Ozannes’ Jersey funds update

Associate Jane Struth describes the current funds environment

The current financial markets and global economic conditions are having a profound impact on funds business in Jersey. Despite these 1930s-style economic conditions, funds are still being established, especially unregulated funds. Unregulated funds were launched in Jersey at the beginning of 2008 when the Collective Investment Funds
(Unregulated Funds) (Jersey) Order 2008 came into force. The order created two new types of unregulated funds, which as the name suggests are exempt from regulation by the Jersey Financial Services Commission and are, therefore, very fast to establish.

This Order seems to mark a turning point, establishing Jersey as the premier finance
centre for unregulated funds and potentially signals the tumble of the Cayman Islands
from this mantle. The ability to establish funds in an efficient and fast way in a wellregulated jurisdiction enhances the attraction of launching funds with Jersey vehicles.

Guernsey will still remain highly competitive for regulated funds because of its pragmatic regulatory approach and it will only be a matter of time before it launches its equivalent product.

An unregulated fund must be established as either:
i) an unregulated eligible investor fund; or
ii) an unregulated exchange-traded fund.

An unregulated eligible investor fund may be either open or close-ended. Only eligible investors can invest in the fund. An eligible investor is (i) an individual who invests a minimum of $1,000,000, (ii) an institutional or professional investor or (iii) one who falls within the other definitions of eligible investor set out in the order. An investor must
sign a declaration confirming that he has read and understood an investment warning
acknowledging that the fund has not been approved or authorised by the Commission and does not, therefore, have regulatory protection, is only suitable for professional or
experienced investors and investment in such a fund involves special risks that could
lead to the loss of all or a substantial portion of the investment.

An unregulated exchange-traded fund is a close-ended fund, which is listed on a
recognised stock exchange. The Order provides a list of recognised stock exchanges.
There is no restriction on the type of investor, which can invest in such a fund.
In order to claim exemption as an unregulated fund, a notice must be filed with the
Commission. A further requirement is that the offering documentation of an unregulated
fund must contain a specified investment warning notifying investors that the fund is not
regulated in Jersey. However, the Commission does not examine or approve any of the
fund documentation.

As these types of funds are not regulated in Jersey, there is no requirement for the
administrator or any other functionary to be resident in Jersey. Jersey resident directors
are not required by the Commission. Unregulated funds can be any entity recognised
under the laws of Jersey and, can therefore, take the form of a company, limited
partnership or unit trust. Unit trusts require a trustee or manager, whilst limited
partnerships require at least one general partner, which in either case must be a Jersey
incorporated company. In the case of a company, the registered office of the company
must be provided by a business registered under the Financial Services (Jersey) Law
1998, as amended in respect of fund services business. Accordingly, all functions can
be carried on from outside Jersey but the registered office of the company must be
provided by a Jersey-based administrator. In less than a year, the introduction of
unregulated funds is being heralded by all in the industry as a welcome development,
which is having a significant positive impact on the investment funds industry as a
whole in Jersey and the future prosperity of the island in these troubled times.
Funds which are already established in Jersey and regulated by the Commission
cannot unfortunately be converted to unregulated funds.

This, therefore, still leaves a few existing unclassified collective investment funds listed on recognised stock exchanges faced with a higher level of regulation. Because of the current financial markets, we are seeing a surge in work in relation to such existing funds. Increasingly, boards of directors have to deal with shareholders who are disgruntled with what they perceive as very expensive fees being paid to managers of funds, for what shareholders feel is very little benefit. When these types of funds were set up several years ago, the management fee was agreed to be calculated with reference to the net asset value of the fund (NAV). In the current financial market, the share prices are heavily discounted but the management fees are still very high. To put this in perspective, some funds may be paying in excess of £1million pounds a year for the management of a fund that is fully invested. One can fully understand the frustration of shareholders in these difficult times, who are seeing a heavily discounted share price but a high management fee linked to NAV being paid to a manager of the fund.

Not even listed funds on a well regulated exchange can be reclassified as unregulated funds. Other methods of re-classification have to be considered. Where a fund is fully invested, the rôle of a manager may be somewhat limited and in the current climate some funds are looking to realise the assets and wind up the fund or reduce their costs.
The board of directors of funds, under pressure from shareholders, are increasingly looking for ways to reduce the rôle of managers and the fees being paid to managers.
An option that is becoming increasingly popular is obtaining the approval of the Commission to reclassify the fund as a listed fund and internalise the management. A listed fund is not as regulated by the Commission as an unclassified collective investment fund listed on recognised stock exchange.

Conversion to a listed fund allows the fund to remain listed on the recognised stock exchange. If the fund to be converted is fully invested, the board of the fund may seek the approval of the Commission for the management of the fund to become internalised as opposed to engaging an external manager. In real estate funds this may be an attractive proposition for funds, as the management of the property is normally carried out in the country where the property is based. If the board can show that they are undertaking an active rôle in managing the property managers outside Jersey, the Commission may be minded to approve the internalisation of the management.

A Jersey-based manager of the fund is therefore not required, saving the cost of paying a management fee. The board will need to satisfy the Commission that there is sufficient monitoring of the property managers and this could be achieved by appointing a representative of the property management company to the board. The board should also look at ensuring that there are sufficient methods of reporting and monitoring.

Accordingly, although the global financial markets are suffering, Jersey is still seeing the launch of funds, in part, as a result of the new unregulated funds’ regime. Ozannes has advised on the launch of some of the first unregulated funds in Jersey. Established funds are increasingly looking for ways to reduce costs and satisfy shareholders in an increasingly difficult marketplace. Whilst the main financial centres in the world are feeling a slow down in activity, funds’ work in Jersey is as busy as ever, especially in relation to restructuring and fund litigation.