 20 October 2009 hedge, private equity, property, other alternative, funds of Portugal – Gibraltar...... signed 14 October 2009 alternative funds, retail/general public funds) etc is not France – Gibraltar...... signed 22 2009 readily available although the split is more or less equal – Gibraltar...... signed 17 September 2009 between hedge funds and private equity / property funds Denmark – Gibraltar ...... signed 2 September 2009 with about 5% as funds of hedge funds. United Kingdom – Gibraltar...... signed 27 August 2009 The total fund assets for domiciled and administered Australia – Gibraltar...... signed 25 August 2009 fund in Gibraltar stands at $4.55 Billion as at 31 New Zealand – Gibraltar...... signed 13 August 2009 December 2011. Germany – Gibraltar...... signed 13 August 2009 Information on domiciled and administered fund assets Ireland – Gibraltar...... signed 24 June 2009 by category is not currently available. USA – Gibraltar...... signed 31 March 2009

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 15 GIBRALTAR

Types of alternative fund vehicle The types of alternative fund vehicles in Gibraltar are closed-ended and open-ended investment companies, limited partnerships, unit trusts and protected cell companies which can act as umbrella funds.

Available types of corporate vehicle There are three types of corporate vehicles in Gibraltar: l Private Limited Company l Public Limited Company l Protected Cell Company (Private or Public)

Types of regulatory fund category l Private Funds l Experienced Investor Funds l Non UCITS Retail Funds l UCITS Funds

Private fund EIF Non UCITS retail fund UCITS fund Audit required Recommended Yes Yes Yes Local audit No Yes Yes Yes Financial statement Recommended Annual Bi-annual Bi-annual requirement Cost of regulatory Zero Application fee – £2.5k / Application fee – £3.5k / Application fee – £12k / fees Annual fee of £800 Annual fee of £3,905 Annual fee of £13,335 Overall cost of fund £12k – £20k From £15k plus above From £20k plus above From £25k plus above establishment regulatory fees regulatory fees regulatory fees Regulatory approval None None – the fund can trade 3-4 months 3-4 months time on the basis of a local legal opinion provided that fund documentation is submitted to the Regulator within 10 business days of launch Overall 2-4 weeks 2-4 weeks 4 weeks plus above 4 weeks plus above establishment time

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 16 GIBRALTAR Gibraltar By James Lasry, Hassans

Since 2005 with advent of the Financial Services the directors on advice from an investment adviser. The (Experienced Investor Funds) Regulations 2005, recently investment manager must comply with the legislation updated to Financial Services (Experienced Investor from the jurisdiction where it acts. If the advisor or Funds) Regulations 2012 (“EIF Regs”) Gibraltar’s funds manager is in Gibraltar or another European jurisdiction, industry has experienced positive and qualitative growth. it will generally require a MiFID license. If it is in any As the majority of Gibraltar’s funds are Experienced other jurisdiction, such as Switzerland or the Investor Funds (“EIFs”) this article will focus primarily on jurisdictions, it is sufficient from a Gibraltar perspective that regime. that it comply with the legislation in those jurisdictions. There is no requirement for a Gibraltar based investment Investor restrictions manager or adviser. The investors who are eligible to invest in EIFs include At present, there is no legislative requirement for a investors who: Gibraltar based custodian or prime broker. This is likely 1. Have EUR1million in assets besides the value of their to change in 2013 when the Alternative Investment residential home; or Fund Manager Directive is enacted into local legislation, 2. In their ordinary employment activity are investment with respect to funds to which the Directive applies (i.e. professionals; or larger than EUR100million or EUR500million for Private 3. Invest an aggregate of EUR100,000 in one or more Equity Funds or smaller funds that wish to opt in to the EIFs. benefits of the Directive). Smaller funds that are exempt The EIF Regulations were recently amended to add to from the provisions of the Directive will therefore be able the following non-cumulative categories to continue to use custodians from any jurisdiction that is 4. Investors who are classed as professional investors considered acceptable to the Gibraltar Regulator. under MiFID; or 5. Investors who invest EUR50,000 in an EIF and are Directors and offering documents advised to do so by an investment adviser that is A key element of the new EIF Regulations is the regulated to European standards. requirement for 2 directors who are resident in Gibraltar There is no minimum or maximum amount of investors and who are licensed by the Financial Services or investment necessary for EIFs. Gibraltar EIFs can Commission to act as EIF directors. There need not be a trade as private companies but are not restricted to a majority of authorised directors on the board of the fund. maximum number of investors. Although it is possible Other directors may be resident in any other jurisdiction to set up an EIF as a PLC it is generally no longer subject to fiscal considerations. The presence of the necessary to do this. Gibraltar EIFs do not have any authorised directors allows for the flexible EIF regime as legislative restrictions on accepting US investors provided they, in essence, act as the Regulator’s “eyes and ears” that the fund and its manager adhere to the relevant US on the board of every fund thus ensuring the proper securities laws. management and operation of each fund. Since Gibraltar funds can trade as private companies, Each fund must produce an offering document that they are eligible under US law to do a “check the box” outlines the service providers, investments, risks, exit election and thus be treated, for US tax purposes, as a strategies, and such general information as is standard partnership. In some cases this obviates the need to set in this industry. The offering document is the document up a US feeder fund structure for US investors. which lists the information that an investor would reasonably expect to have before making an informed Promoter / Investment manager / Custody investment decision. requirements There are no promoter requirements in Gibraltar beyond Authorisation and regulation the ordinary due diligence and KYC requirements. A fund The authorisation process for EIFs is probably the EIF can be self-managed (by its board of directors) or it can regime’s most attractive element. Gibraltar is possibly the be managed by a third party investment manager or by only jurisdiction in the that allows for

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 17 GIBRALTAR

a fund to be launched on the basis of a legal opinion, Income Tax on the basis that the fund is a Collective provided that the fund’s documentation is submitted Investment Scheme. Under this certificate the fund is not to the Regulator within 10 business days of the fund’s subject to on investment income. There is launch. There is also an optional pre-approval channel of no capital gains tax in Gibraltar. The other option is that authorisation whereby the documents can be submitted the fund may elect to be taxed under Gibraltar’s 10% to the Regulator before launch and the Regulator has territorially based corporate tax regime. This latter option 10 business days to respond. The majority of Gibraltar’s is often used for Real Estate or Private Equity funds funds, however, still opt for the pre-authorisation that wish to avail themselves of the European Parent launch with the caveat that any unexpected or unusual Subsidiary Directive and which need to demonstrate structures or elements are generally discussed with the that they are taxable in order to gain the benefits of Regulator beforehand. Going forward, the fund must that directive. These funds are nevertheless unlikely to submit its audited accounts to the Regulator within be liable to any Gibraltar corporate tax as Gibraltar’s 6 months of its financial year end along with a form territorial corporate tax regime only taxes profits of a containing general compliance and statistical information. trade which are accrued in or derived from Gibraltar An EIF has an obligation to notify the Regulator of sourced assets. Unless a fund invests in physical assets any material changes within 20 business days. There is located in Gibraltar it is unlikely it will produce any an obligation to notify the Regulator of any breaches to taxable income in Gibraltar. regulations immediately. Investment Managers on the other hand are taxable, The fund administrator plays a central role in the if established as a limited company, at a rate of 10% of ongoing communication with the Regulator. Indeed they profits, subject to all the usual deductions. When the are often the primary interface with the Regulator. There principals of the investment manager or adviser are is a requirement under the EIF Regs to use a Gibraltar expatriates to Gibraltar and have elected to be taxed based fund administrator. This was recently relaxed under a tax regime such as that known as Higher under the new Regulations to allow non-Gibraltar based Executives Possessing Specialist Skills (“HEPSS”), their fund administrators who are approved by the FSC and by personal employment and dividend income tax is capped the Minister with responsibility for Financial Services. It is at under £30,000. In order to be considered under the anticipated that the larger internationally recognised fund HEPSS scheme, applicants must possess skills (such administrators will be permitted to administer Gibraltar as fund management) which are not readily available in based EIFs. It is important to note that this is not an Gibraltar, earn more £100,000 from their employment and authorisation procedure but a much shorter approval they must own or rent a residence in Gibraltar that is process by the local authorities. In such cases the suitable to their family’s needs and that is approved for foreign administrator would have to appoint a local agent such categories of residents. for service of documents as it is not otherwise required to maintain any presence in Gibraltar. Valuation rules It is important to note that when a fund is established A fund must its policy on valuation in its offering outside of Gibraltar and redomiciles to Gibraltar it may memorandum. Funds in Gibraltar must be audited to retain its foreign administrator. This will be of particular internationally accepted accounting standards such as benefit to funds wishing to redomicile to the European UK or US GAAP or IFRS. Union and yet have legitimate concerns about retaining continuity with their service providers. Investors in funds Conclusion in jurisdictions that have similar although not identical Gibraltar EIFs are probably the most user friendly fund experienced investor regimes will, with approval of the vehicles within the European Union. They certainly have Regulator either on a fund by fund or jurisdiction by the quickest time to market within the EU as it is possible jurisdiction basis, be deemed to be experienced investors to launch a Gibraltar EIF before getting approval from under the EIF Regs. the Regulator. The Gibraltar Regulator on the other hand Since EIFs are targeted to experienced investors, there has a plethora of powers in order to regulate such funds are no statutory investment or borrowing restrictions save and to protect the interests of the investors. This, along that the fund must state in its offering memorandum what with the generally closely-knit investment community its policy is with respect these issues. in Gibraltar allows for a quick, efficient and safe funds jurisdiction within the European Union. n Taxation Gibraltar funds are generally structured to be tax neutral. This can be achieved in two possible ways. The first is by obtaining a certificate from the Commissioner of

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 18 tax planning • corporate & commercial • Financial SerViceS • fUnds • litigation • proPertY • truStS

EUROPEan fUnds. fUndamEntaL PRIncIPLEs.

Whatever or wherever the challenge, we can provide the solutions.

The development of the fund industry in Gibraltar has witnessed a tremendous growth with many funds being domiciled in this rock-solid and well-regulated offshore environment. Hassans has been at the forefront acting as advisers to both the Gibraltar Government and Fund Managers.

Hassans can be your perfect partner in setting up funds whether Private, Experienced Investor Funds, Non-UCITS Retail Funds, UCITS Funds or Protected Cell Companies. could say we’re fundamental to any fund being set-up in Gibraltar. Hassans – International Lawyers

www.gibraltarlaw.com 57/63 Line Wall Road, PO Box 199, Gibraltar · Tel (+350) 200 79000 · Fax (+350) 200 71966 · Email [email protected]

A4 FUNDS ad – 297mm x 210mm + 3mm bleed Guernsey

Infrastructure...... 23 ...... 8 Fund of hedge fund...... 17 Emerging markets...... 11 Balanced...... 2 Other...... 51 Total...... 713 Domiciled and administered fund assets total: £179.7 billion Domiciled and administered fund assets by category: Closed-ended...... £123.9bn GUERNSEY Open-ended...... £55.8bn St. Peter

Regulator Guernsey Financial Services Commission, PO Box 128, Glategny Court, Glategny Esplanade, St Peter Port, Guernsey GY1 3HQ

JERSEY St Helier Service providers Guernsey has high quality legal, accounting, valuation, registrar, company secretarial and audit services for the structuring, launch and administration of funds. The Island also has a high level of choice and competition in terms of administrators and custodians. Local stock exchange: The Channel Islands Stock Exchange, 1 Lefebvre Street, St Peter Port, Guernsey GY1 4PJ Local fund industry body: Guernsey GIFA – Guernsey Investment Fund Association and GIBA – Guernsey International Business Association Fund legislation Promotion agency for funds/financial sector: The Protection of Investors () Law 1987 Guernsey Finance, Guernsey Information Centre, North Plantation, St Peter Port, Guernsey GY1 3PN Number of funds Domiciled...... 860 Double taxation treaties 13: Australia, Denmark, Faroe Islands, Finland, Greenland, Number of funds by category Iceland, Ireland, Jersey, Malta, New Zealand, Norway, As at end of March 2012 Sweden and United Kingdom. *Note that some schemes have more than one category Open ended schemes Tax information exchange agreements Money market/cash:...... 21 35: Argentina, Australia, Bahamas, Canada, Cayman Managed currency...... 10 Islands, China, Czech Republic, Denmark, Faroe Islands, Debt...... 39 Finland, France, Germany, Greece, Greenland, Iceland, Equity/securities...... 92 India, Indonesia, Ireland, Japan, Mexico, Netherlands, Derivatives...... 24 New Zealand, Norway, Poland, Portugal, , San Real property...... 29 Marino, , South Africa, , St Kitts and Private equity...... 4 , Sweden, , United Kingdom and the United Venture capital...... 1 States of America. Infrastructure...... 0 Hedge fund...... 22 Types of alternative fund vehicle Fund of hedge fund...... 68 l Open-ended or closed-ended investment company Emerging markets...... 14 l Open-ended or closed-ended PCC Balanced...... 10 l Open-ended or closed-ended ICC Other...... 31 l Limited partnership Total...... 365 l Open-ended or closed-ended unit trust Closed ended schemes Money market/cash:...... 2 Available types of corporate vehicle Managed currency...... 0 Guernsey funds may be structured in the traditional way Debt...... 48 as companies, unit trusts or limited partnerships. Equity/securities...... 69 The jurisdiction also offers the potential to structure Derivatives...... 16 the fund as a protected cell company (PCC), being a Real property...... 122 single legal entity with distinct cells, the assets and Private equity...... 308 liabilities of each cell being segregated by law from the Venture capital...... 36 assets and liabilities of each other cell.

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 20 Guernsey

The fund may also be structured as an incorporated Licensees cell company (similar to a PCC except that each cell is Annual fees: a separate legal entity, effectively a company within a Designated persons of authorised or registered company). open‑ended collective investment schemes...... £3,000 Designated persons of authorised or registered Types of regulatory fund category closed‑ended collective investment schemes...... £3,000 l Open or closed ended authorised funds (including QIF) Principal manager of authorised or registered – Class A (open ended) open‑ended collective investment schemes...... £1,500 – Class B (open ended) Manager of authorised or registered closed‑ended – Class Q (open ended) collective investment schemes...... £1,500 – Closed ended authorised Other licensees...... £3,000 l Open or closed ended registered fund Application fee: Licensees...... £2,100 Audit requirement Form EX Notification Guernsey funds must be audited. Local auditors are Annual fee...... £500 required. Application fee...... £1,000

Financial statement requirements Regulatory approval time Audited Financial Statements: Class A funds must l Authorised funds – approximately 8 weeks from submit the audited financial statements 4 months after applying for outline authorisation to launch date. the end of the annual accounting period and the half- l Registered fund and QIF – approximately 5 weeks from yearly financial statements 2 months after the half-yearly beginning of preparation of all documents required for accounting period. formal authorisation to launch date. All other funds must submit audited financial l CISX listing (application to list of CISX runs concurrent statements to the Commission 6 months after the end of with fund establishment) – approximately 5 weeks from the annual accounting period. preparation of documents for CISX listing application to the fund being listed on the CISX. Cost of regulatory fees Timescales may vary due to the levels of regulatory Open-ended collective investment schemes comment and the ability of the parties to finalise Annual fees: documentation. Where funds are, for example, a further Scheme...... £3,100 cell of a PCC approved previously by the GFSC and/ Per additional class...... £200 or CISX timescales may be substantially quicker. It is Application fees: possible to fast track licence applications (for example, Scheme...... £3,100 if a new manager is to be established to manage the New class of umbrella/multi class scheme...... £650 funds) with responses within 10 days where applications Non-Guernsey collective investment schemes are connected with QIF or Registered Fund applications. . Annual fee...... £500 Application fee...... £1,000 Overall establishment time Closed-ended collective investment schemes As above. Annual fee...... £3,100 Application fee...... £3,100

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 21 Guernsey Guernsey By Paul Wilkes, group partner, Collas Crill

Introduction are subject to the Class A, B or Q Rules respectively. Collective investment funds have been operating in Authorised closed-ended funds are subject to The Guernsey for four decades, and Guernsey-based funds Authorised Closed-Ended Investment Schemes Rules are promoted and sponsored by leading institutions 2008. in over 38 countries. As a result, there is a healthy Registered funds are subject to ongoing supervision choice of experienced fund service providers such by the GFSC. Open-ended and closed-ended registered as administrators, custodians, auditors, tax and legal funds are subject to The Registered Collective Investment advisors. Scheme Rules 2008. These rules are generally regarded The main advantages of establishing a fund in as being less onerous than those applicable to Guernsey are: authorised funds. l Flexibility of structure and regulation The Prospectus Rules 2008 apply to all registered l Experienced service providers funds and set out the requirements for disclosure in the l Stability of government and internationally compliant offer documents of the fund. standards Registered funds cannot be sold to the public in l Access to the Channel Islands Stock Exchange (CISX) Guernsey except by or through a Guernsey regulated l Taxation entity.

