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Alternative Investment Funds 2013

Alternative Investment Funds 2013: Guernsey Chapter - Bedell

Bedell

Bedell CristinGuernsey1.3 Are Alternative Investment Funds themselves required tobe licensed, authorised or regulated by a regulatorybody?The POI Law creates two categories of Guernsey AIF:authorised collective investment schemes, which requireauthorisation by the GFSC under the POI Law; andregistered collective investment schemes, which requireregistration by the GFSC under the POI Law.Any AIF established in Guernsey will require either authorisation orregistration by the GFSC. Authorisation and registration requiredifferent application processes (see below).1.4 Does the regulatory regime distinguish between openendedand closed-ended Alternative Investment Funds(or otherwise differentiate between different types offunds) and if so how?As well as distinguishing between authorised and registered AIFs(the difference being in the regulatory process and the level ofongoing supervision by the GFSC – see below), the regulatoryregime also makes a fundamental distinction between open-endedand closed-ended AIFs.Open-ended AIFs are those in which the investors are entitled underthe terms of the scheme to have their units redeemed or repurchasedby the AIF or to sell their units on an investment exchange at a pricerelated to the value of the property to which they relate. In a closedendedAIF, there is no right to have shares redeemed, although,usually, a closed-ended AIF will have a predetermined life.A Guernsey closed-ended AIF is not required to appoint a localcustodian or a local fund manager or adviser. An open-ended AIFgenerally must appoint a Guernsey-licensed custodian to hold itsassets on trust. Both open-ended and closed-ended AIFs arerequired to appoint a locally licensed administrator (referred to as a“designated manager” in the relevant legislation and rules).Previously, every open-ended AIF also had to appoint a Guernseylicensedprincipal manager. This requirement has been removed,but some promoters are continuing to use principal managers withintheir structures.Open-ended AIFs may be authorised or registered. Authorisedopen-ended AIFs may be:class A: eligible for marketing to the general public in theUK and certain other jurisdictions. There are comprehensiverules which regulate the contents of documents by which aclass A scheme is established, the general administration ofthe scheme and the investment parameters;class B: not usually for sale to the general public andtypically established for marketing to institutions and highnet worth/sophisticated investors. The rules applying tothese schemes are less comprehensive than those applying toclass A schemes; andclass Q: restricted to qualifying professional investors. Therules governing such schemes are less prescriptive than thosefor class A and class B schemes.Closed-ended AIFs may be authorised or registered.1.5 What does the authorisation process involve?In order to obtain a POI Licence, the applicant must satisfyminimum criteria for licensing, as set out in the POI Law. Suchminimum criteria include satisfying the GFSC that the applicant forthe POI Licence and its related parties are “fit and proper” personsand have due integrity and skill to carry on the relevant business.The business must be directed by at least two individuals ofappropriate standing and experience, who are sufficientlyindependent of each other. Generally, the GFSC would expect tosee at least two Guernsey resident directors, although the GFSCmay accept only one Guernsey resident director where the applicantis itself administered by another licensee in the Bailiwick ofGuernsey. The GFSC would need to be satisfied that the businessof the applicant is conducted in a prudent manner, which wouldinclude being satisfied as to financial resources requirements andprofessional indemnity cover. Financial resources requirementsvary according to the nature and scale of the activities of theapplicant. For example, a local custodian of an open-endedcollective investment scheme is required to have net assets of£4,000,000 and a local designated manager of a collectiveinvestment scheme is required to have minimum net assets of£100,000, whereas a licensee with no physical presence (staff andpremises) in the Bailiwick of Guernsey is required to have netassets of at least £10,000.The application for a POI Licence is made by completing form RA/1.Forms PQ (personal questionnaires) will generally have to becompleted for any proposed director or controller of the prospectivelicensee. As stated above, traditionally, the obtaining of a POI Licencecould take around four to six weeks, although a fast-track process,allowing approval to be obtained within ten working days, is availablefor applicants who are seeking to provide services to qualifyinginvestor funds (“QIFs”) or registered closed-ended investment funds.As mentioned above, both open-ended and closed-ended AIFs maybe either authorised or registered.Under the registered fund regime, responsibility for ensuring thatthe promoter of the AIF is fit and proper and that the funddocumentation complies with the relevant regulatory requirementslies with the designated manager of the AIF. The designatedmanager must provide warranties to the GFSC verifying thosematters and, in reliance on those warranties, the GFSC will issue thenecessary registration within three working days.For authorised funds, the above fast-track process is not available(save in relation to QIFs – see below) and a traditional three-stageapproval process must be followed:outline consent: this involves providing detailed informationin connection with the promoter of the AIF and some generalinformation in relation to the proposed AIF; followed byinterim consent: once the promoter has obtained outlineconsent, draft documentation relating to the AIF structureitself is submitted to the GFSC for review. If successful, thisapplication will result in notification that the GFSC will beminded to grant final approval upon receipt of final certifieddocumentation; andfinal consent: final signed/certified documentation is lodgedand the GFSC’s consent is issued within 48 hours.The overall timing for this process is usually in the region of sixweeks.A fast-track approval process is also available for QIFs, which areauthorised funds limited to qualified investors (namely professionalinvestors, experienced investors and/or knowledgeable employees).An individual investor investing USD 100,000 or more is aqualified investor. In making the application for approval, thefund’s Guernsey administrator must give warranties to the GFSCthat the requirements for a QIF have been satisfied.The most significant advantage that registered funds therefore haveover authorised funds is the fast-track three working day approvalprocess and a fast-track ten working day approval process forservice providers (see above). Authorised funds are generallysubject to a lengthier approval process, save for QIFs.GuernseyICLG TO: ALTERNATIVE INVESTMENT FUNDS 2013© Published and reproduced with kind permission by Global Legal Group Ltd, LondonWWW.ICLG.CO.UK67

