Types of Unclassified Jersey Investment Funds

The establishment and operation of investment funds in Jersey is governed principally by two pieces of legislation, namely, the Control of Borrowing (Jersey) Law, 1947 as amended, (the “Borrowing Law”) and the Collective Investment Funds (Jersey) Law, 1988 as amended, (the “CIF Law”). Together the two statutes provide the framework for appropriate investor protection whilst retaining the flexibility to adapt quickly to changing market conditions.

Expert funds

The publication of the Expert Fund Guide by the JFSC on February 3, 2004 opened the door to establishing innovative schemes and hedge fund-type products aimed at sophisticated, high net worth, professional and institutional investors. There is no restriction on the number of investors in an Expert Fund and no requirement for the creation of a local management company linked to the fund’s promoter.

The authorisation of an Expert Fund requires a Jersey based monitoring fund functionary, in most cases the administrator, to take primary responsibility for self certifying that a proposed fund meets the structure and documentation criteria for an Expert Fund. This helps minimise the regulatory role of the Jersey Financial Services Commission (the “JFSC”) in the establishment of the fund. The functionary also certifies that appropriate disclosures have been made in the fund’s documentation, particularly in respect of the offering document’s disclosures of investment and borrowing strategies.

An application for establishment of an Expert Fund must be lodged with the JFSC, completed by the regulated Jersey functionary and countersigned by the directors of the fund, the general partner or trustee. If the fund meets the Expert Fund guidelines and all regulatory checks are satisfied, the appropriate consents and certificates will be issued by the JFSC on an expedited basis, normally within three days.

In general the ongoing regulatory requirements of Expert Funds are principally continuing to have two resident directors, complying with the terms of the Expert Fund Guide, and notifying the JFSC of any material change that might alter the terms of the original certificate. The monitoring functionary has ongoing responsibility for overseeing compliance by the investment manager with the fund’s investment principles and notifying the JFSC of any breach of the terms.

In an Expert Fund, no particular investment or leverage restrictions are imposed by the regulator provided that the functionary believes the strategies have been fully disclosed to investors. The JFSC should be informed if there is an intention to leverage more than 200 per cent, providing the reason for this.

The fund’s board, general partner or trustee is ultimately responsible for the management and control of the fund. A fund company must have two Jersey-resident directors, who must be approved by the regulator and must have relevant fund experience. There is no requirement for the investment manager to be represented on the board of directors, but this is normal practice.

Investors in Expert Fund must receive and accept an investment warning acknowledging that the fund is suitable only for expert investors and to confirm their awareness that it involves special risks and is subject to limited regulatory oversight. Investors must also confirm that that they are either investing US$100,000, are a professional investor as defined by the Expert Funds Guide or a high net worth individual with US$1m in assets excluding their principal residence, but including assets jointly held with a spouse, or fall within another category of “expert investor”.

Most Expert Funds rely on the professional investor exemption or the minimum subscription level. The JFSC has confirmed that applications to extend the definition of ‘expert investor’ to carried interest investors is likely to be treated sympathetically and that those involved in establishing and providing services to an Expert Fund should be able to invest in the fund without having to meet the expert investor criteria.

The investment manager should be regulated in an OECD or associate member jurisdiction, although a non OECD-based investment manager may also be approved if it can demonstrate a relevant track record in an appropriate strategy and is well known to investors. Any jurisdiction with a memorandum of understanding with the JFSC or where the local regulator can provide suitable assurances to its Jersey counterpart is likely to be acceptable.

An investment manager should operate a “four eyes” principle in its investment procedures. They should possess relevant experience in relation to the investment strategies followed by the Expert Fund, be solvent, and have no previous record of regulatory infractions.

Investment managers that do not meet these criteria fully may be approved on a case-by-case basis by the JFSC. There is no capital adequacy requirement unless the investment manager is resident in Jersey, in which case it must have a substantial share capital and comply with the Financial Services (Jersey) Law 1998, as amended.

Most Expert Funds can benefit from regulatory flexibility regarding custody of assets provided that it can demonstrate adequate safekeeping procedures, although open-ended Expert Funds must use a Jersey custodian.

An open-ended Expert Fund that is a hedge fund may appoint a prime broker that is part of a group with a credit rating of A1/P1 or better.

Expert Funds must have a regulated Jersey administrator (or manager/trustee) with a physical presence in the island whose role includes taking reasonable measures to monitor the investment manager’s adherence to the investment and borrowing restrictions set out in the fund’s prospectus.

The functionary must also maintain sufficient records in Jersey to fulfil its obligations to the regulator.

Unregulated funds

The Unregulated Fund regime introduced on February 19 2008 allows eligible funds to merely notify the JFSC of their establishment, rather than going through a full authorisation process. There are two forms of unregulated fund, the Unregulated Eligible Investor Fund and Unregulated Exchange Traded Fund.

Unregulated Eligible Investor Funds are available to investors injecting a minimum of USD1,000,000 or equivalent into the fund, or that meet the criteria of a sophisticated investor, and investors must acknowledge in writing their acceptance of the risks involved. In addition, the fund must ensure that its investors meet the legal requirements for investment. The fund may be open-ended or closed-ended and take the form of a company or cell company, unit trust or partnership. The fund may list only on a stock exchange that permits restrictions upon transfers of interests, to ensure that only eligible investors can access the fund.