Legal structures Regulation of service providers Guernsey funds may be structured in the traditional The GFSC also regulates the licensing of fund service way as companies, unit trusts or limited partnerships. providers, such as administrators, custodians and Guernsey also offers the potential to structure the investment managers/advisers (if based in Guernsey). relevant legal entity as an incorporated cell company The POI Law requires any person who carries out (ICC) or a protected cell company (PCC). A PCC is a “controlled investment business” in or from within the single legal entity with distinct cells, the assets and Bailiwick of Guernsey to obtain a licence from the GFSC. liabilities of each cell being segregated by law from the Controlled investment business includes activities such assets and liabilities of the other cells. An ICC is similar as investment management or advice, administration and to a PCC except that each cell is a separate legal entity, custody. In addition, the manager of a Guernsey fund, effectively a company within a company. or general partner (if the fund is established as a limited Choice of structure will generally depend on the needs partnership) will generally require a POI licence. of the investors. Relevant factors include tax treatment An open-ended fund must have a Guernsey resident in investors’ home jurisdiction of income and capital administrator (called the designated manager) and distributions from the fund. custodian trustee (the designated trustee). The designated trustee must be independent of the CISX listing investment manager and the designated manager. Each Funds may be listed on the CISX regardless of whether of the designated manager and designated trustee must they are companies, unit trusts or limited partnerships. be licensed by the GFSC. A closed-ended fund will require a designated Regulation of funds manager. In the absence of a formal custodian, the GFSC Funds are regulated by the Guernsey Financial Services must be advised as to the provisions for custody of the Commission (GFSC) under The Protection of Investors fund’s assets. (Bailiwick of Guernsey) Law, 1987 (POI Law). There is no requirement for a Guernsey fund to have a The POI Law characterises funds (be they open- separate investment manager. ended or closed-ended) into two categories for regulatory However, in practice, an investment manager may still purposes: authorised funds and registered funds. be put in place for commercial and risk management Authorised funds are regulated and subject to purposes. Typically, the manager will be a special continuing supervision by the GFSC. Within this category, purpose vehicle, formed as a subsidiary of the promoter. open-ended funds are classified as A, B or Q funds and Where the fund has a separate investment manager

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 22 Guernsey

(or advisor), these need not be resident or licensed in Upon submission of a registration application, which Guernsey, provided the services are performed outside of must include the warranties from the administrator, Guernsey. certified copies of final versions of scheme particulars and signed agreements with service providers, the GFSC Process for Authorisation / Registration will issue a declaration of registration within 3 working Authorised funds days. There is a three-stage process: 1. Outline consent – GFSC is provided with outline details Obtaining a POI licence of the fund together with information in response to The process for obtaining a POI licence for a Guernsey- the new promoter’s checklist (if the promoter is not based manager or general partner of a fund is run already known to the GFSC). concurrently with the process for authorisation or 2. Interim consent – GFSC is provided with a near final registration of the fund. In respect of QIF or registered draft of the scheme particulars and the appropriate fund applications there is the option to use a fast track application form confirming compliance with applicable POI licensing procedure, which will ensure a 10 working- rules, plus the application fee. day turn-around time. Again, the fund’s administrator 3. Final consent – certified copies of final versions of must provide certain warranties to the GFSC as to the scheme particulars and signed agreements with fitness and propriety of the persons behind the manager service providers must be submitted to GFSC. Final or general partner. consent is usually obtained within 2-3 days. The other stages take longer, and the overall process can take Taxation 6-8 weeks for a new promoter. There are no capital, value added or inheritance taxes in Guernsey, nor any stamp or document duties except in Qualifying Investor Funds (QIFs) respect of Guernsey real property. Alternatively there is a streamlined approval process With the exception of certain businesses, companies available for authorised funds, known as the QIF regime. (including funds) now pay a standard rate of 0% income A fund that uses this procedure can only be targeted tax on profits. Funds still have the option to apply for at certain professional or experienced investors. The exempt company status (on payment of an annual fee of administrator of a QIF is responsible for collecting due £600). diligence on the fund promoter and must make certain warranties to the GFSC as to their fitness and propriety. UCITS III The GFSC will grant authorisation for a QIF within 3 The GFSC has issued rules for Class A funds in line with working days of submission of a completed application. the UCITS III regime. The rules are awaiting confirmation from the FSA and Treasury that they will be designated Registered funds in the UK. Thereafter it will be possible to passport As with the QIF regime, the administrator of the fund Guernsey Class A funds into the UK. n must make certain warranties to the GFSC as to the fitness and propriety of the promoter.

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 23 If you want a more enterprising approach to fund business, there’s one place you should look where?

Guernsey offers the experience, the infrastructure and the intellectual capital to deliver innnovative fund solutions for any market, in any asset class. We combine a breadth and depth in management, administration, custody and structural innovation that is second to none, with a wide non-executive director resource, as well as a first class, well regulated professional infrastructure.

Make Guernsey your first port of call.

Telephone: +44 (0) 1481 720071 Email: [email protected]

BANKING • FIDUCIARY • FUNDS • INSURANCE • ASSET MANAGEMENT

guernseyfinance.com

funds ad_210x297mm_AW.indd 1 08/12/2011 12:48 Ireland

domiciled funds was made up of E871 billion of UCITS net assets and E245 billion of non-UCITS net assets (source: Central Bank of Ireland). Domiciled and administered fund assets by category: All data as of 31 December 2011 (source: Central Bank of Ireland) Money Market:...... E345 billion Bonds:...... E169 billion Equities:...... E265 billion Hedge:...... E58 billion Other:...... E116 billion The numbers of Irish registered funds by regulatory category are provided above. The variation between the Central Bank of Ireland aggregate total assets figure and the total net asset value figure of the Central Bank as stated above is due to rounding and other factors. There are no up-to-date official statistics available on the categories of non-Irish funds administered in Ireland as such.

Regulator The Central Bank of Ireland (commonly known as the “Central Bank”). Address: Funds Authorisation and Supervision Divisions, Central Bank of Ireland, Block D Iveagh Court, Harcourt Road, Dublin 2, Ireland Ireland Service providers There are a large number of law-firms which provide legal services to the alternative investment funds industry Fund legislation here, both the leading commercial firms and smaller l UCITS: European Communities (Undertakings for niche practices. Collective Investment in Transferable Securities) All of the main accountancy firms have large Regulations, 2011 operations in Ireland. l Non-UCITS investment companies: Part XIII of the There are approximately 50 fund administrators active Companies Act, 1990 in Ireland, many of which have affiliated custodian l Non-UCITS unit trust: Unit Trusts Act, 1990 operations in Ireland, the majority of which would have l Investment Limited Partnerships (non-UCITS): alternative investment fund servicing capabilities. Investment Limited Partnerships Act, 1994 There are no available statistics on Irish corporate l Non-UCITS common contractual funds: Investment service providers as generally these entities are required Funds, Companies and Miscellaneous Provisions Act, to be regulated in Ireland. Generally, fund administrators 2005 or specialised transfer agency companies would provide those services normally provided by corporate services Number of funds provides, excluding company secretarial services which l 5,077 Irish regulated funds as of April 30, 2012 are also provided by corporate secretarial affiliates of the (including sub-funds) (source: Central Bank of Ireland) law-firms and certain independent firms. l 7,248 non-Irish funds administered in Ireland as Investment banks involved in prime brokerage do not of March 31, 2012 (source: Irish Funds Industry typically provide this service out of Ireland. Over 431 Association) fund promoters have Irish domiciled funds as part of their distribution strategy (source Lipper Ireland Funds Number of funds by category Encyclopaedia June 2011). All data as of 30 April 2012 and includes sub-funds There are no official statistics on the number of (source: Central Bank) placement agents in Ireland. UCITS...... 3 ,101 Local stock exchange: The Irish Stock Exchange Limited Non-UCITS...... 1,976 Local fund industry body: Irish Funds Industry Association Retail Non-UCITS...... 380 Promotion agency for funds/financial sector: Professional Investor Non-UCITS...... 181 Industrial Development Agency and Irish Funds Industry Qualifying Investor Non-UCITS...... 1, 412 Association Domiciled and administered fund assets total: The latest available data is as of March 31, 2012 shows Double taxation treaties E that there were 908 billion in total net assets in non- Ireland has signed comprehensive double taxation Irish domiciled funds administered in Ireland (source; Irish treaties with 66 countries, of which 59 are currently E Funds Industry Association) and 1,116 billion in total net in effect. The double taxation agreements which are assets in funds domiciled in Ireland. The figure for Irish currently in effect and having force of law cover the

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 25 Ireland

following countries: , Australia, Austria, Bahrain, Types of alternative fund vehicle , Belgium, , Canada, Chile, China, , l Open-ended, hybrid or closed-ended investment Cyprus, Czech Republic, Denmark, , Finland, company with fixed or variable capital France, , Germany, Greece, Hong Kong, , l Open-ended, hybrid or closed-ended unit trust Iceland, India, , Italy, Japan, Republic of Korea, l Open-ended, hybrid or closed-ended common , , Luxembourg, Macedonia, , contractual funds Malta, Mexico, , , Netherlands, New l Open-ended, hybrid or closed-ended investment limited Zealand, Norway, , Poland, Portugal, Romania, partnerships , , Singapore, Slovak Republic, Slovenia, Each of the above may be established as single or South Africa, Spain, Sweden, Switzerland, Republic of multi-portfolio funds and with one or multiple classes of Turkey, United Arab Emirates, United Kingdom, United shares. Investment companies and common contractual States, Vietnam and . fund sub-funds have statutory ring-fencing of their assets Ireland has also signed double taxation treaties with and liabilities. the following countries and the legal procedures to give Available types of corporate vehicle these agreements force of law are at various stages: l Single portfolio company , Bosnia & Herzegovina, , Kuwait, , l Segregated portfolio (umbrella) company Panama and . l Variable or fixed capital company Negotiations for new agreements with Qatar, Thailand, and Uzbekistan have been concluded and are Types of regulatory fund category expected to be signed shortly. In addition negotiations l UCITS (no minimum initial subscription requirement); for new agreements with the following countries are at l Retail Non-UCITS (no minimum initial subscription various stages: Argentina, , and . It is requirement except for private equity funds, in respect also planned to initiate negotiations for new agreements of which it is E12,500); with other countries in the course of 2012. l Professional Investor Non-UCITS (minimum initial subscription of E100,000); Tax information exchange agreements l Qualifying Investor Non-UCITS (minimum initial Ireland has concluded Tax Information Exchange subscription of E100,000, investor wealth tests and risk Agreements (TIEAs) and Agreements for affording relief acknowledgement). from double taxation with respect to certain income of There are certain other categories which are not widely individuals and establishing mutual agreement procedures used. For example, non-designated collective investor in connection with the adjustment of profits of associated funds (which are available to life assurance companies, enterprises with Guernsey, the Isle of Man and Jersey. pension funds and other collective investors; tax exempt, Ireland has also concluded Tax Information Exchange do not have to be sold publicly) are not widely used due Agreements (TIEAs) with , and to their narrow investor requirements. Barbuda, , Bermuda, the British Virgin Islands, the Cayman Islands, the , Gibraltar, , Audit requirement , the , , St Lucia, Yes, annual, local. St. Vincent & the Grenadines and, the Turks & Caicos Islands and . Financial statement requirements In addition, Ireland has been designated by the Yes, all semi-annual unaudited and annual audited. Cayman Islands as a country that may make requests Corporate Qualifying Investor Funds do not have to for tax information under Part IV of the Tax Information prepare semi-annual unaudited accounts. Authority Law. This allows the Revenue Commissioners to request information relevant to a tax investigation Cost of regulatory fees (including bank and entity ownership information) from E2,025 per year for each fund plus E475 per sub-fund the Cayman Islands authorities without the necessity of a up to a maximum of E4,400 (source: Central Bank of bilateral TIEA. This applies for taxable periods beginning Ireland: A Guide to Industry Funding Regulations, 2011). on or after 1 May 2009. This is reviewed on an annual basis by the Central Bank of Ireland. European Union – Taxation of Savings Income Directive Overall cost of fund establishment Under the European Savings Directive, all European Legal costs will vary from law-firm to law-firm and Member States and a number of associated and depending on the type of fund and other factors. There dependant territories are required to exchange certain is no up-front regulatory fee. There is a small government information and/or impose a withholding tax on particular levy for incorporating corporate funds and other initial types of payments made to certain individuals. , statutory filings. Liechtenstein, , and Switzerland are not participating in automatic exchange of information Regulatory approval time but are exchanging information on a request basis. Their Qualifying Investor Funds: 24 hours following filing of participation is confined to imposing a withholding tax. prospectus, constitutive document, principal service The other associated or dependant territories that are agreements, application request, completed regulatory participating are Anguilla, Aruba, British Virgin Islands, application forms including a fund summary, and various Cayman Island, Guernsey, Isle of Man, Jersey, , confirmations assuming promoter, investment manager, and .

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 26 Ireland

administrator, custodian and directors have already been UCITS: Similar to Retail Non-UCITS, however, the policies approved by the Central Bank and the application is and procedures regarding the overall management and within normal prescribed parameters and any required governance of the UCITS (whether by the Board of the derogations have been obtained in advance. UCITS or a separate Irish management company (in Professional Investor Non-UCITS: If promoter approval is the case of common contractual funds and unit trusts required, this must be obtained generally before the a management company is compulsory) must be pre- fund application is submitted to the Central Bank. The approved by the Central Bank prior to the submission of promoter approval will generally take approximately two the UCITS application for authorisation. This pre-approval weeks. Once promoter approval is obtained, and the fund process can generally take two to four weeks. application is submitted, the Central Bank endeavours to respond to the initial application within two weeks Overall establishment time and subsequent responses from the fund each time In each case from a standing start (i.e. fund promoter, within approximately one week. Normally, two to three investment manager and directors have not been sets of comments can be expected, depending on the previously approved by the Central Bank, but fund service nature of the fund, resulting in the application spending providers have been chosen) to fund authorisation: approximately four to five weeks in total with the Central UCITS...... tends to take approximately 3 months Bank. The total time taken to have the fund authorised Non-UCITS then depends on the speed at which the promoter Retail...... approximately 2 months responds to the Central Bank’s comments. Professional Investor Funds...... approximately 2 months Retail Non-UCITS: Similar to Professional Investor Fund above. Qualifying Investor Fund...... approximately 1 month

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 27 Ireland Ireland By Dillon Eustace

1. What if any are the investor restrictions the investment in the QIF; or investors who certify that Irish Funds are not required to have a minimum number they are an informed investor by providing either (i) of investors, however, certain Irish regulated funds must, a confirmation (in writing) that the investor has such depending on the category of fund, and the specific knowledge of and experience in financial and business wording of the legislation, invest capital raised from matters as would enable the investor to properly evaluate “the public” (UCITS), raise capital by providing facilities the merits and risks of the prospective investment; or (ii) for “direct or indirect participation by the public” (Non- a confirmation (in writing) that the investor’s business UCITS investment companies) or must constitute an involves, whether for its own account or the account arrangement made for the purpose, or having the effect, of others, the management, acquisition or disposal of of providing facilities for the participation by “the public” property of the same kind as the property of the QIF. (non-UCITS unit trusts). In relation to PIFs and QIFs, an exemption from the There are certain other categories which are not minimum initial subscription requirement and, in the case widely used. For example, non-designated collective of QIFs, the investor criteria, is available to directors of investor funds (which are available to life assurance the fund, the investment management company, directors companies, pension funds and other collective investors), of the investment management company, the fund are not required to facilitate direct or indirect public promoter (i.e. sponsor) and its affiliates, and employees participation). These are not widely used due to the fact of the investment management company who are that their income and gains are taxable in Ireland. directly involved in the fund’s management or are senior employees with experience in the provision of investment 2. What if any are the investor restrictions management services. UCITS must be offered in , but All QIF investors must certify in writing to the fund that may also, but not alternatively, be offered elsewhere. UCITS they meet the minimum criteria listed above and that they and Non-UCITS established as common contractual funds are aware of the risk involved in the proposed investment may not be offered to natural person investors. Apart from and of the fact that inherent in such investments is the that, and outside of normal matters of contractual capacity, potential to lose the entire sum invested. there are no substantive Irish restrictions in relation to the Please see “1” above in relation to non-designated nature or quality of UCITS investors. collective investor funds. There are no minimum investments imposed by the Central Bank in relation to Irish non-UCITS retail 3. Is there a requirement for an Irish fund’s funds other than that non-UCITS retail funds which sponsor (promoter) to be approved by the Irish are authorised by the Central Bank as venture capital Regulator? or private equity funds must impose a minimum initial Before the Central Bank of Ireland (the “Central Bank”) subscription requirement of E12,500 on each investor. will accept an application for the authorisation of Non-UCITS Professional Investor Funds (“PIFs”) are an Irish investment fund, the Central Bank must be required to impose a minimum initial subscription satisfied regarding the promoter’s expertise, integrity, requirement of E100,000 otherwise there are no Irish adequacy of financial resources and that it or its key restrictions. Non-UCITS funds that can be offered solely management have a relevant track-record in collective to Qualifying Investors (“QIFs”) are required to apply a investment schemes. With limited exceptions, the minimum initial subscription requirement of E100,000 promoter is required to be regulated by a supervisory and may be sold only to investors who are professional authority recognised by the Central Bank and generally clients within the meaning of Annex II of Directive speaking any OECD member state national regulator will 2004/39/EC (Markets in Financial Instruments Directive); be acceptable. Promoters are required to have audited or investors who receive an appraisal from an EU net shareholder funds or partners capital of not less credit institution, a MiFID firm or a UCITS management than E635,000 on an ongoing basis. The requirements company that the investor has the appropriate expertise, are essentially the same for all categories of Irish fund experience and knowledge to adequately understand though for retail funds, experience in the distribution of