Bedell CristinGuernsey1.6 Are there local residence or other local qualificationrequirements?2 Fund StructuresGuernsey68No Guernsey licensed entity can provide services to a collectiveinvestment scheme established in Guernsey, unless such collectiveinvestment scheme has been registered or authorised by the GFSC.Generally, all Guernsey domiciled AIFs must be administered by alocally-licensed administrator and open-ended funds must also havea locally-licensed custodian. Closed-ended schemes are notrequired to have a custodian, but where they elect to appoint one,the GFSC is willing to consider the appointment of a custodiandomiciled outside Guernsey.Any locally-licensed service provider will need to satisfy theminimum criteria for licensing set out in the POI Law (see above).In addition, generally, the GFSC would expect to see at least twoGuernsey resident directors, although the GFSC may accept onlyone Guernsey resident director where the applicant is itselfadministered by another licensee in the Bailiwick of Guernsey.POI Licensees must comply with the Licensees (Conduct ofBusiness) Rules 2009, which deal with matters such as corporategovernance, general conduct of business, record keeping anddealing with client assets. Further, all POI Licensees and allauthorised or registered AIFs must comply with the GFSC’s Codeof Corporate Governance for the Finance Sector (the “Code”).Non-compliance with the principles set out in the Code does notautomatically result in sanctions or proceedings, but the GFSC willrequire an assurance statement confirming that the directors haveconsidered the effectiveness of their corporate governance practicesand are satisfied with their degree of compliance, in the context ofthe nature, scale and complexity of their business. Companiesshould prepare a self-assessment in order to assist the board in itsconsideration of the Code and the Code should be consideredperiodically at a board meeting and the discussion minuted.It is possible for the holder of a POI Licence, such as a fundadministrator, to outsource certain of its functions to an entityoutside Guernsey. However, such delegation must be done incompliance with outsourcing guidelines issued by the GFSC. ThePOI Licensee must retain sufficient expertise to oversee delegatedfunctions. It is common for advisers to be appointed in otherjurisdictions, for example, an investment adviser to the AIF.Provided that no activities are being conducted by that adviser in orfrom within Guernsey, it should not need a licence from the GFSC.1.7 What service providers are required?As set out above, each AIF must be administered by a locallylicensedadministrator and open-ended funds must also have alocally-licensed custodian. Closed-ended schemes are not requiredto have a custodian, but, where they elect to appoint one, the GFSCis willing to consider the appointment of a custodian domiciledoutside Guernsey.In addition, some promoters are continuing to use principalmanagers within their open-ended structures, although these are notrequired by law/regulation. The GFSC adopts a flexible approachto authorisation of hedge funds and in relation to the appointmentof prime brokers (as set out above).Generally, there will need to be at least two Guernsey residentdirectors of the AIF (see above). In addition, typically, the AIFwould appoint its own local counsel and accountants/auditors, aswell as overseas advisers in relevant jurisdictions.WWW.ICLG.CO.UK© Published and reproduced with kind permission by Global Legal Group Ltd, London2.1 What are the principal legal structures used forAlternative Investment Funds?AIFs may be structured in a number of ways, as non-cellularcompanies, cellular companies, limited partnerships, unit trusts, orother entities. Most commonly used structures in practice areclosed-ended and open-ended companies and closed-ended limitedpartnerships. The type of vehicle used for a fund will often bedriven by investor requirements, whether in terms of investorfamiliarity with a particular fund vehicle or fiscal requirements of aparticular investor base. Generally, structuring aims to achieve taxneutrality for the investor.Private equity funds are often structured as limited partnerships,which are generally treated as tax transparent in mostjurisdictions and allow great flexibility in terms of structuring,whereas listed AIFs are generally corporate in form. Theprotected cell company has long been a vehicle of choice formutual funds, whereas UK retail investors are familiar with theunit trust as a fund structure.2.2 Please describe the limited liability of investors.The liability of shareholders in a Guernsey company limited byshares is limited to the amount, if any, unpaid on the shares held bythem. The liability of members of a company limited by guaranteeis limited to the guaranteed amount. The liability of a limitedpartner in a limited partnership is, in general terms, limited to theamount contributed, or agreed to be contributed, by him to thecapital of the partnership. The liability of unit holders in a unit trustis limited to the amount payable in respect of their units.2.3 What are the principal legal structures used for managersand advisers of Alternative Investment Funds?The structure of managers and advisers will often depend onrequirements such as limited liability and fiscal efficiency. Wherelimited liability is paramount, we would often expect to see themanager/adviser structured as a body corporate. Locally-licenseddesignated managers and custodians tend to be structured as bodiescorporate. Within a classic private equity fund structured as alimited partnership, the general partner may be a body corporate, ormay itself be a limited partnership with a corporate general partner.Much will depend on the required taxation treatment of thestructure in jurisdictions other than Guernsey.2.4 Are there any limits on the manager’s ability to restrictredemptions in open-ended funds or transfers in openendedor closed-ended funds?Open-ended AIFs are those in which the investors are entitled underthe terms of the scheme to have their units redeemed or repurchasedby the AIF or to sell their units on an investment exchange at a pricerelated to the value of the property to which they relate. In a closedendedAIF, there is no right to have shares redeemed, although,usually, a closed-ended AIF will have a predetermined life.In the case of AIFs that are listed, it is usual for the relevant listingauthority to require that the shares/interests/units in the AIF arefreely transferable. It is common for the constitutional documentsand information particulars of the AIF to set out circumstances inwhich the manager would be able to restrict transfers orredemptions – for example, requirements for minimum holdings,ICLG TO: ALTERNATIVE INVESTMENT FUNDS 2013

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