Unregulated Exchange Traded Funds are not regulated by the JFSC on the basis that they are already regulated by an approved stock exchange. An Unregulated Exchange Traded Fund may only take the form of a closed-ended fund, but may be established as a company or cell company, unit trust or partnership.

Listed funds

Introduced in 2007, the Listed Fund Guide provides a fast-track procedure for the establishment of closed ended funds that are listed on recognised stock exchanges or markets such as the Channel Islands Stock Exchange. The investment manager of a listed fund must be established in an OECD jurisdiction or one with which the JFSC has entered into a memorandum of understanding, or that is otherwise approved by the regulator.

COBO-only funds

“COBO Only Funds” are those where the number of such offers is less than 50 and where the fund is not listed. Consent will be required from the JFSC under the Borrowing Law and in considering this, the JFSC will perform a preliminary review of the “promoter” behind the scheme as well as a review of the private placement memorandum prior to the issue of a COBO consent. In considering a promoter, the JFSC will analyse the track record, reputation and experience of the promoter as well as such issues as spread of ownership and financial resources. The JFSC will also have an ongoing regulatory role and the COBO consent will set out various conditions, which the fund will need to comply with.

Very Private arrangements

These are investment vehicles with less than 10 investors, where there is no requirement to issue a prospectus or private placement memorandum (“PPM”) to market the fund; it is purely a private arrangement.

Maintaining the investor cap at below 10 investors will ensure that the investment vehicle does not fall under the scope of the Collective Investment Fund (Jersey) Law 1998 (“CIF Law”).

The establishment process of these arrangements are substantially more economical and straightforward. Typically, an agreement, akin to a PPM will be put in place between the investors. This document will govern the relationship between the investors and how the investment vehicle will be managed.

Tax considerations

The key objective is to ensure that the tax treatment for investors is at least as favourable as that in respect of a direct investment, or an investment in another vehicle with the same investment strategy. There are 3 main points of taxation to consider:

• The direct taxation impact on the fund itself (ie taxation in its country of residence and taxation on its underlying portfolio)
• Taxes in relation to distributions made by the fund (eg withholding taxes)
• The direct taxation impact on the investor in his country of residence (eg whether he is taxed on the unrealised value of his investment)

Jersey tax position

From 2009, the States of Jersey are to implement a standard rate of corporate income tax of 0% and a special rate of corporate income tax of 10% into the Island’s existing tax system, which will replace the exempt company tax system currently in place. A small proportion of companies can be subject to the 10% special rate of corporate income tax under the zero/ten system and it is proposed that the 10% rate will apply to ‘specified financial services Companies’. The “Zero-Ten” taxation rules have been structured so as to ensure that Jersey fund companies (and fund managers established in Jersey but with no physical presence) are not adversely affected compared to the current exempt company rules where a company is not deemed resident in Jersey; i.e. these fund companies will be taxable at the 0% rate.

There are no taxes, registration fees or duties payable to the Jersey authorities in respect of the establishment or administration of a Unit Trust. By extra-statutory concession neither the trustee nor the assets of a Unit Trust will be liable to Jersey income tax on the income of a Unit Trust arising outside Jersey or, by concession, bank interest arising in Jersey. In addition, distributions paid to non-residents will not be subject to any withholding. However, the manager will be required to deduct Jersey income tax from distributions made to any Jersey unit holders.

A Limited Partnership is tax transparent. Profits and losses of the Limited Partnership are attributed to the partner themselves who will be taxed according to their proportionate share of profits and losses. The Limited Partnership itself will not be subject to assessment for income tax and a non-resident partner will not be liable to Jersey income tax except on Jersey source income (but excluding by concession, bank deposit interest). Interest receivable by a non-resident partner from a loan made to a Limited Partnership is not Jersey source income. Hence, provided a Limited Partnership has no Jersey resident partners (a general partner is treated as non-resident for these purposes) and no Jersey source income, no tax return is required to be submitted.

How can IFG help?

IFG has a unique fund services offering for those promoters seeking a boutique and bespoke approach to funds services business.

Our open architecture enables us to devise the most appropriate structure and service that will meet each client’s particular objectives.

We are regulated by the JFSC to undertake Fund Services and Trust Company business. In essence our offering includes:

Fund Services

• Fund Manager
• Administrator
• Registrar
• Distributor
• Subscription Agent
• Redemption Agent
• Manager of a managed entity

Corporate Governance

• Non executive director services, for:
• Fund vehicles
• Fund Investment Manager
• SPVs
• Corporate Secretarial Services
• Company administration
• Provision of compliance officer
• Provision of money laundering reporting officer

Remuneration Services

• Employment companies
• Employee Benefit Trusts
• Share Plans
• Pensions
• Payroll administration
• HR Services

Jersey Relocation Services

• Employment companies
• Employee Benefit Trusts
• Share Plans
• Pensions
• Payroll administration
• HR Services

Accounting Services

• Bookkeeping
• Management reporting
• Annual Financial Statements
• Liaising with auditors

Channel Islands Stock Exchange

• Listing services
• Continuing obligations

IFG does not provide taxation or legal advice. The information and expression of opinion expressed in this briefing note are not intended to be a comprehensive study or to provide taxation or legal advice. Specific advice concerning individual situations should be taken and IFG can provide introductions to advisers who specialise in this area.