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 28 Ireland

retail funds or access to a retail distribution network will to have at least two Irish resident Directors on its board. be an additional consideration. The board of Directors of a fund or its management company/general partner cannot have Directors in 4. Is there a requirement for the investment common with the depositary of the fund. All Directors manager of an Irish fund to be approved by the appointed to such entities must be approved in advance Irish Regulator? by the Central Bank pursuant to a fitness and probity Before the Central Bank will accept an application for the regime applicable to all regulated financial services authorisation of an Irish investment fund, the proposed sectors in Ireland on the basis that the Central Bank is discretionary investment management company(ies) satisfied that each has appropriate expertise and integrity of the fund must be cleared in advance. Acceptable and is of good repute. The names and biographies of investment management firms include those which are the directors must appear in the fund’s Prospectus. regulated under the Markets in Financial Instruments Resignations of Directors from the Boards of Irish funds Directive (MiFID) (Directive 2004/39/EC) and non-EU firms or their management companies/general partners must regulated by a supervisory authority recognised by the be notified immediately to the Central Bank. Central Bank. It is an Irish legislative requirement (Section 21 of In relation to Irish UCITS, the investment managers the Central Bank Reform Act 2010) that each Irish fund must be authorised or registered for the purpose of and, if applicable, its management company satisfies asset management and must be subject to prudential itself on reasonable grounds that a person appointed supervision. In addition, where a non-EU investment to a so-called “pre approval controlled function” (“PCF”) manager is proposed to be appointed, there must be a complies with the Central Bank’s 2011 Fitness and Probity form of co-operation agreement in place between the Standards (the “Standards”). Directors are considered to Central Bank and the supervisory authority of the third be PCFs. It is also a legislative requirement that the PCF country that regulated the investment manager. agree to abide by the Standards. Where a PCF does not comply with the Standards, the Irish entity cannot 5. What are the custodian/depositary bank permit that person to act as a PCF (this applies to new requirements for an Irish fund? appointments and existing appointments). In complying The assets of Irish regulated funds must be entrusted to with the Standards, the Central Bank expects the Irish a depositary for safe-keeping. The depositary must be a entity to consider the specific competencies and level of credit institution authorised in Ireland, an Irish branch of probity that should be expected of a PCF of the relevant an EU credit institution or an Irish incorporated company entity of the particular kind in question. The Standards which is wholly owned by an EU credit institution (or set out specific minimum due diligence that the Central equivalent from a non-EU jurisdiction) provided that the Bank expects would be undertaken by the Irish entity. liabilities of the Irish company are guaranteed by its parent. The prescribed role of the depositary is to ensure, as 7. What are the Prospectus/offering document/ a general rule, legal separation of non-cash assets and constitutive document requirements? to ensure that certain core aspects of the management All UCITS and Non-UCITS must issue a prospectus, which of the fund are carried out in accordance with applicable must be dated, and the essential features of which must legislation, Central Bank conditions and the fund’s be kept up to date. Investors must be offered a copy of constitutive documents, for example, valuation, sale, the Prospectus, free of charge, prior to subscribing for issue, repurchase and cancellation of fund units. In units in the relevant fund. Any changes to the Prospectus addition, the depositary must enquire into the conduct must be made by prior approval of the Central Bank or, in of the management company, investment company or the case of Qualifying Investor Funds prior notification to general partner in each annual accounting period and the Central Bank. Any material changes to the Prospectus reporting thereon to the fund’s unitholders. must be notified to investors in the fund’s subsequent periodic reports. The overriding Central Bank consideration 6. What are the local Director requirements? is that the Prospectus should contain sufficient information Both UCITS and non-UCITS investment companies to enable investors to make an informed decision are required to have a minimum of two Irish resident whether to invest in the fund. In particular, the investment Directors on their boards. Common contractual funds objectives and policies of a fund must be clearly described and unit trusts are required to have an Irish management in the Prospectus with sufficient information to enable company and such management companies are required investors to be fully aware of the risks they are entering to have at least two Irish resident Directors on their into. Separate Prospectuses may be issued by funds boards. Investment limited partnerships are required to established as umbrella funds in respect of each of their have an Irish General Partner and such entity is required sub-funds, though the Central Bank discourages this

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 29 Ireland

practice for UCITS. Separate prospectuses may not be appointment of which is approved by the depositary. The issued in respect of separate share classes, except in valuation rules must be set out in the fund’s Prospectus the context of Qualifying Investor Funds provided that the and must be set out, or referred to, in the fund’s Prospectuses are consistent with the other Prospectus(es) constitutive document. The final checking of the fund’s for the fund/sub-fund of an umbrella fund (except in net asset value must be carried out in Ireland by staff relation to that information which is class specific). UCITS located in Ireland, in the absence of a derogation from the must also issue a “key investor information document” Central Bank. Valuation rules must be applied consistently which contains the essential characteristics of the UCITS throughout the life of a fund. The valuation policy is in concise and non-technical language. ultimately the responsibility of the board of Directors of the fund/management company/general partner. 8. Are Irish funds required to be licensed? Broadly speaking, units of Irish investment funds that Client asset protection: independent custody of assets are available for public participation may not be sold or The applicable rules are outlined in “5” above. purchased nor may sales or purchases be solicited without the fund having sought and obtained authorisation of the Depositary as fiduciary of investors Central Bank under the relevant Irish funds legislation. The applicable rules are outlined in “5” above.

9. What are the Central Bank requirements Portfolio regulation before an Irish fund can launch? The Central Bank imposes diversification requirement and Before an Irish investment fund can launch, the fund concentration requirements on Irish UCITS, non-UCITS must be in possession of a written authorisation from retail funds and Professional Investor Funds. the Central Bank pursuant to the relevant Irish legislation. UCITS are permitted to invest principally in transferable There are no minimum capitalisation requirements except securities which are listed or traded on a regulated in the case of UCITS investment companies which have exchange or other market, money market instruments, not appointed Irish management companies, which must other UCITS and UCITS equivalent funds, cash deposits, have a minimum capital of E300,000 prior to authorisation listed or OTC derivatives which are sufficiently liquid by the Central Bank. (and the underlying assets of which are eligible for direct investment by the UCITS or are permitted financial 10. What ongoing Central Bank requirements indices, interest rates or exchange rates). UCITS are apply to Irish funds? subject to significant diversification, concentration, The ongoing core Central Bank requirements can be counterparty and global exposure requirements including broken down into: a 10% of net asset value per issuer restriction (subject to a 40% limit on issuers making up more than 5% of net Disclosure asset value counterparty restriction (which is raised to Please see “7” above in relation to the Prospectus. 10% for credit institution counterparties). Each fund must issue annual audited financial A retail Non-UCITS’ general investment restrictions statements and (other than in the case of corporate prohibit it from investing more than 10% of its net asset Qualifying Investor Funds, which are exempt from this value in securities which are not listed or traded on a requirement) semi-annual unaudited financial statements, recognised and regulated market, more than 10% of net comprising a balance sheet, income statement (in the asset value in the securities of any one issuer and more case of the annual audited financial statements only), than 10% of its net asset value in any class of security a portfolio statement and statement of changes in the issued by a single issuer. The net maximum potential composition of the portfolio during the period and any exposure that the fund can achieve through efficient significant information which will enable investors to portfolio management techniques and borrowings cannot make an informed judgement on the development of the exceed 25% of net asset value. fund and its results. There are exceptions and specific restrictions for retail Non-UCITS funds of funds including funds of unregulated Valuation and pricing funds, feeder funds, real estate funds, private equity Fund assets must be valued on the basis of market funds and managed futures funds. prices where available or, where unavailable, generally In the case of Professional Investor Funds, the at probable realisation value calculated by the Directors standard investment and borrowing restrictions applicable of the fund/management company/general partner or to retail Non-UCITS can be disapplied to the extent by a competent third party appointed by the Directors agreed with the Central Bank. As a general rule of of the fund/management company/general partner, the thumb, the quantitative limits are doubled.

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 30 Ireland

The Central Bank disapplies all but a small number The Central Bank employs a risk based supervisory of policy driven investment restrictions in relation to approach known as PRISM (Probability Risk Impact Qualifying Investor Funds. SysteM). This focuses the most resources on firms considered to have a potentially high systemic impact Duty to act in investors’ best interest and to avoid on the financial system and a high risk to the consumer. conflicts of interest The Central Bank enforces on the basis of periodic The fund’s prospectus must contain a description of the reporting requirements, a requirement for the Directors/ potential conflicts of interest which could arise between management company/general partner and depositary to the management of the fund and the fund, with details, deal with the Central Bank in an open and co-operative where applicable, of how these are going to be resolved. manner and inspections, the frequency of which is Any transaction carried out with a fund by a promoter, based on risk assessment or on complaint. While PRISM manager, depositary, investment adviser and/or is intended to result in a common basic approach to associated or group companies of these must be carried regulation across all financial sectors, it is also intended out as if effected on normal commercial terms negotiated to identify where risk is concentrated most highly within at arms length and transactions must be in the best the financial system. Furthermore it differentiates between interests of the investors. types and degrees of risk in different financial sectors and so avoids an investment fund being regulated to Regulatory reporting the same degree as a bank or insurance company for The fund/management company/general partner must example. The Central Bank’s enforcement strategy is to submit a monthly report within ten days of its effective engage in “pre-defined enforcement” which concentrates date, setting out the fund’s net asset value, net asset on high impact areas such as market conduct, value per unit and net subscription and redemptions in the consumer protection and financial crime, focussing fund’s units during the month. The annual audited financial on firms with significant market share, and “reactive statements of the fund and semi-annual unaudited financial enforcement” which is event or report based, and to statements of the fund (where required) must be submitted operate in a proportionate, consistent, targeted and to the Central Bank within four and two months respectively transparent manner. of the balance sheet date. The fund/management company/general partner must submit monthly returns to 11. What are the Regulatory requirements the statistics department of the Central Bank. applicable to service providers to Irish funds? All Irish investment funds are required to appoint an Reporting to investors Irish fund administrator (or a suitably licensed Irish The annual audited financial statements and semi-annual management company) which will perform certain unaudited financial statements (where required) must be minimum activities in Ireland such as the final checking made available to investors free of charge upon request of the net asset value of the fund prior to its release and must be available for inspection at a specified and the maintenance of the fund’s shareholder register. location. Qualifying Investor Funds in the form of Irish fund administrators are subject to regulation investment companies are not required to produce semi- under the Irish Investment Intermediaries Act, 1995, annual unaudited financial statements. the European Communities (Markets in Financial Instruments) Regulations, 2007 or the European Changes to the fund Communities (Undertakings for Collective Investment Any change to the Prospectus or any material service in Transferable Securities) Regulations, 2011 (in the agreement of the fund is subject to prior approval case of UCITS management companies providing fund by, or, in the case of Qualifying Investor Funds, prior administration services). notification to, the Central Bank. Material changes to the Irish investment funds are also required to appoint a investment policy of the fund of the fund as disclosed in depositary. The depositary must have its registered office the Prospectus or any change to the fund’s investment within Ireland or have established a place of business objective are subject to prior investor approval. Any in Ireland if its registered office is in another Member such changes must be notified in advance to investors State of the European Union. The depositary fiduciary enabling them to redeem their units in the fund prior to duties may not be delegated to a third party and must the implementation of the change. be performed by the depositary appointed in Ireland. The custody functions may however be delegated to Enforcement a custodian located inside or outside of Ireland. Irish The Central Bank has independent statutory powers of depositaries are subject either to the requirements of enforcement that are not dependant on judicial action. Irish banking law (in the case of domestic banks), foreign

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 31 Ireland

banking law and certain Irish conduct of business rules the UCITS application for authorisation. The proposed (in the case of the Irish branches of foreign banks) or the Administrator and depositary of the Fund must be in European Communities (Markets in Financial Instruments) possession of the relevant license from the Central Bank. Regulations, 2007 (in the case of wholly owned Irish non- Any derogations from the Central Bank’s requirements banking subsidiaries of foreign banks). that a fund requires must be obtained in advance of All Irish funds are required to appoint an investment submitting the formal application for authorisation. manager (or Irish management company) that will be responsible for the investment management of the Irish 13. What is the role of the service providers in fund’s assets. The conditions applicable such companies’ authorisation/ongoing regulation? clearance to act by the Central Bank as described in Authorisation: “4” above. UCITS, retail Non-UCITS and Professional Investor Funds Irish Professional Investor Funds and Qualifying are authorised by application from the fund, or in the case Investor Funds are entitled to appoint prime brokers. of a unit trust, its management company and depositary Prime brokers must be regulated to provide prime or in the case of a common contractual fund or limited brokerage services and each prime broker or its parent partnership, its management company or general partner company must have financial resources of not less than as appropriate. The depositary and fund administrator will E200 million and a short term credit rating of not less be required to make certain certifications to the Central than A1 or equivalent. Bank as part of the authorisation process. In the case of Qualifying Investor Funds, which are 12. What is the Regulatory procedure in getting authorised by means of a self-certification process, the an Irish fund licensed? fund/management company/general partner and, in the All fund authorisations must be obtained pre-launch. case of unit trusts, the depositary, makes the formal Post-authorisation changes to fund documentation application, which is undertaken by its Irish legal advisers require the approval of the Central Bank or, in the case and the depositary certifies that the information contained of Qualifying Investor Funds, prior notification to the in the application, as it relates to the depositary, Central Bank. is accurate. To obtain this authorisation, the fund, or in the case of a unit trust, its management company and depositary Ongoing: or in the case of a common contractual fund or limited The Irish Administrator/management company will be partnership, its management company or general generally be responsible for carrying out the minimum partner, must apply to the Central Bank in writing. In the activities referred to in “11” above and for preparing the case of UCITS and Non-UCITS retail and Professional regulatory reporting and financial statements referred to Investor Funds, this application is initially made in draft at “10” above. form. In the case of Qualifying Investor Funds, a formal The Custodian will prepare the report referred to in “5” application is made on the business day prior to the above for inclusion in the fund’s annual audited financial proposed date of authorisation, with accompanying final, statements. executed documentation and no formal review of the The Administrator, Custodian and management documentation is undertaken by the Central Bank. company are each expected to deal in an open and In all cases, before making an application, the co-operative manner with the Central Bank and to proposed promoter of the fund must have been cleared participate in such meetings as the Central Bank by the Central Bank, as must the proposed investment considers necessary to review the fund’s operations and manager. Non-discretionary investment advisers are its business developments. not required to be cleared by the Central Bank. The Directors of the proposed fund/management company/ 14. What leverage restrictions apply to Irish general partner must be approved in advance by the funds? Central Bank. Any management company or general UCITS: UCITS may not borrow except for temporary partner being appointed must be approved in advance purposes subject to a limit of 10% of net asset value by the Central Bank. In the case of a UCITS, the policies and have a “global exposure” limit that is applicable to and procedures regarding the overall management and the UCITS’ use of derivatives. In calculating their global governance of the UCITS (whether by the Board of the exposure, UCITS currently have the choice whether to UCITS or a separate Irish management company (in use the so-called commitment approach, a simple but the case of common contractual funds and unit trusts conservative method of calculating global exposure which a management company is compulsory) must be pre- calculates exposure based on the marked to market approved by the Central Bank prior to the submission of value of the underlying assets to which the derivative

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 32 Ireland

contracts refer, or an advanced risk measurement respect to its investments may be subject to taxes, methodology such as Value-at-Risk (“VaR”). VaR including withholding taxes, in the countries in which measures maximum expected loss at a given confidence the issuers of investments are located, these foreign level over a specific time period. VaR may be calculated withholding taxes may, nevertheless, be reduced or using an acceptable proprietary or commercially available eliminated under Ireland’s network of tax treaties to the model. The commitment approach methodology is extent applicable (see “Treaty Access“ below). normally used by UCITS that use a limited number Furthermore, there are no Irish withholding taxes on of non-complex derivatives and the latter by more distributions to investors provided the investors have made sophisticated users of derivatives. It is the responsibility the appropriate tax declaration of non-Irish residence to of the UCITS to ensure that the method selected the fund or the fund has satisfied and availed of certain is appropriate, taking into account the investment prescribed equivalent measures. Furthermore, there strategy of the UCITS, the types and complexities of are no Irish withholding taxes on distributions made to the derivatives used and the proportion of the UCITS certain categories of Irish investors (which would include portfolio which comprises derivatives. A UCITS must use approved pension schemes, charities, other investment an advanced risk measurement methodology such as funds, etc). There is no stamp duty or subscription tax is the VaR approach to calculate global exposure where: payable in Ireland on the issue, transfer, repurchase or (i) the UCITS engages in complex investment strategies redemption of units in a fund. Many of the key services which represent more than a negligible part of the UCITS provided to Irish funds (fund administration, investment investment policy; and/or (ii) the UCITS has more than management, etc) are exempt from Irish VAT. a negligible exposure to exotic derivatives; and/or (iii) the commitment approach does not adequately capture Treaty access the market risk of the UCITS portfolio. The UCITS’ Where treaty access is important, non-UCITS funds global exposure as measured using the commitment may use wholly owned trading vehicles for treat access approach may not represent more than 100% of the whereby the fund finances the trading vehicle in return net asset value of the UCITS (in other words, a UCITS for the issuance to the fund of a taxable profit stripping total exposure may be 210% of the net asset value of participating debt instrument by the vehicle. Irish trading the UCITS (including temporary borrowing)). If VaR is vehicles are fully taxable in Ireland which typically removes used, the UCITS may not have an exposure greater one of the obstacles to tax-exempt regulated funds than 20% of the net asset value (known as “absolute obtaining treaty benefits, namely the requirement to be VaR”) based on a confidence level of 99% and a holding “liable to tax”. Through this profit stripping mechanism, period of twenty days, all of which limits may be scaled such vehicles’ taxable profits can be managed to a down proportionately, or the UCITS may not have a VaR desired level which can be zero if so desired. greater than twice the VaR of a relevant benchmark or a Ireland has signed comprehensive double taxation corresponding, derivative-free portfolio (known as “relative treaties with 66 countries, 59 are currently in effect with VaR”). The degree of exposure that a UCITS has may negotiations at various stages on 7 other. be reduced by the use of allowable position netting and hedging positions. 16. What tax applies to Irish investment Retail Non-UCITS: such a fund’s net maximum potential managers? exposure is limited to 25% of net asset value and includes Generally 12.5% on fee income derived from investment borrowing and exposures arising through the use of management services. derivatives. In the case of leveraged managed futures The Irish tax authorities impose a 20% withholding tax funds, there is no such leverage limit though such funds on dividends and other profit distributions. However there effectively have a margin to equity ratio restriction of 50%. are significant exemptions under domestic law from this Professional Investor Funds: such a fund’s net withholding tax in relation to (i) payments made to persons maximum potential exposure is limited to 100% of net resident in EU Member States and countries asset value including borrowing and derivatives exposures. and (ii) payments made to companies resident outside the Qualifying Investor Funds: unlimited leverage, subject EU or a non-tax treaty country provided more than 50% of to only to Prospectus disclosure. the recipient company is ultimately controlled by persons resident in a treaty country or EU member state (other 15. What is the tax status of Irish funds in than Ireland), once certain declarations are put in place. Ireland? A fund that is authorised in Ireland is not subject to Irish 17. What are the asset valuation rules applicable tax on its income (profits) or gains. While dividends, to Irish funds? interest and capital gains that a fund receives with These are described in “10” above. n

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 33 At Dillon Eustace our many years of experience mean we can For more information contact: provide clear, focused advice, without ever losing sight of the Mark Thorne, bigger picture. We offer national and international corporates, Dillon Eustace, banks, asset managers and insurers our expertise in: 33 Sir John Rogerson’s Quay, Dublin 2.

• Debt & Investment • General Commercial Tel: +353 1 667 0022, Fax: +353 1 667 0042 Funds Listing • Investment Funds [email protected] • Asset Management • Insolvency & • Banking Corporate Recovery or • Capital Markets • Restructuring Daniel Forbes, • Distressed Asset Investing • Aircraft Leasing Dillon Eustace, • Commercial Property • Regulatory Compliance 245 Park Avenue, 39th Floor, • Corporate Finance • Securitisation New York, NY 10167, USA. • Cross Border Insurance • Structured Finance Tel: +1 212 792 4166, Fax: +1 212 792 4167 • Financial Services • Tax [email protected]

Jersey

Regulator Jersey Financial Services Commission, PO Box 267, 14-18 Castle Street, St Helier, Jersey, JE4 8TP, Channel Islands. Tel: +44 (0)1534 822000; Email: [email protected]; www.jerseyfsc.org.

Service providers l Five first tier law firms, plus over twenty further law firms l Each of the big four accountancy firms have operations in Jersey and there are several second tier GUERNSEY firms present also. St. Peter Port l There are well in excess of 150 corporate service providers/administrators. l There were 40 banks registered in Jersey as at 31 March 2012. There are not really prime brokerage operations located in Jersey as such, but access to UK

JERSEY operations can be established through local offices; for St Helier example ABN, , JPM, Citibank, UBS and RBC each have operations in Jersey. Local stock exchange: The Channel Islands Stock Exchange, LBG PO Box 623, One Lefebvre Street, St Peter Port, Guernsey GY1 4PJ, Channel Islands www.cisx.com Local fund industry body: The Jersey Funds Association, www.jerseyfunds.org Promotion agency for funds/financial sector: Jersey Jersey Finance Ltd, 4th Floor, Sir Walter Raleigh House, 48-50 Esplanade, Jersey JE2 3QB, Channel Islands. Fund legislation Email: [email protected] l Collective Investment Funds (Jersey) Law, 1988 www.jerseyfinance.je l Control of Borrowing (Jersey) Order, 1958 l Financial Services (Jersey) Law, 1988 Double taxation treaties There is further, subordinate legislation covering differing Full agreements: Estonia, Guernsey, Hong Kong, Malta, regulatory options, prospectus issuance consent and Qatar, UK. similar. Partial agreements: These are more limited than full agreements and generally provide for the avoidance of Number of funds double taxation on certain income of individuals and As of 31 March 2012 there were over 1,400 funds income derived from the operation of ships and aircraft – registered under the Collective Investment Funds (Jersey) Australia, Denmark, Faroe Islands, Finland, France, Law, 1988 and Control of Borrowing (Jersey) Order, 1958 Germany, Greenland, Iceland, New Zealand, Norway, laws, comprising nearly 2,500 separate asset pools. It Poland, Sweden. should be noted that these statistics do not include those Further information on tax treaties may be found at: funds established as “Unregulated Funds” or very private www.gov.je/taxesmoney/internationaltaxagreements/ structures (i.e. with fewer than fifteen investors). doubletaxation/pages/index.aspx.

Number of funds by category Tax information exchange agreements During the first quarter of 2012 the total number of Argentina , Australia, Canada, China, Czech Republic, regulated funds increased by 20 from 1,392 to 1,412. Denmark, France, Finland, France, Germany, Greenland, The data does not include funds established under the Iceland, India, Indonesia, Ireland, Italy, Japan, Mexico, Unregulated Funds Regime, of which there were 166 by Netherlands, New Zealand, Norway, Poland , Portugal, the end of the period. South Africa, Sweden, Turkey, UK, USA. Updates can be obtained from the States of Jersey Domiciled and administered fund assets web site as detailed above. total During the first quarter of 2012 the net asset value of Types of alternative fund vehicle funds increased by £6.8bn from £189.4bn to £196.2bn. Funds in Jersey may be established as open or closed- ended vehicles, although certain of the lighter touch Domiciled and administered fund assets by regulatory options are limited to closed-ended vehicles category only. It is possible to establish funds in Jersey as At 31 March 2012 there were 1,205 Single Class Funds companies, including protected cell and incorporated and 1,264 Umbrella Sub-Funds with a total NAV of cell companies, as well as limited partnerships, including £196.2bn.

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 35 Jersey

incorporated limited partnerships and separate limited Cost of regulatory fees partnerships, as well as unit trusts. The comparison table attached details regulatory fees.

Available types of corporate vehicle Overall cost of fund establishment The types of corporate vehicle in Jersey are a standard This really depends on the amount of legal work involved limited company, as well as protected cell and in preparation of fund documentation and also the incorporated cell companies. regulatory application.

Types of regulatory fund category Regulatory approval time Jersey has a wide range of regulatory options available The Jersey Financial Services Commission’s stated for funds, from recognised funds, which are rarely response time for a regulatory application for an Expert used and heavily regulated, retail type funds to private Fund is 3 working days from receipt of a complete placement funds, with a much lighter touch regulation, as application. A fund seeking consent under Control of well as “Unregulated Funds” and very private structures Borrowing (Jersey) Order, 1958 takes longer with 10 (i.e. with fewer than fifteen investors). Depending on the working days for an in-principle approval and twenty likely number of investors alternative funds would tend to working days in total for full approval. An important be established as expert funds or where they are more consideration here is that the regulator requires the specialised and have fewer investors, private placement principals of funds (i.e. directors, compliance officers and funds or very private funds. similar) to complete and submit a personal questionnaire. See the attached table from Jersey Finance for a The response time for consideration of a questionnaire comparison of the various options. (if it is the applicant’s first submission) is 30 working days, so the timing of submission needs to be carefully Audit requirement managed. All private Jersey companies (i.e. those with greater than 30 shareholders) with must appoint an auditor and the Overall establishment time Jersey Financial Services Commission provides a list of A Jersey company can be established on fast-tracked approved auditors. basis in 24 hours, so from a regulatory point of view a vehicle can be established and operational very quickly. Financial statement requirements However, the overall establishment time will depend on All Jersey companies are required by law to produce the time that it takes to complete documentation, agree annual financial statements but only the financial terms with service providers etc. statements of public companies need to be filed with the Companies Registry. There will be regulatory filing requirements though for those funds that have received a regulatory license.

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 36 Jersey Jersey By Ashley Le Feuvre, Senior Manager Funds/SPV Group, Volaw Trust & Corporate Services Limited

Jersey is an international finance centre for a range the Collective Investment Funds (Jersey) Law, 1988 as of financial services including fund administration. amended, (the “CIF Law”). Together the two statutes Businesses are attracted to Jersey by the Island’s provide the framework for appropriate investor protection stable government, its proximity to both the UK and whilst retaining the flexibility to adapt quickly to changing continental , the significant expertise developed market conditions. by the industry in a wide range of financial services A fund’s promoter and advisers will need to examine and a competitive, co-operative and well-regulated tax the constituent parts of the fund structure, namely its environment. Jersey is a parliamentary democracy that is target investors, expected investments, the fund itself a dependency of the British Crown. It is a British Island, and functionaries to the fund. Each of these will have but is not part of the United Kingdom, nor is it a colony. an impact on the preferred fund structure and regulatory Under Protocol 3 to the United Kingdom’s treaty of consent required. Accession to the European Economic Community, the Codes of Practice were recently introduced by the Island is part of the of the European JFSC covering those funds licensed under the CIF Law, Community. Jersey is not, however part of the single for the purpose of establishing sound principles and market in financial services and as a result, is not providing practical guidance in respect of such funds. required to implement EU Directives on such matters as movement of capital, company law or money laundering. Investors However, Jersey will emulate such measures where Investors will generally fall into three categories: (i) appropriate having particular regard to the Island’s high net worth individuals, (ii) institutions, and (iii) fund- commitment to meeting international standards of of-funds. To one extreme, fund structures can target financial regulation and countering money laundering and private arrangements where very few investors exist and terrorist financing. are identified from the outset. Alternatively, promoters Jersey has been a key player in the international may wish to market a fund to the public and therefore investment funds market for over forty years and has require an offering document and possible third party over the years adapted its regulatory regime to facilitate assistance in sourcing investors. The number of “offers” the establishment and administration of alternative made to potential investors and the number of actual investment funds. Expert Funds were introduced in 2004, subscriptions made by investors has an impact on which provided a streamlined regulated product for funds whether a fund is a private or public arrangement, targeting expert investors. The Unregulated Fund product and also the regulatory fund categories that can be was launched in 2008, whilst in November 2007 applied. Further, the promoter should consider what (if changes were made to the regulation of Jersey fund any) minimum investment will be applied as this is a functionaries (local entities providing services to funds, prerequisite of certain regulatory categories and is also a for example, administrators and custodians) to improve requirement for potential exemptions for the regulation of the efficiency of interaction between the Jersey Financial an investment manager/adviser. Finally, the domicile and Services Commission (the “JFSC”) and functionaries. residency of investors is an important consideration and More recently, in 2012 the Jersey Private the JFSC’s list of approved countries may also have an Placement Fund Guide was issued by the JFSC. impact on the structure due to investor considerations.

Fund structure Investments The establishment and operation of investment funds Investment funds generally focus on investing in property, in Jersey is governed principally by two pieces of private equity, equities, derivatives and fund-of-fund legislation, namely, the Control of Borrowing (Jersey) investments, although more diverse investments such Law, 1947 as amended, (the “Borrowing Law”) and as art, film and carbon credits have also emerged. The

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 37 Jersey

income and expenses of the fund will vary depending on Types of vehicle the investments held, which in turn may have taxation Different structures are available to be used as considerations. investment funds in Jersey and a combination of It is essential that the fund promoter has clearly structures may also be permitted. considered the investment strategy of the fund, based on a realistic assessment of the market. A promoter should Companies be able to forecast the expected costs and revenues from The principal piece of legislation governing Jersey a strategy to ensure that sufficient returns will be achieved companies is the Companies (Jersey) Law, 1991 (the to attract investors. A strategy will generally focus on “Law”), which is a comprehensive, modern statute capital growth and/or income, which is important as an governing all aspects of the regulation of the formation investor may be taxed differently depending on how a and administration of private companies in Jersey. Share fund distributes monies back to investors. capital can be denominated in any currency and issued It is common for the promoter to provide investment in various classes, including redeemable shares. The management and/or advisory expertise to the fund. The ability to incorporate “no par value” companies has regulator may require this functionary to be regulated. added yet more flexibility. The Articles of Association registered upon The fund’s characteristics incorporation can include any entity specific provisions An open-ended fund will generally require periodic such as classes of shares, rights attaching to shares, valuations and dealing days whereby new investors dividend and voting rights, rights to winding up or return can be received and existing investors can redeem of capital, appointment and removal of directors and pre- their holdings. As a result, administrative costs will vary emption rights. depending on the frequency and complexity of such valuation and dealing procedures. Fund promoters should Incorporated Cell Companies (“ICCs”) and Protected Cell consider the basis for valuing fund assets, ensuring Companies (“PCCs”) independent valuations are available at dealing and In 2006, the Law was amended to introduce the concept reporting dates. of incorporated and protected cell companies. Both forms A fund may also generate periodic net income, which of Cell Company are vehicles that can create individual can be re-invested, accumulated, or distributed back to segregated cells. Segregated Cells in both PCCs and investors. The promoter should identify the preferred ICCs will have their own assets and liabilities, distinct treatment for such income balances in conjunction with and “ring fenced” from those of other Cells and the Cell appropriate tax advice. Whilst individual investors are Company itself. The key legal principle of both PCCs and encouraged to obtain their own tax advice in assessing ICCs is that assets of each individual Cell will not be the appropriateness of the fund, if the promoter is clear available to the creditors of any other Cell. on what investors are being targeted, it should be simpler A PCC is a separate legal entity, but individual protected to pre-empt the tax considerations of the investors and cells do not have legal personality independent of the PCC. organise the fund’s distribution policy accordingly. The ICCs are similar to PCCs, however, each incorporated cell fund itself should generally be tax neutral. is a separate corporate entity with the ability to appoint separate boards of directors. Administratively, once a Cell Functionaries Company is created, repeat transactions can be established The fund will require the services of certain third party on a much-reduced timescale. Hence, Cell Companies have functionaries. These could include an administrator, advantages for funds and securitisations structures where auditor, custodian and advisory committee. A regulated initial documentation can be complex but may potentially be administrator or custodian may be required in some replicated in future offerings. circumstances and certain categories of fund may require an annual audit. Unit Trusts Functionaries with a presence in Jersey, who provide In contrast to an investment company, a unit trust is not services to both Jersey and non-Jersey domiciled a separate legal entity as such, but a trust arrangement investment funds are regulated by the Financial Services whereby legal ownership of the fund’s assets is vested (Jersey) Law, 1998 (the “FSJ Law”). Under the law a fund in a trustee who holds the assets of the fund on trust for services business must be registered to provide one the benefit of the unit-holders. or more classes of Fund Services Business. Codes of The unit trust will generally be constituted by means Practice set out the principles and standards of conduct of a trust instrument made between a trustee company expected of persons registered under the FSJ Law for and an independent manager. Typically the manager carrying on Fund Services Business activities. will promote, manage and administer the scheme.

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 38 Jersey

Subscription proceeds will be paid to the trustee which Unregulated Eligible Investor Fund to have a Jersey-based will act as custodian of the investment assets of the administrator or custodian, nor for it to have any Jersey fund. In addition, the trustee will generally supervise resident directors. There is also no need for Jersey-based compliance by the manager with its obligations under the auditors to be appointed to the fund. The fund may only trust instrument. list on a stock exchange, such as The Channel Islands The trust instrument will generally contain provisions Stock Exchange (the “CISX”), which permits restrictions regulating the issue, redemption and valuation of units, upon transfers of interests within the fund. This is in the appointment and removal of the trustee and the order to ensure that only eligible investors are allowed to manager, their duties and remuneration, borrowing invest in the fund. powers, investment restrictions and for the winding-up of An Unregulated Exchange Traded Fund is not regulated the trust. For most practical purposes a unit trust scheme by the Jersey Financial Services Commission on the basis will operate and be regulated in the same manner as a that it is already complies with the listing requirements of corporate investment fund. an approved stock exchange. There is a prescribed list of stock exchanges for which funds listed on them may Limited Partnerships classify as Unregulated Exchange Traded Funds. A limited partnership may be an appropriate structure An Unregulated Exchange Traded Fund may only take for a number of different purposes. A principle use is the form of a closed-ended fund, but may be established to provide an additional form of investment vehicle, as a company (or cell company), unit trust or limited in particular for the venture capital industry. A limited partnership. As with an Unregulated Eligible Investor partnership can also be an attractive structure for various Fund, there is no need for Jersey-based auditors to be tax planning purposes as the partnership is generally appointed to the fund. treated as being fiscally transparent. There is no maximum or minimum imposed on the Very Private and COBO-only Funds number of limited partners. The general partner will Very Private investment funds (whether in corporate form, manage the business of the partnership and have limited partnership, or as a special purpose unit trust) unlimited liability for its debts. The liability of investors can be tailored for a single individual, a strictly limited taking interests as limited partners (and who do not number of investors or structured as a closely held joint participate in the management of the business) will be venture investment vehicle. These Very Private Funds limited generally to the amount of their investment. will require very little regulatory supervision and can The introduction in 2011 of Incorporated Limited be formed very quickly. Very Private Funds are usually Partnerships and Separate Limited Partnerships has established to meet the requirements of a single investor further increased flexibility and options available. or a corporate group (up to a maximum of 15 investors). The fund’s constitutional documents will usually state Regulatory options that there is a specific restriction on the nature of the The range of regulatory categories that may be applied to investor. Thereafter little more is required than the fund structures by the JFSC is summarised below: disclosure of the beneficial ownership to the JFSC. Hence the fund may be structured to suit particular needs or Unregulated Funds circumstances. This regime allows eligible funds merely to notify Where a promoter seeks to make a number of “offers” the Jersey Financial Services Commission of their to potential investors to invest in a proposed structure, establishment, rather than going through a full there will be additional regulation by the JFSC. “COBO authorisation process. Two forms of unregulated fund Only Funds” are those where the number of such offers have been introduced; an Unregulated Eligible Investor is less than 50 and where the fund is not listed. Fund and an Unregulated Exchange Traded Fund. Consent will be required from the JFSC under the An Unregulated Eligible Investor Fund is available to Control of Borrowing (Jersey) Order, 1958. Prior to the investors injecting a minimum of USD1,000,000 each into issue of a COBO consent, the JFSC will perform a the fund, or to a sophisticated investor. The investors will preliminary review of the promoter behind the scheme as be required to acknowledge in writing their acceptance well as a review of the private placement memorandum. of the risks involved in a prescribed form. In addition, In considering a promoter, the JFSC will analyse its track the fund must take steps to ensure that its investors record, reputation and experience as well as such issues meet the legal requirements to invest in the fund. The as spread of ownership and financial resources. The fund may be open-ended or closed-ended and may JFSC will also have an ongoing regulatory role and the take the form of a company (or cell company), unit trust COBO consent will set out various conditions, which the or limited partnership. There is no requirement for an fund will need to comply with.

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 39 Jersey

Exemptions are available under the FSJ Law whereby certifying that the fund meets the criteria expected of flexibility in the regulation and appointment of service an Expert Fund. In particular, a Jersey Administrator providers (i.e. for investment management / advisory is required to certify that any offering documentation services) can be achieved. These exemptions are contains appropriate disclosures and information on normally dependent on the investors being considered the fund’s investment and borrowing strategies. The professional investors, or if the minimum investment per appropriate criteria for an Expert Fund are contained in investor is £250,000 or more, and where all investors the Jersey Expert Fund Guide issued by the JFSC and have acknowledged a prescribed investment warning. available from their website. Each Expert Fund will require its investors to confirm Private Placement Funds in writing that they have received and accepted an The Jersey Private Placement Fund Guide (the “Guide”) investment warning acknowledging that the fund is was issued by the JFSC on 26 January 2012. A Private suitable only for expert investors and confirm their Placement Fund satisfying the Guide’s conditions brings awareness that the fund involves special risks and that a number of advantages – it removes the Commission’s only limited regulatory oversight applies. An investor traditional “promoter test” (which sets out detailed will also have to confirm that he is either: a) investing criteria against which the Commission vets new USD100,000 in the fund; or b) is a “professional investor”; promoters of funds), making it much simpler for new or c) is a “high net worth individual”. The applicable and existing promoters to establish funds in Jersey; it definition of a “high net worth individual” is USD1,000,000 offers a streamlined 72-hour authorisation process for of assets (excluding the principal residence). Such assets the approval of funds which meet the Guide’s criteria, can be jointly held with a spouse. The definition of a and it provides certainty in relation to the contents of the “professional investor” is “a person, partnership or other offering document requirements. It is anticipated that the unincorporated association or body corporate, whose new regime will be of particular interest to promoters ordinary business or professional activity includes, or of specialised and alternative investment funds aimed it is reasonable to expect that it includes, acquiring, at sophisticated and professional investors, including underwriting, managing, holding or disposing of private equity, mezzanine, infrastructure and property investments whether as principal or agent, or the giving funds and is expected to enhance Jersey’s position of advice on investments.” as a leading jurisdiction for the servicing of alternative Due to their nature, most Expert Funds will investment funds. probably rely on the professional investor exemption A Private Placement Fund is a closed-ended or the minimum subscription of USD100,000. However, investment. Participation can be offered to no more than circumstances will, of course, make the “high net worth 50 potential investors, who must be either Professional individual threshold” extremely relevant in smaller private Investors or Sophisticated Investors, as defined in the client / family type of fund arrangements. In addition Guide. Annual accounts and an auditor’s report must be those involved in establishing and providing services to an provided to all investors. Expert Fund are able to invest in the fund. The JFSC have A Private Placement Fund can be structured as a confirmed that any application to extend the definition of company, a unit trust, or one or more forms of limited “Expert Investor” in respect of types of “carried interest” partnership. It may be a fund established in Jersey or investors is likely to be treated sympathetically. elsewhere but a fund established outside Jersey must be A fund that is established for expert investors can have managed in Jersey by a Designated Service Provider as considerable flexibility in both its structure and operation. defined in the Guide. In most cases, it should be possible to structure the Listed Funds PPF in such a way as to ensure that the general partner, The Jersey Listed Funds Guide provides certainty and trustee or manager falls outside the licensing regime for guidance to those wishing to establish such funds in a fund services businesses pursuant to the FSJ Law. quick and cost-effective manner, and is a response to an increased market demand for Listed Funds. Listed Funds Expert Funds are established on certification by the fund administrator Expert Funds can use any fund vehicle type and are that the fund complies with the criteria set out in the established for sophisticated, high net worth, professional Guide. The JFSC issues the relevant permits on receipt of and institutional investors. Expert Funds can be set up as the certification. open or closed ended funds and have no restrictions on A Listed Fund can only be listed on an exchange the number of investors. approved by the JFSC. The number of approved Existing authorised Jersey Fund Administrators are exchanges is extensive, global in scope and includes all able to progress the launch of Expert Funds by self- exchanges upon which listings are ordinarily sought.

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 40 Jersey

The investment manager of a Listed Fund must be of to be appropriate to the nature of the particular fund. good standing, established and regulated (if appropriate This involves negotiations with the promoter and/or – the JFSC recognises that some investment managers his professional adviser, following scrutiny of all the may not be regulated) in an OECD member state or a documentation and other information associated with the jurisdiction with which the JFSC has a memorandum of Unclassified Fund. The JFSC’s Promoter Policy applies understanding. to Unclassified Funds and describes certain criteria with A small number of key structural requirements are which The JFSC will expect a promoter to comply. imposed on such funds including that the fund must be closed-ended (meaning that it is not normally open for Public Funds: Recognised Funds subscriptions and redemptions at the option of investors) A Jersey fund that has been registered as a “Recognised and that the fund’s offering document must carry a clear Fund” may be marketed freely to the public in the UK investment warning and contain all information necessary due to the granting of “Designated Territory Status” for potential investors to make an informed decision. under Section 87 of the UK’s Financial Services Act 1986 There are no investment or borrowing restrictions (now Section 270 of the Financial Services and Markets imposed on Listed Funds and no limit on the number or Act 2000). “Designated Territory Status” also helps a type of investors in such funds. Recognised Fund to be marketed to other European Union jurisdictions. Public Funds: Unclassified Funds To qualify as a “Recognised Fund”, a fund must adopt These funds are authorised under the CIF Law. They constitutional documents, restrictions on investments may be open-ended or closed-ended and may have and protection of investors equivalent to those of a a corporate structure, be a unit trust or a limited conventional UK authorised unit trust. Recognised partnership. Typically, they will have a lower minimum Funds are the most highly regulated and are subject to investment requirement than Expert Funds. a compensation scheme for the protection of investors. The JFSC’s policy is that each Unclassified Fund Many types of equity, bond and money market funds is regulated to an extent and in a manner considered have been established in Jersey as Recognised Funds. n

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 41

LUXEMBOURG

Number of funds As of 31 May 2012 Overall...... 3,874 By legal form Total FCPs...... 1,929 Total Sicavs...... 1,909 Others...... 36 2010 Law, Part I FCP...... 1,121 Sicav...... 738 Others...... 0 Total...... 1,859 2010 Law, Part II FCP...... 286 Sicav...... 291 Others...... 5 Total...... 582 SIFs Luxembourg FCP...... 522 Sicav...... 880 Others...... 31 Total...... 1,433

Administered fund assets As of 31 May 2012 (EUR million) Overall...... 2,212,027 By legal form Luxembourg Total FCPs...... 631,335 Total Sicavs...... 1,569,393 Others...... 11,229 2010 Law, Part I Major Fund Legislation and circulars FCP...... 440,428 l Law of December 17, 2010 (2010 law) on undertakings Sicav...... 1,310,294 for collective investment. Others...... 0 l Law of March 26, 2012 (2012 law) on Specialised Total...... 1,750,722 Investment Funds, amending law of February 13, 2007 2010 Law, Part II (SIF or 2007 law). FCP...... 79,955 l Grand-ducal regulation of February 8, 2008, concerning Sicav...... 122,757 certain definitions of the law of December 20, 2002 on Others...... 1,003 undertakings for collective investment (as amended) Total...... 203,715 and transposing Commission Directive 2007/16/CE on SIFs UCITS eligible assets. FCP...... 110,952 l Grand-ducal regulation of July 14, 2010, concerning Sicav...... 136,342 exception from subscription tax of UCITS, Part II Funds Others...... 10,296 and SIFs investing in microfinance institutions. Total...... 357,590 l CSSF regulations 10-04 and 10-05 transposing Commission directives 2010/43/EU and 2010/44/EU Regulator respectively of , 2010 implementing UCITS IV Financial Sector Supervisory Commission (CSSF), 110 Level 2 measures. route d’Arlon, L-2991 Luxembourg. l CSSF Circular 02/80 relating to funds pursuing alternative investment strategies. Double Taxation Treaties l CSSF Circular 91/75 on undertakings for collective With 64 countries (as of April 2011): Armenia; Austria; investment. Azerbaijan; Bahrain; , Belgium; Brazil; Bulgaria; l CSSF circular 11/512 presenting the main regulatory Canada; China; Czech Republic; Denmark; Estonia; changes in risk management following publication of Finland; France; Georgia; Germany; Greece; Hong CSSF Regulation 10-4 and ESMA clarifications. Kong; Hungary; Iceland; India; Indonesia; Ireland; Israel; l CSSF Circular 11/508 on management companies Italy; Japan; Latvia; Liechtenstein; Lithuania; Malaysia; under the 2010 law. Malta; ; Mexico; Moldova; Monaco; Mongolia; l CSSF Circular 11/509 on cross-border marketing of Morocco; Netherlands; Norway; Panama; Poland; UCITS under the 2010 law. Portugal; Qatar; Romania; Russia; San Marino; Singapore; ; Slovenia; South Africa; South Korea; Spain; Sweden; Switzerland; Thailand; Trinidad & Tobago; Tunisia; Turkey; United Arab Emirates; United Kingdom; United States; Uzbekistan; Vietnam.

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 43 LUXEMBOURG

Double taxation treaties are currently under negotiation published and sent to the CSSF within two months of or awaiting approval by Luxembourg’s parliament with the end of the period to which they relate a further 21 countries: Albania; Argentina; Cyprus; SIF Law Croatia, Egypt; ; Kuwait; Kyrghizstan; ; l Audited annual financial statement must be available Macedonia; New Zealand; Oman; Pakistan; Saudi Arabia; to investors within six months of the end of the Serbia and Montenegro; Seychelles; ; ; financial year Tajikistan; Ukraine; Uruguay. Overall cost of fund establishment Types of alternative fund vehicle CSSF Regulatory fees: Open-ended investment company Funds set up under the 2010 law, Sicar law and SIF Law: l Investment company with variable capital (société One-off fees of EUR2,650 for a single-compartment fund d’investissement à capital variable or Sicav) or EUR5,000 for an umbrella fund on submission of an Close-ended investment company application for regulatory approval and annual regulatory l Investment company with fixed capital (société fees of the same amount. d’investissement à capital fixe or Sicaf). Luxembourg and EU-domiciled UCIs Common Contractual Fund (similar to unit trust in UK law) l Listing fee: EUR1,250 l Common contractual fund (fonds commun de l Visa fee (for funds domiciled in EU countries other placement or FCP) than Luxembourg): EUR1,250 l Maintenance fee: Available types of corporate vehicle EUR1,875 for first listing Sicavs under the 2010 law must be set up as a public EUR1,250 for second listing limited company (SA). Under the SIF law Sicavs and EUR875 for third listing and Sicafs may be set up as a: EUR500 for fourth and subsequent listings l Public limited company (SA) Non EU-domiciled UCIs l Partnership limited by shares (SCA) l Listing fee: EUR2,500 l Private limited liability company (S.àr.l) l Visa fee: EUR2,500 l Co-operative organised as an SA l Maintenance fee EUR2,500 for first listing Audit requirement EUR1,875 for second listing l Audit requirements governed by Article 154 of the 2010 EUR1,250 for third listing and Law and various circulars. EUR625 for fourth and subsequent listings l Luxembourg regulation requires that all Luxembourg funds be audited at least annually (for certain funds Regulatory approval time (by the CSSF) semi-annually) by a Luxembourg auditor approved by Funds set up under the 2010 Law: the CSSF and a member of the Luxembourg Institute 4-16 weeks of Auditors. Funds set up under the SIF Law: 3-12 weeks Financial statement requirements 2010 Law l Audited annual financial statement must be published within four months of the financial year-end, and be available 15 days prior to the annual general meeting l Unaudited semi-annual financial statements must be

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 44 LUXEMBOURG Luxembourg By Rémi Chevalier and Olivier Sciales, Chevalier & Sciales

I. Why Luxembourg? Supervisory Commission (usually known by its French The establishment of the European Union’s single acronym, CSSF), in overseeing alternative funds. The market has enabled the Grand Duchy of Luxembourg to revised SIF law came into force on April 1, 2012. become one of the leading global domiciles and service The law brings the SIF legislation into line with centres for both traditional and increasingly alternative AIFM Directive rules in areas including delegation, risk investment funds and related vehicles, ranked as the management and the handling of conflicts of interest. world’s second-largest fund centre measured by assets In parallel with the December 2010 funds legislation that under management after the United States. From the transposed the Ucits IV directive into Luxembourg law, it establishment of Luxembourg’s first fund in 1959 and allows sub-funds of a SIF umbrella structure to invest in a total of 805 at the end of 1990, the industry number other compartments of the same structure in the same has grown to 3,874 funds, comprising a total of 13,412 way that Ucits funds can do. separate investment portfolios, at the end of May 2012. Article 5 of the revised law abolishes a peculiarity The fund industry has benefited from the open-arms of the SIF regime that allowed fund promoters to wait welcome of the Luxembourg authorities toward foreign until up to a month after the launch of a fund to submit businesses, capital and investment, as well as the it to the CSSF for approval. Henceforth funds must be country’s location in the heart of western Europe, close authorised by the regulator before they can be launched, to the continent’s principal investment fund markets, its like funds created under the 2010 legislation. In practice, highly qualified and polyglot workforce, and its political, this provision was rarely used because of the risks of economic and social stability. The grand duchy’s having to revise a structure after it had been launched. competitiveness has been strengthened by a business- The legislation is relatively short, consisting of just friendly tax regime favouring the establishment of funds, 18 articles. The first article states that the activity and a comprehensive legislative framework designed for of management of a SIF must comprise at least both traditional and alternative investments. management of the investment portfolio, excluding The authorities and industry representative pay close passive funds that seek to create value solely by the attention to changes in the regional and worldwide long-term holding of assets and creates a distinction operating and market environment for investment funds between SIFs and private wealth management companies and the country’s legislation has been refined and created under Luxembourg’s law of May 11, 2007, but it updated in a timely manner, coupled with the practice does not exclude private equity or real estate funds. of becoming one of the first member states to adopt Article 3 allows SIFs created as open-ended investment EU directives into national law. Today, despite the companies (Sicavs) to benefit from measures in the 2010 unfavourable global economic climate and continuing law under which fund articles of association drawn up in uncertainty over the creditworthiness of both private and English no longer need to be translated into French or sovereign debtors, Luxembourg has not only maintained German, nor do they need to send shareholders physical its position as an international fund distribution hub but (as opposed to electronic) copies of their annual reports has seen the net assets under management of domiciled except on request. It also sets rules for voting rights and funds reach EUR2.212trn (about USD2.79trn) in May 2012. what constitute a quorum at shareholder AGMs. The legislation now requires SIFs to put in place II. Legal and regulatory framework systems to detect, measure, manage and monitor the The law of February 13, 2007 established Specialised investment risk of its individual positions and their Investment Funds as a vehicle designed for alternative contribution to the portfolio’s overall risk profile. SIFs must investments and other funds aimed at sophisticated also be structured and organised to minimise the risk of investors. It was amended by the law of March 26, 2012, conflicts of interest, and draw up rules to manage any to take account of new and impending EU legislation conflicts that do arise without causing harm to investors. including the Ucits IV directive and the Alternative Article 7 sets down that where SIFs delegate tasks Investment Fund Managers Directive, which will come into and functions to third-party providers, the CSSF must be effect on July 22, 2013, as well as the increased experience informed in advance and delegation should not affect of Luxembourg’s financial regulator, the Financial Sector oversight of the fund. Individuals or legal entities to which

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 45 Luxembourg

portfolio management is delegated must be appropriately is likely to take a minimum of three weeks for SIFs and authorised or licensed and regulated, except by express four weeks for Ucits, and in some cases longer. The CSSF permission from the CSSF. provides a five-step approval process for the establishment A SIF’s managers must be able to determine that the of a Luxembourg fund: delegated provider is qualified and capable, and they must retain ultimate control over the fund’s activities 1. Initial submission of the questionnaire requesting and the ability to revoke the delegation. Delegation authorisation should not create conflicts of interest – so, for instance, An application file consisting of the completed application investment management may not be delegated to the questionnaire and appended documents, should be fund’s custodian – and the delegation of functions must submitted together by electronic means, through the be revealed in the fund’s offering documents. CSSF’s e-file programme or e-mail, once all constituents Article 13 states that funds are not prohibited from of the project are completely settled. deviating from their investment policy for the purposes of liquidity management, hedging or efficient portfolio 2. Acknowledgement of receipt of the application file management. Article 15 allows the CSSF to withdraw The CSSF will acknowledge receipt of the application authorisation for one or more sub-funds of a SIF while file within two working days and will inform the applicant maintaining the authorisation for other sub-funds of the about the staff member in charge of examining the same structure. application through the e-file programme or e-mail. Article 16 of the law follows the 2010 legislation in allowing one sub-fund of a SIF to invest in another. This 3. Transmission of CSSF feedback and further requests article clarifies that the rules regarding a company’s of information investment in its own shares set out in Luxembourg’s 1915 The CSSF aims (but does not guarantee) to contact company law do not apply to SIFs. Sub-funds of the same the applicant or a contact person designated in the SIF may not cross-invest in each other, and voting rights questionnaire with feedback within 10 working days of shares held by one sub-fund in another are suspended. following receipt of the file. The applicant may be asked Article 17 stipulates that SIFs established before the for further information and/or supporting documents, or date of entry into force of the amendment law, April 1, to explain specific aspects of the application. 2012, have a transitional period up to June 30, 2013 to comply with the new rules on the delegation of functions 4. Completion of examination phase and invitation to (Article 42ter). submit final version of documents The law of December 17, 2010 incorporated into The CSSF will inform the applicant when the examination Luxembourg’s legislation the Ucits IV directive, the latest phase of the application is completed. From this point, iteration of the EU’s regime for cross-border distribution of applicants may not change the scope of the application investment funds to retail investors, dating back to 1985. or alter the final versions of the constitutive documents on The law differentiates between Undertakings For Collective the basis of which the examination has been completed, Investment In Transferable Securities (Ucits, regulated otherwise the examination will have to begin again at largely by Part I of the 2010 law) and other Undertakings stage 2. Confirmation of a satisfactory completion of the For Collective Investment (UCIs or Part II funds, so called examination phase mean the applicant may submit the after Part II of the 2010 law which governs them). final clean version of any compulsory documents required Other recent regulatory developments include the to finalise the approval process of the fund. issue of CSSF Circular 11/512 presenting the main regulatory changes in risk management following the 5. Entry of the fund on the official list publication of CSSF Regulation 10-4 and clarifications by Formal accreditation and entry on the official list is the European Securities and Markets Authority (Esma) contingent on the submission of all required documents as well as the CSSF Circular 11/509 regarding the new in a finalised form, a prospectus under the terms of notification procedure for Luxembourg Ucits seeking to Circular CSSF 08/371, and the management regulations, market their shares or units in other EU member states, articles of incorporation and agreements in signed form. and for Ucits from other member states seeking to Upon satisfactory receipt of the prospectus and other market in the grand duchy. required documents, the CSSF will register the fund on Luxembourg funds, both Ucits and SIFs, can benefit the official list. The regulator will also will issue official from a fast-track procedure under which in principle accreditation letters, related attestations and identification (although this is not guaranteed) the CSSF aims to codes, register the documentation and return a visa- transmit its comments and observations to the applicant stamped version of the full prospectus within five working within as little as 10 working days. In practice authorisation days following receipt of the required documents.

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 46 Luxembourg

Luxembourg investment funds are divided into three 2012. The SIF is a lightly regulated and tax-efficient fund categories: offering promoters an onshore alternative to traditional l UCIs or Part II funds (582 as of the end of May 2012). offshore jurisdictions such as the Cayman Islands or l Ucits (1,859 in May 2012). British Virgin Islands when deciding on the jurisdiction in l SIFs (1,433 in May 2012). which to set up a fund and type of vehicle to use. Like Part II funds, investment funds created under the SIF law i) Ucits are subject to the individual distribution rules of each Ucits are designed for retail investors, and benefit from the country where they are marketed. so-called EU ‘passport’ that allows them to be marketed freely throughout all 27 EU member states as well as iv) Regulatory body other countries belonging to the European Economic Area The CSSF authorises and oversees all Luxembourg with a minimum of notification requirements. Transferable registered funds. Its annual regulatory fees for funds securities are defined in Article 1 of the 2010 law as under the 2010 law and SIFs are EUR2,650 for a shares in companies or other equivalent securities, single compartment fund and EUR5,000 for a multiple bonds and other forms of securitised debt, and any other compartment fund. negotiable securities, including certain types of derivative instrument, that carry the right to acquire transferable v) Future regulatory changes securities by subscription or exchange. Non-Ucits funds established in Luxembourg and other Four categories of fund investing in transferable EU member states, as well as managers domiciled within securities fall outside Part I of the 2010 law: EU countries, will be subject from July 22, 2013 to the l Closed-ended funds. provisions of the Directive on Alternative Investment Fund l Funds that raise capital without promoting the sale of Managers, which will provide a harmonised regulatory their shares or units to the public within the EU. framework for the distribution across the EU of funds l Funds whose management regulations or aimed at sophisticated investors. constitutional documents stipulate that they may be The directive was formally agreed on June 8, 2011 and sold only to the public in countries that are not EU it formally entered into force on July 21, 2011, but member member states. states have two years to transpose its measures into l Categories of funds determined by the Luxembourg national law. Detailed ‘Level 2’ implementation measures financial regulator, the CSSF, for which the investment are expected to be enacted in the form of a regulation policy rules laid down in Chapter 5 of the 2010 law are from the European Commission in the second half of inappropriate in view of their investment and borrowing 2012. The regulation, which will have direct application policies. in member states and will not have to be adopted into national law, is based on advice from the European ii) Part II funds Securities and Markets Authority (Esma), delivered to the By contrast, UCIs established under Part II of the 2010 Commission on November 16, 2011 following consultation law may only market their shares or units in other EU with industry members and representative organisations. countries or elsewhere if they comply with the individual The Commission is not obliged to follow all of Esma’s conditions laid down by the authorities in the country recommendations and is not expected to do so. concerned. The criterion determining whether a fund is Luxembourg is expected to pass legislation subject to Part I or Part II of the 2010 law is its planned transposing the AIFM Directive into national law before investment objective; Part I of the 2010 law applies the end of 2012. This may be accompanied by other only to funds whose the sole objective is investment in legislation affecting the fund industry including the transferable securities, whereas a Part II fund may invest establishment of a partnership structure effectively in other types of asset, making them suitable as the replicating limited liability partnerships in legal form for the establishment of alternative investment jurisdictions. vehicles including hedge, venture capital and real A draft text of the next iteration of the Ucits directive, estate funds. dubbed Ucits V, was published by the European Commission at the beginning of July 2012. Its main iii) SIFs purpose is to bring the Ucits rules on remuneration of The SIF law of 2007 replaced the legal framework fund managers and depositary requirements into line with previously applicable to institutional funds through a law those enacted in the AIFM Directive. of 1991 by establishing a statutory regime specifically designed for investment funds aimed at sophisticated III. Constitution of a fund and legal structures investors, and it was amended by the law of March 26, Investment funds may take the form of an open-

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 47 Luxembourg

ended investment company (known as a Sicav after iv) Fund establishment expenses its French acronym), of which there were 1,909 at the According to the latest regulation regarding regulatory end of May 2012, a closed-ended investment company charges, issued on April 1, 2010, formation expenses or Sicaf, of which there were 31 in May 2012, or a comprise a fixed capital duty amounting to EUR75 for common contractual fund (FCP) with a management all funds, notary’s fees, legal fees, and a CSSF filing company (1,929 in May 2012). Any of these entities may duty of EUR2,650 for a single-portfolio fund or EUR5,000 be established as an ‘umbrella’ structure with multiple for an umbrella fund, whether the fund is established compartments or sub-funds with different investment under the law of December 17, 2010 or is a Sicar or SIF. policies. In this case each compartment is treated as The formation expenses may also comprise a Stock a segregated entity whose assets belong to and may Exchange visa fee of EUR1,250 for a Luxembourg or EU be claimed by only investors in that particular sub-fund; fund, or EUR2,500 for a non-EU fund. creditors of or investor in other sub-funds have no claim against the assets. v) Minimum capitalisation The minimum capitalisation of EUR1.25m required under i) Sicavs and Sicafs both the 2007 and 2010 laws must be reached within 12 A Sicav is a open-ended investment company whose months following approval by the CSSF in the case of a capital is always equal to its net assets, and for which SIF, compared with six months for a fund set up under no formalities are required for increases and reductions the 2010 law. in capital through investments in or redemptions of its shares at investors’ request at a price equal to the net vi) Regulatory control asset value per share. By contrast, a Sicaf is a closed- Funds set up as SIFs now require regulatory approval ended investment company whose investors do not have prior to incorporation, in the same way as funds set up the right to redeem their shares at their request before under the 2010 law. While funds established under the any expiry of the fund’s term. SIF law are not required to have a promoter, the SIF’s directors are subject to approval by the CSSF; they must ii) FCPs enjoy a good reputation and be able to demonstrate the An FCP is a common contractual fund, the liability experience necessary to manage the type of alternative of whose joint owners is limited to the amount they investment fund in question. Article 5 of the 2012 law says have invested. It should be noted that an FCP has no the persons responsible for management of the SIF’s legal personality and therefore must be managed by a investment portfolio, and any changes, must be notified Luxembourg management company, whereas a Sicav to the CSSF, which must certify that they are of good or Sicaf can be managed by its board of directors. reputation and have the experience necessary to manage Ucits in the form of FCPs are managed by management the type of alternative investment fund in question. companies under the conditions laid down in Chapter 15 of the 2010 law, whereas Chapter 16 of the 2010 law In complying with the establishment requirements, lays down the conditions under which management fund promoters can benefit from the overall financial companies manage Part II funds. infrastructure in Luxembourg, which included 143 banks as of the end of May 2012. iii) Choosing a legal structure The choice of whether to create a fund as an FCP or IV. Investors’ eligibility as an investment company (Sicav or Sicaf) is mainly Investment funds set up under the 2010 law are based on tax considerations. An FCP is tax transparent, authorised for public distribution and there is no a concept guaranteed in the Luxembourg tax legislation. restriction on the eligibility of investors, whereas by Marketing and operational considerations are also contrast the SIF law incorporates restrictions on qualifying relevant to the choice of this vehicle since a Luxembourg- investors. SIFs are reserved for “well-informed investors” domiciled FCP benefits from the high service standards able to understand and assess the risks associated with provided by management companies in the grand duchy. investments in such a fund. Well-informed investors are The cultural background of different countries appears defined as institutional investors, professional investors, to influence the choice of promoters whether to create or any other investors who have declared in writing a fund as an FCP or as an investment company. For that they are well-informed investors and either invest example, FCPs are traditionally widely used in Germany, a minimum of EUR125,000 or are certified by a bank, while in France investors are more familiar with investment firm or management company as having the investment in Sicavs. appropriate expertise, experience and knowledge to understand investment in the fund adequately. Article 2

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 48 Luxembourg

of the 2012 law requires SIFs to have in place procedures merely states that a SIF should apply the principle of to verify that its investors qualify as sophisticated rather risk diversification under which the collective investment than retail clients. of funds must be made in assets “in order to spread the investment risks”. The CSSF clarified in Circular V. Investment restrictions 07/309 that: Within the broad principle of risk spreading, different l A SIF may not invest more than 30 per cent of its types of fund are subject to varying rules governing assets or commitments in securities of the same type the scope of their investment policy. The rules are issued by the same issuer. significantly restrictive in the case of Ucits, lighter for Part l Short sales may not result in the SIF holding a short II funds and substantially lighter for SIFs. position in securities of the same type issued by the same issuer representing more than 30 per cent of its i) Ucits assets. The 2010 law imposes a range of restrictions upon l When using derivatives, the SIF must ensure a similar investments by Ucits that have been clarified by recent level of risk-spreading via appropriate diversification of statements from the regulator: the underlying assets. l The grand-ducal regulation of February 8, 2008 clarifies However, the CSSF may, if it deems the circumstances the notion of Ucits as provided in the 2002 and 2010 appropriate, grant exemptions to these rules on a case- laws, in light of the Commission Directive 2007/16/EC. by-case basis. l Circular CSSF 08/339 (as amended by Circular 08/380) implements the guidelines of the Committee of VI. Reporting and audit requirements European Securities Regulators (Cesr, which became i) Prospectus Esma on January 1, 2011) in relation to eligible assets Funds are obliged to issue a prospectus containing for investment by Ucits, and provides additional a presentation as well as economic and commercial clarifications relating to the eligible asset rules of the information on the fund and its management company. successive Ucits directives, which has been expanded The law of July 10, 2005 on prospectuses for securities to include not only transferable securities and money specified that closed-ended funds falling outside Part market instruments but bank deposits, funds of funds, I of Luxembourg’s fund legislation were exempt from derivatives and funds tracking recognised financial the obligation to publish a full prospectus, although indices. such funds were still obliged to publish a simplified prospectus. This was also obligatory for Ucits funds up to ii) Non-Ucits Part II Funds July 1, 2011, when the law of 2010 replaced the simplified While there are no restrictions on eligible assets in which prospectus for new funds by the Key Investor Information a Part II fund may invest, its investment policy is subject Document. Under the 2010 law, the prospectus must to approval by the CSSF, and certain rules are laid down include the information necessary for investors to make in Circular IML 91/75 (as amended by Circular CSSF an informed judgment about the proposed investment 05/177), while others are specifically applicable to funds in the fund, and especially of the risks involved; it must pursuing alternative investment strategies. These rules be updated whenever necessary for this purpose and at are laid down in Circular CSSF 02/80, which states that: least annually. l Aggregate commitments in terms of short selling may Under Article 12 of the 2012 law, the CSSF’s approval not exceed 50 per cent of assets, and no more than is required for any substantial change made to the 10 per cent of securities of the same type issued by SIF’s offering documents, such as the name of the the same issuer may be sold short. fund or of sub-funds, the replacement of the custodian, l Borrowings must not exceed 200 per cent of net administrator, auditor or manager, the creation of new assets. sub-funds or a significant change in investment policy. l Counterparty risk, defined as the difference between Ucits funds must comply with the Esma guidelines the value of assets given as guarantee and the 10-788 of July 28, 2010, which require inclusion in the amount borrowed, may not represent more than 20 per prospectus of information relating to risk management. cent of the fund’s assets per lender. This includes the method used to calculate global exposure by differentiating between the commitment iii) SIFs approach, relative Value at Risk approach and absolute Specialised investment funds set up under the law of VaR approach; for Ucits adopting the VaR approach, the February 13, 2007, as amended by the law of March expected level of leverage and any possibility of higher 26, 2012, are not required to comply with any detailed leverage levels; and information on the reference portfolio investment restrictions or leverage rules. The legislation when Ucits use the relative VaR approach.

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 49 Luxembourg

ii) Issuing document KIID must be produced for each Ucits fund or sub-fund, As part of the lighter regulatory regime than that for Part and may also be produced for different classes of shares II funds governed by the 2010 law, SIFs are required or units in the same fund of sub-fund where there may only to produce an ‘issuing document’ comprising the be significant differences in performance between them. information necessary for investors to make an informed The KIID should enable investors to make an informed judgment investment in the fund, although the 2007 law choice about investing in a fund without reading the full does not specify any minimum content. The issuing prospectus, and it should enable them to compare one documents and any subsequent changes to it must be fund with another easily. communicated to the CSSF. Since July 1, 2012, all Ucits funds are required to have a KIID. Any significant changes to the fund, such as in its iii) Financial statement risk/reward profile or its management, require the issue Luxembourg funds (or their management companies of an amended KIID, and it must be updated at the end in the case of common contractual funds) are required of each year. It must be published in at least one of the to publish at least an annual report and, in the case official languages, or another language approved by the of investment companies and FCPs governed by the local regulator, of any EU country in which the fund is to 2010 law, also a half-yearly report covering the first six be marketed. months of the fund’s financial year. The annual report must include audited accounts and a report on the fund’s VII. Taxation of funds business, as well as any other information necessary Luxembourg Ucits, Part II funds and SIFs do not pay for investors to make an informed judgement about the income and capital gains taxes in the grand duchy, nor is fund. The audit must be conducted by an authorised stamp duty payable on share issues or transfers. independent auditor who is qualified and a member of There is a fixed capital duty of EUR75 to be paid upon the Luxembourg Institute of Auditors (IRE). The auditor incorporation. In addition, some funds are also subject must report promptly to the CSSF if any information to an annual subscription tax. Under the SIF law this provided to investors does not truthfully describe the annual subscription tax is levied at 0.01 per cent of the financial situation of the fund, or if the auditor becomes fund’s net assets, compared with a standard rate 0.05 aware during the audit that any fact or decision is liable per cent for funds under the 2010 law. However, the to constitute a material breach of the law or regulations, rate is 0.01 per cent for funds whose exclusive policy or to affect the ongoing functioning of the fund. is investment in money market instruments or bank It should be noted that unlike a fund established under deposits. Other funds, such as certain institutional cash the 2010 law, a SIF is not obliged to disclose details funds and pension pooling funds, are exempted from the of its portfolio as part of the information necessary for subscription tax, no matter under which law they are set investors to make an informed judgment about the fund, up. The 2010 law extended or confirmed this exemption nor is it required to publish the net asset value per share for exchange-traded funds and funds whose primary of the fund, as is the case for Ucits and Part II funds. aim is investment in microfinance institutions. It should be noted that investors may invest in a SIF by means iv) Key Investor Information Document of equity or debt in order to benefit from effective tax Until July 2011 Ucits funds were also required to produce optimisation, and that SIFs do not have to respect any a simplified prospectus, providing a summary of the main particular debt-equity ratio. prospectus. Under the Ucits IV directive, implemented Luxembourg has signed double taxation treaties into Luxembourg’s domestic legislation by the law of with 64 countries, and 21 others are under negotiation December 17, 2010, this is replaced by the Key Investor or awaiting approval from Luxembourg’s parliament or Information Document (KIID for short), designed to the legislature of the other country. These agreements provide full but concise information on the fund’s main seek to eliminate or reduce withholding taxes on foreign features, written in plain, non-technical language and income or capital gains. However, only 36 of these produced in a standard format, usually on two A4 pages. treaties are applicable to Sicavs, whether in the form of a Designed to provide investors with a more easily Ucits, Part II fund or SIF. understandable picture of the fund’s activities than was provided by the simplified prospectus, the KIID seeks to VIII. Stock Exchange Listing describe in straightforward terms the fund’s investment Luxembourg funds in the form of Ucits, Part II funds strategy, the risks involved, the service providers used and SIFs as well as foreign funds may be listed on the by the fund, the charges levied against the fund’s assets Luxembourg Stock Exchange. Various conditions must be for investment management and other services, and its met by foreign funds seeking a listing on the exchange, recent performance where this is applicable. A separate notably that the fund promoter is of good reputation and

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 50 Luxembourg

IX. At-a-glance guide to Luxembourg funds

Ucits funds Part II funds SIFs (Part I of the 2010 Law) (Part II of the 2010 Law) (2007 Law, revised 2012) CSSF approval Yes Yes Yes required prior to incorporation Supervised by CSSF Yes Yes Yes EU Passport Yes No No Eligible assets – Transferable securities Unrestricted but subject to Unrestricted – Bank deposits CSSF approval – Money market instruments – Fund of funds – Financial derivatives – Index tracking funds Eligible investors Unrestricted Unrestricted Well-informed investors – Institutional investors – Professional investors – Investors declaring that they are well informed and either invest a minimum of EUR125,000 or are certified by a bank, investment firm or management company as capable of making an informed decision on investment in the fund Need for a promoter Yes, although this may change Yes, although this may change No in the future in the future Investment – Provisions of the 2010 Law – Provisions of the 2010 Law Compliance with risk diversification rules: restrictions – Provisions of Circular CSSF – Circular IML 91/75 (as – SIF may not invest more than 30% of 08/339, investment possible amended by Circular CSSF assets or commitments in securities of in: 05/177) the same type from the same issuer • Transferable securities – For Part II funds pursuing – Short position in securities of the same • Deposits alternative investment type from the same issuer may not • Money market instruments strategies, Circular CSSF exceed 30% of SIF’s assets • Liquid financial assets 02/80, relating to short sales, – When using derivatives, SIF must • Other undertakings for borrowing and investment ensure similar level of risk-spreading collective investment restrictions via diversification of underlying assets Tax treatment – No income tax – No income tax – No income tax – Annual subscription tax of – Annual subscription – Annual subscription tax of 0.01% of the 0.05% of NAV (exchange- tax of 0.05% of NAV NAV (microfinance funds exempt) traded funds exempt) (exchange-traded funds and – Fixed capital duty of EUR75 – Fixed capital duty of EUR75 microfinance funds exempt) – No withholding tax on dividend – No withholding tax on – Fixed capital duty of EUR75 distributions and interest payments dividend distributions and – No withholding tax on interest payments dividend distribution and interest payments Issue and For Sicav or FCP, issue, For Sicav or FCP, issue, – No requirement that issue, redemption redemption of redemption or repurchase redemption and repurchase or repurchase price be based on NAV shares or units price must be based on NAV price must be based on NAV – Can issue shares at a pre-determined fixed price – Can repurchase shares below NAV Disclosure of Yes Yes No portfolio

has adequate and appropriate professional experience. X. Conclusion The annual Luxembourg Stock Exchange listing fee The Luxembourg investment fund industry, as part of a for Luxembourg and EU funds is currently EUR1,875 for a leading international , is now a recognised first line of quotation, EUR1,250 for a second, EUR875 for label for funds throughout Europe and in other parts a third and EUR500 for a fourth and any additional lines of the world, including East Asia, the Middle East and of quotation. The fees for non-EU funds are EUR2,500 for South America. The country continues to benefit from a first line of quotation, EUR1,875 for a second, EUR1,250 the political consensus in favour of maintaining the for a third and EUR875 for a fourth and any subsequent competitiveness of the fund industry and the financial listings. sector as a whole, reflected in the proactive approach of the authorities to the adoption of EU legislation and the regular revision of national fund regimes to take into

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 51 Luxembourg

account the needs and preferences of global standard- Chevalier & Sciales setters, investment managers, fund service providers and Law firm (Luxembourg) investors. These efforts have contributed significantly to 51 Route de Thionville the creation of a stable and protective environment for L-2611 Luxembourg the fund industry and the strengthening to Luxembourg’s www.cs-avocats.lu global reputation and market position. Tel: +352 26 25 90 30 The pragmatism of the Luxembourg authorities is Fax: +352 26 25 83 88 also reflected in the regulatory approach of the CSSF to industry members, its readiness to engage in dialogue Main contacts: with market participants, and its careful calibration of the Rémi Chevalier (founding partner) appropriate balance of the interests between industry Tel: +352 26 25 90 30 members and investors, especially important in view of Mobile: +352 621 50 46 35 the ongoing global market turbulence that continues to Email: [email protected] impact the fund industry. Luxembourg’s long-standing dominance in Europe’s Olivier Sciales (founding partner) cross-border retail fund industry has provided it with Tel: +352 26 25 90 30 broad awareness of the need for industry transparency Mobile: +352 621 53 11 46 and effective protection of investors, a feature that has Email: [email protected] helped to consolidate its market position during periods of turbulence and instability. The next challenge is the EU’s Alternative Investment Fund Managers Directive, which was finalised in June 2011 and will come into effect on July 22 next year. The directive will introduce a harmonised regulatory framework for alternative fund managers seeking to market products within the EU that will include greater disclosure levels than the industry has typically adhered to in the past, and that will give Luxembourg fresh opportunities to meet the needs of managers and investors. n

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 52

Malta

l Blue Planet Investment Management Limited l Calamatta Cuschieri Fund Services Limited l Custom House Global Fund Services l Folio-ITL Fund Service Limited l Global Capital Financial Management Limited l Helevetic Fund Administration (Malta) Limited l Heritage International Fund Managers Limited Valetta l HSBC Global Asset Management (Malta) Limited l HSBC Securities Services (Malta) Limited l IDS Fund Services (Malta) Limited l Praxis Fund Services (Malta) Limited l SGGG Fexco Fund Services (Malta) Limited l Somerset Management (Malta) Limited l TMF FundAdministrators (Malta) Limited l TMF FundServices (Malta) Limited l Trident Fund Services (Malta) Limited l Tromino Financial Services (Malta) Limited l Fund Management Limited l Valletta Fund Services Limited Custodians/Trustees of Collective Investment Schemes l Bank of Valletta plc l Custom House Global Fund Services l Deutsche Bank Malta Limited l HSBC Bank (Malta) plc l Mediterranean Bank plc l Sparkasse Bank Malta plc Lawyers, Accountants and Auditors Malta There are over 50 law firms in Malta (although only around 15 undertake fund work). A directory of law firms as well as sole practitioners can be found at Fund legislation: www.avukati.org. l Investment Services Act, (Cap. 370 – Laws of Malta) There are around 40 accountancy firms, including l Companies Act, (Cap. 386 – Laws of Malta) the “big four”. For a detailed list of the accountants and l Trusts and Trustees Act (Cap. 331 – Laws of Malta) auditors practicing in Malta please refer to l Income Tax Act (Cap. 123 – Laws of Malta) www.miamalta.org. Trustees Number of funds Reference should be made to the MFSA website As at end December 2011 www.mfsa.com.mt (Trusts & Trustees/Licence Holders) Retail Ucits...... 59 Local Stock Exchange: Retail Non-Ucits...... 31 Malta Stock Exchange, Garrison Chapel, Castille Place, Non-Ucits Foreign...... 22 Valletta VLT 1063, Malta: CEO: Mr Mark Guillaumier Professional Investor Funds (PIFs)...... 442 Local fund industry body: Domiciled and administered fund assets total: Malta Funds Industry Association (MFIA) c/o Level 6, The E Net Asset Value of Locally Based CISs in 2011: 8.3 billion Mall Offices, The Mall, Floriana, VLT 16, Malta. Domiciled and administered fund assets by category: Promotional bodies for funds/financial sector: E Professional Investor Funds (PIFs):...... 5.8 billion Malta Funds Industry Association (MFIA) c/o Level 6, E Retail Ucits...... 1.65 billion The Mall Offices, The Mall, Floriana, VLT 16, Malta, and E Non-Ucits...... 0.85 billion FinanceMalta, Garrison Chapel, Castille Place, Valletta VLT 1063, Malta Regulator Malta Financial Services Authority (MFSA), Notabile Double taxation treaties Road, Attard BKR 3000, Malta. Tel: (+356) 2144 1155; Malta has an extensive double taxation treaty network. Email: [email protected] The following are the agreements currently in force with the respective countries: Service providers Albania, Australia, Austria, Bahrain Barbados, Belgium, Recognised Fund Administrators Bulgaria, Canada, China, Croatia, Cyprus, Czech Republic, There are 25 firms in possession of a recognised fund Denmark, Egypt, Estonia, Finland, France, Germany, administrator certificate: Georgia, Greece, Hungary, Iceland, India, Ireland, Isle of l Abacus Fund Administration Limited Man, Italy, Jersey, Jordan, Korea, Kuwait, Latvia, Lebanon, l Alpha Value Management Limited , Lithuania, Luxembourg, Malaysia, Morocco, l Alter Domus Services Malta Limited Netherlands, Norway, Pakistan, Poland, Portugal, Qatar, l Amicorp Fund Services Malta Limited Romania, San Marino, Serbia, Singapore, Slovakia, l Apex Fund Services (Malta) Limited Slovenia, South Africa, Spain, Sweden, Switzerland, Syria, l Benchmark Advisory Limited Tunisia, U.A.E., United Kingdom, USA.

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 54 Malta

Tax information exchange agreements Valuation rules Tax information exchange provisions are included in the Usually valuation rules are dealt with in the offering Double Tax Treaties themselves. prospectus. Memoranda of Understanding with other Regulators: Malta has over 30 bilateral or multilateral Memoranda of Types of alternative fund vehicle Understanding or other agreements with other regulatory l Unit trust authorities. These MoUs cover regulatory co-operation l Open-ended investment company (SICAV) and exchange of regulatory information in a number of l Close-ended investment company (INVCO) sectors. A full list of these agreements may be found on l Mutual fund www.mfsa.com.mt (Memoranda of Understanding). l Limited liability partnership Available types of corporate vehicle: Director requirements Segregated fund or cell, and portfolio structures are The Companies Act provides that the director of a available under the Companies Act. company is bound to act honestly and in good faith Types of regulatory fund category: in the best interests of the company. Furthermore, the l Retail funds directors must promote the well-being of the company l Professional Investor Funds – 3 Categories: (i) and shall be responsible for: Experienced Investor Funds, (ii) Qualifying Investor a) the general governance of the company and its proper Funds, (iii) and Extraordinary Investor Funds administration and management; and l Maltese Ucits1 Schemes; b) the general supervision of its affairs. l Maltese Non-Ucits Schemes; In particular, the directors of a company shall be obliged l Overseas Non-Ucits Schemes. to exercise the degree of care, diligence and skill which would be exercised by a reasonably diligent person Audit requirement having both the knowledge, skill and experience that Yes may reasonably be expected of a person carrying out the same functions as are carried out by said director Financial statement requirements in relation to the company; and the knowledge, skill and Directors are required by law to prepare financial experience that the director has. The directors must statements for each financial period. These financial not make secret or personal profits from their position statements must give a true and fair view of the financial without the consent of the company, nor make personal position of the fund as at the end of the financial period gain from confidential company information and must and of the profit or loss for that period in accordance avoid situations which could give rise to conflicts of with the IFRS (International Financial Reporting Standard) interest. Lastly, the Act provides that the directors must requirements. not use any property, information or opportunity of the company for their own or anyone else’s benefit, nor Regulatory fees obtain benefit in any other way in connection with the Collective Investment Schemes (Maltese Ucits Schemes, exercise of their powers, except with the consent of the Maltese Non-Ucits Schemes and Overseas Based Non-Ucits company in general meeting or except as permitted by Schemes) the company’s memorandum or articles of association. Application Fee Annual Fee Every public company is bound by law to have at least Scheme...... E2,000...... E2,500 2 directors whereas private companies must have at least Up to fifteen sub-funds (per sub-fund)...... E450...... E400 1 director. Sixteen sub-funds and over (per sub-fund).E250...... E150 Sub-fund in the form of an IC...... E2,000...... E2,500 Taxation of funds As a general rule, collective investment schemes are European UCITS Schemes exempt from tax on income and capital gains, so long as Application Fee Annual Fee these are not investing in immovable property situated in Scheme...... E2,000...... E2,500 Malta. Up to fifteen sub-funds (per sub-fund)...... E450...... E450 Certain Malta-based funds, with a value of specified Sixteen sub-funds and over (per sub-fund).E250...... E250 assets situated in Malta amounting to at least 85% of the value of the total assets of the fund, may be taxed on Professional Investor Funds their investment income at the rate of 35%. Application Fee Annual Fee In the case of Value Added Tax, the activities of a CIS Preliminary indication of acceptability are considered exempt without credit for VAT purposes. Of a fund...... E600...... Nil Scheme...... E1,500...... E1,500 Taxation of investment managers Additional sub-funds (per sub-fund)...... E1,000...... E500 All companies (including investment management Sub-fund in the form of an IC...... E1,500...... E1,500 companies) pay 35% on profits. Under Malta’s tax system the shareholder is entitled to a refund of tax upon distribution of dividends. The amount of the tax refund is set at 6/7ths of the tax paid by the company on the underlying profit (5/7ths in the case of passive interest Footnote: and royalties). 1. Undertakings for Collective Investment in Transferable Securities.

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 55 MALTA Malta By the Malta Financial Services Authority

Investment services regulation Professional Investor Funds The Investment Services Act provides for the A Professional Investor Fund promoted to Experienced authorisation of investment services licence holders and or Qualifying Investors is required to draw up an Offering collective investment schemes operating in or from Malta. Document which should at least include the prescribed When considering whether to grant or refuse a information. The Offering Document should be provided Licence, the MFSA will, in particular, have regard to: to prospective investors free of charge. a. the protection of investors and the general public; A Professional Investor Fund targeting Extraordinary b. the protection to the reputation of Malta taking into Investors may either draw up an Offering Document or account Malta’s international commitments; a Marketing Document which should at least include a c. the promotion of competition and choice; and list of Service Providers including the Directors, General d. (in the case of a scheme) the reputation and suitability Partner(s) or Trustee (as applicable), and their respective of the applicant and all other parties connected with contact details; a definition of Extraordinary Investor; a risk the Scheme. warnings section describing in brief at least the principal The Act also provides for the recognition and supervision risks associated with investing in the PIF; the investment of persons who provide administrative services in or from objectives, policies and restrictions of the PIF or where Malta which do not themselves constitute licensable applicable its sub-funds; details of the fee structure; details activity under the ISA to licence holders in Malta, or to of the classes/ units on offer (whether these constitute a equivalent authorised persons and schemes overseas. distinct sub-fund or not); an overview of the safekeeping Once licensed, an entity is subject to ongoing arrangements (where a custodian/ prime broker is not supervisory requirements. The Scheme shall submit half- appointed); a prescribed statement in the case where the yearly and annual reports to the MFSA and such other PIF has issued “Voting Shares” to the promoters and “non information, returns and reports as the MFSA may from Voting Shares” to prospective Investors; the Extraordinary time to time request. The accounting information provided Investor Declaration Form and the Subscription Form in the annual report shall be audited by a qualified auditor together with the text prescribed at law. approved by the MFSA. The auditor’s report, including The Marketing Document should also include any qualifications thereto shall be reproduced in full in the as an Annex, either the most recent version of the annual report. The half-yearly and annual reports shall be Constitutional Document of the PIF or a summary thereof. published and submitted to the MFSA within two and four In the latter case, the Marketing Document should months respectively of the end of the period concerned. provide that a copy of the PIF’s Constitutional Document will be provided to prospective investors upon request. Funds regulation The Marketing Document or where applicable the Prospectus/offering document/MoA requirements Offering Document, should be provided to prospective Retail Collective Investment Schemes investors free of charge. All collective investment schemes are required to draw up a Prospectus which includes the prescribed Investor restrictions information. These schemes are also required to comply Professional Investor Funds (PIFs) are alternative with the requirements outlined in the Investment Services investment funds for high net worth individuals and Act (Prospectus of Collective Investment Schemes) institutions. Regulations, 2005. The Investment Services Rules for Professional Investor As from July 2012 Maltese UCITS will also be required Funds classify these funds into three types, depending on to draw up a key investor information document (KIID). the experience and sophistication of the end investor and The KIID shall include appropriate information about the the level of protection required. These are the: essential characteristics of the Maltese UCITS such as to l “Experienced Investor” – being a person having the reasonably enable the investors to understand the nature expertise, experience and knowledge to be in a position and the risks of the Scheme that is being offered to them to make his own investment decisions and understand and, consequently to take investment decisions on an the risks involved. An experienced investor is requested informed basis. to confirm certain qualities such as experience and

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 56 Malta

track record in making investments and to provide other the minimum investment threshold may be applicable on a relevant information. Before an Experienced Investor per scheme basis rather than on a per sub-fund basis. Fund may accept any investment, it should obtain a In the case of retail collective investment schemes, the completed “Experienced Investor Declaration Form” in Rules do not provide for any minimum initial investment which the investor confirms that he/she has read and thresholds. understood the mandatory risk warnings and describes why he/she is an “Experienced Investor”. Investment restrictions l “Qualifying Investor” – being an individual whose All schemes have to follow the risk spreading principle as net worth or joint net worth with the investor’s specified under the Investment Services Act. Article 2 of spouse exceeds EUR 750,000. Prior to accepting the ISA however permits the licensing of Schemes that are any investment the PIF should be in receipt of a not restricted by the risk spreading requirement subject to completed “Qualifying Investor Declaration Form” in certain conditions prescribed therein. Professional Investor which the investor confirms that he/she has read Funds promoted to “Qualifying” or “Extraordinary” investors and understood the mandatory risk warnings and are not subject to risk diversification requirements. describes why he/she is a “Qualifying Investor”. l “Extraordinary Investor” – being an investor whose net Leverage restrictions worth must exceed EUR 7.5 million. Prior to accepting In the case of Professional Investor Funds promoted to any investment the PIF should be in receipt of a Experienced Investors borrowing for investment purposes completed “Extraordinary Investor Declaration Form” or leverage via the use of derivatives is restricted to 100% in which the investor confirms that he/she has read of NAV. and understood the mandatory risk warnings and Professional Investor Funds promoted to Qualifying describes why he/she is an “Extraordinary Investor”. Investors are not subject to any investment or borrowing Proformas of the aforementioned forms are available on (including leverage) restrictions other than those which the MFSA website. may be specified in their Offering Document. In the case of retail collective investment schemes, the Professional Investor Funds promoted to Extraordinary Rules do not provide for any investor restrictions. Investors are not subject to any investment or borrowing (including leverage) restrictions other than those which Minimum initial investment may be specified in their Offering Document/ Marketing In the case of Professional Investor Funds promoted to Document. Experienced Investors, the Rules provide that the minimum investment threshold must amount to EUR 10,000 and that Service provider regulation the total amount invested may not fall below this threshold The Investment Services Act prescribes that any person unless this is the result of a fall in the net asset value wishing to carry out an investment service in Malta of the PIF. The minimum investment threshold applies to needs a licence in terms of the Act. The Authority each individual “Experienced Investor”. expects all services providers to be ‘fit and proper’ that is In the case of Professional Investor Funds promoted to to be able to show high degrees of competence, integrity Qualifying Investors the minimum initial investment must and solvency. Service Providers of collective investment amount to EUR 75,000 and the total amount invested schemes generally include, amongst others, a Manager, may not fall below this threshold unless this is the result a Custodian, an Administrator and an Investment Adviser. of a fall in the net asset value. As long as the minimum Professional Investor Funds may have either Maltese threshold is satisfied, additional investments – of any or Foreign Services Providers. Foreign Service Providers, size – may be made. The minimum investment threshold when accepted by the MFSA as Service Providers of applies to each individual “Qualifying Investor”. a collective investment scheme should be established In the case of Professional Investor Funds promoted and regulated in a Recognised Jurisdiction. Recognised to Extraordinary Investors, the minimum initial investment Jurisdictions include EU and EEA Members and other must amount to EUR 750,000. The total amount invested countries, to be approved on a case by case basis, that may not fall below this threshold unless this is the result are considered as having EU equivalent rules. of a fall in the net asset value. Provided that the minimum The MFSA may, in the following scenarios, also accept threshold is satisfied, additional investments – of any size Service Providers which may not be established and – may be made. regulated in a Recognised Jurisdiction: In the case of joint holders, the abovementioned i. where the Service Provider is the subsidiary of a firm minimum investment limit remains that set for each investor. that is regulated in a Recognised Jurisdiction, that In the case of an umbrella fund comprising of sub-funds retains control of its subsidiary and undertakes to each of which is set up as a Professional Investor Fund, provide all the necessary information to the MFSA; or

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 57 MALTA

ii. where the MFSA considers that the Service Provider is Fund manager subject to regulation to an equal or comparable level Retail Collective Investment Schemes in the jurisdiction concerned. A Maltese UCITS Scheme which is not self-managed Where one or more of the proposed Service Providers shall appoint a Maltese or European management is not based in a Recognised Jurisdiction or does not company. fall under (i) above, it is recommended that prior to the A Maltese management company appointed by a submission of an Application for a PIF Licence, the Maltese UCITS Scheme must fulfil three criteria namely: promoters submit an application for preliminary indication 1) the fund manager should be established in Malta; of acceptability of a PIF. 2) the fund manager must hold a Category 2 Investment Services Licence issued in terms of Article 6 of the Promoter requirements Investment Services Act, 1994 and There is no mandatory requirement to have a promoter 3) must qualify as a Maltese Management Company in though this role may be fulfilled either by the service terms of the UCITS Regulations. provider or the administrator introducing the fund in Malta. The UCITS IV Directive offers UCITS Fund Managers the opportunity to exercise a management passport. The Investment advisor UCITS IV management company passport permits the The role of the investment advisor is that of providing remote establishment and cross border management of financial advice to the scheme/fund or its Manager with UCITS funds within the EU. regards to the investment and re-investment of the assets A European management company may be appointed of the Scheme/Fund. The Investment Advisor will not as long as it complies with Regulations 9 and 10 of the have any discretion with respect to the investment and Investment Services Act (UCITS Management Company re-investment of the assets of the Scheme/Fund. Passport) Regulations, 2011 and Part CII of the Investment Retail Collective Investment Schemes: Services Rules for Investment Services Providers. Maltese UCITS Schemes and Maltese Non-UCITS Schemes Where a Maltese Non-UCITS Scheme proposes to are generally not required to appoint an Investment Adviser appoint a third party Manager and the proposed Manager and where appointed, the proposed Investment Adviser is established in Malta, it should be in possession of a need not be established and regulated in Malta. Category 2 Investment Services Licence issued in terms Where the Investment Adviser is appointed by the of Article 6 of the Investment Services Act, 1994 and Manager, rather than by the Scheme, such Investment authorised to provide fund management services. Adviser is subject to MFSA’s approval. Where the Professional Investor Funds proposal includes the appointment of an Investment In the case of Professional Investor Funds, where a third Adviser that is established in Malta, the Adviser should party Manager is to be appointed and the proposed be in possession of a Category 1A, 1B, 2 or 3 Investment Manager is established in Malta, the Manager should Services Licence issued in terms of Article 6 of the be in possession of a Category 2 Investment Services Investment Services Act, 1994 and should be duly Licence issued in terms of Article 6 of the Act and should authorised by the MFSA to provide investment advice to be duly licensed and authorised by the MFSA to provide collective investment schemes. management services to collective investment schemes. Professional Investor Funds: The MFSA expects the Manager to exercise care Professional Investor Funds are generally not required to and diligence in the selection of a Sub-Manager and to appoint a third party Investment Adviser. Moreover, the assume responsibility for the acts of the Sub-Manager proposed Investment Adviser need not be established and regulated in Malta. Custodian requirements Where the Investment Adviser is appointed directly The main role of the custodian is that of safe-keeping by the Manager, rather than by the PIF such Investment of the assets of the scheme and ensuring that the fund Adviser is not subject to MFSA’s approval and no manager is acting within the powers granted through the eligibility criteria apply. prospectus or marketing document and in accordance Where the proposal includes the appointment – directly with the Standards Licence Conditions and the by the PIF – of a third party Investment Adviser, and the Constitutional Document. proposed Investment Adviser is established in Malta, the Retail Collective Investment Schemes Adviser should be in possession of a Category 1A, The Rules provide as follows: 1B, 2 or 3 Investment Services Licence issued in terms a. The Custodian should be based in Malta and in of Article 6 of the Act and should be duly licensed and possession of a Category 4 Investment Services authorised by the MFSA to provide investment advice to Licence issued by the MFSA. The custodian can be collective investment schemes. either a credit institution licensed under the laws of

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 58 Malta

Malta, or such other body corporate, unincorporated The Scheme shall obtain the written consent of the body or association acceptable to the MFSA, providing MFSA before the appointment or replacement of any the services of a Custodian. party to act in the capacity of Custodian to the Scheme. b. The Custodian shall have sufficient financial resources The MFSA reserves the right to object to the proposed and liquidity at its disposal to enable it to conduct replacement or appointment and to require such its business effectively and to meet its liabilities. The additional information it considers appropriate. Custodian shall also have the business organisation, The Custodian shall be separate and independent from systems, experience and expertise deemed necessary the Manager and shall act independently and solely in by the MFSA for it to act as Custodian. The Scheme the interests of the unit holders. Any facts, relationships, shall be required to satisfy the MFSA that the arrangements, or circumstances which may at any stage proposed Custodian meets the above requirements. bring that independence into question shall be declared c. The MFSA shall be entitled to be satisfied, on to the MFSA as soon as the Scheme becomes aware of a continuing basis that the Custodian has the any such matter. appropriate expertise and experience to carry out its The Scheme shall notify the MFSA before the functions. appointment or replacement of any party to act in the d. The appointment and/or the replacement of any capacity of Custodian or Prime Broker to the Scheme at party who is to be the Custodian of the Scheme, the least ten business days in advance of the appointment terms of that appointment, and the contents of the or replacement. Such notification shall be accompanied agreement to which the appointment is subject, shall by a confirmation from the Board of Directors/ General be agreed in advance with the MFSA. The MFSA Partner(s)/ Manager as the case may be that the proposed shall have the right to require the replacement of the Custodian or Prime Broker is authorised to provide these Custodian of the Scheme. services by its home state regulator; and evidence of the e. The Custodian shall be separate and independent authorisation of the Custodian or Prime Broker. from the Manager and shall act independently and Where no Custodian is appointed, responsibility for the solely in the interests of the unit holders. Any facts, establishment of proper arrangements for the safe keeping relationships, arrangements, or circumstances which of the PIF’s assets remains with the Directors/ General may at any stage bring that independence into Partner(s)/ Trustee and officers of the PIF. The applicant question shall be declared to the MFSA as soon as will be required to outline – as part of the application the Scheme becomes aware of any such matter. process – the arrangements that will be put in place to • Professional Investor Funds ensure adequate safekeeping of the assets of the PIF. Where the PIF wishes to appoint a Custodian established Category 4 deals with licence holders authorised to in Malta, the Custodian should be in possession of a act as trustees or custodians of Collective Investment Category 4 Investment Services Licence issued in terms Schemes. The law provides that their Minimum Initial of Article 6 of the Act. Capital Requirement amounts to EUR 125,000. A Professional Investor Fund promoted to Extraordinary Investors is required to appoint a third party Start-up PIFS – ICs of RICCs with common service Custodian responsible for the safe keeping of the assets providers of the PIF and for undertaking monitoring duties over A Recognised Incorporated Cell Company (RICC) may the PIF’s Manager as more fully detailed in the relevant provide administrative services under a standardised set- standard licence conditions. The Custodian shall be: up to one or more start-up funds formed as incorporated i. an entity providing the services of Custodian in Malta cells (ICs). Each IC can be either third party managed in terms of a Category 4 Investment Services Licence or self-managed. In the case where an IC is third-party issued under the Investment Services Act, 1994; or managed, it will be required to appoint an investment ii. an entity constituted in a Member State or EEA State manager, approved by the RICC. An IC should, unless and operating from a Member State or EEA State otherwise authorised in writing by the MFSA, appoint other than Malta, providing the services of Custodian the service providers selected for it by its RICC. RICCs to collective investment schemes; or and their ICs are regulated by the Companies Act iii. an entity constituted outside Malta and operating from (Recognised Incorporated Cell Companies) Regulations, outside Malta providing the services of a Custodian 2012 and supplementing investment services rules. to collective investment schemes where the MFSA is satisfied that such entity is of sufficient standing and Regulatory procedure repute and having the business organisation, systems, PIFs – Preliminary indication of acceptability experience and expertise deemed necessary for it to The promoter of a Professional Investor Fund may act as Custodian. apply for a preliminary indication of acceptability on the

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 59 Malta

basis of the proposed structure of the PIF and service The MFSA will consider the nature of the proposed providers. This application must be submitted in respect Scheme/Fund and a decision will be made regarding of a prospective PIF having one or more of its Service which “Standard Licence Conditions” (SLCs) should Providers is not the subsidiary of a firm that is regulated apply. Some of these conditions may be disapplied in a Recognised Jurisdiction, which retains control of its or amended (where the circumstances justify such subsidiary and undertakes to provide all the necessary treatment, as long as investors are adequately protected) information to the MFSA. If any of the external service- and supplementary conditions (if any) may be applied. providers to be appointed by the PIF operate from a The licence conditions are very important since they country that is not a “Recognised Jurisdiction” or are represent the ongoing requirements to which the not subsidiaries of a company involved in financial Applicant will be subject, if and when licensed. services and regulated in a Recognised Jurisdiction, it is Phase Two – Pre-Licensing recommended that at an early stage, applicants request a Once the review of the draft Application and supporting preliminary indication of acceptability of the PIF. documents has been completed, the Authority will issue In such a case, the MFSA will review the proposed its ‘in principle’ approval for the issue of a licence. At structure of the PIF and its prospective Service Providers this stage, the Applicant will be required to finalise any and will inform the applicant whether the proposed outstanding matters. Submission of signed copies of structure of the PIF and its Service Providers are the revised Application form together with supporting acceptable to the MFSA. documents in their final format, and any other issues The MFSA will ordinarily communicate the raised during the Application process, should be resolved acceptability or otherwise of the proposed structure of as part of this phase. A licence will be issued as soon as the PIF within seven business days of receipt of the all pre-licensing issues are resolved. application for preliminary indication of acceptability of a Phase Three – Post-Licensing/Pre-Commencement of PIF. However, this does not substitute the application for Business a PIF Licence. The Applicant may be required to satisfy a number of post-licensing matters prior to formal commencement of Applications for a Collective Investment Schemes business. Licence/ Professional Investor Fund Licence When submitting an application for a licence under the Regulatory approval time: Investment Services Act, the promoter should ensure The MFSA is used to working within agreed that the appropriate Application Form is completed. The timeframes and deadlines. These may vary according application process can be divided into three phases as to circumstances such as the prompt submission follows: of information and feedback required from the fund Phase One – Preparatory promoter and the nature and complexity of the funds In all cases, the MFSA recommends that the promoters and the verification process. However the following are meet up with the regulatory authority to describe their indicative timelines: proposal. This meeting should take place prior to the Collective Investment Schemes: The general rule actual submission of the application. Although guidance is that MFSA will review the draft application form and will be given on the relevant regulatory requirements the supporting documentation and will provide feedback and on the completion of the Application documents, within three weeks from submission of the application responsibility for the formulation of the proposal and the documents. completion of the Application documents will remain with Third party managed Professional Investor Funds the Applicant. It is essential that the Applicant provides a promoted to Experienced or Qualifying Investors: The comprehensive description of the proposed activity at the MFSA will review the Application Form and supporting beginning of Phase One. documents and provide the Applicant with comments After preliminary discussions, the promoters should thereon within seven business days from receipt of the submit a draft Application Form, together with the application documents. supporting documents specified in the Application Third party managed Professional Investor Funds Form itself. The Application Form and the supporting promoted to Extraordinary Investors: The MFSA documentation will be reviewed and comments provided will review the Application Form and the supporting to the Applicant. The MFSA may ask for more information documents and will provide the Applicant with comments and may make such further enquiries as it considers thereto within three business days. This time-frame only necessary. The ‘fit and proper’ checks – which entail applies when the PIF appoints a third party Manager and following up the information which has been provided in where all service-providers are based and regulated in the Application documents – begin at this stage. Recognised Jurisdictions. n

FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul 2012 www.hedgeweek.com | 60 structured for success

Exceptional Growth for Malta’s Fund Industry

The number of collective investment schemes increased from 200 in 2006 to 525 in December 2011.

This success was made possible by Malta’s highly favourable business environment. This includes the role played by the island’s Single Regulator, renowned throughout the industry for its flexibility coupled with meticulous attention to detail.

The island’s highly competitive, cost-effective business environment and the presence of all the Big Four accounting firms adds even further advantage.

An onshore EU jurisdiction allowing passporting and redomiciliation of funds, with an efficient fiscal regime, a balmy and a multilingual, ethical and professional workforce, Malta offers a winning combination of advantages specifically designed to foster further growth and maximise success.

more information on: www.financemalta.org

Scan QR Code with your smartphone Effective | Secure | Skilled

Find us on: FinanceMalta @FinanceMalta FinanceMaltaYT FinanceMalta

FinanceMalta - Garrison Chapel, Castille Place, Valletta VLT1063 - Malta | [email protected] | tel. +356 2122 4525 | fax. +356 2144 9212

FinanceMalta is the public-private initiative set up to promote Malta’s International Financial Centre

Top View