Alternative Investment Funds

Transcription

1 hedgeweek guide to setting up Alternative Investment Funds Jul 2010 Focus Report: BVI Cayman Islands Guernsey Ireland Jersey Luxembourg Malta

2 C o n t e n t s In this issue 03 Introduction By Sunil Gopalan, Global Fund Media 05 British Virgin Islands: Jurisdiction information 06 British Virgin Islands: Overview By Ross Munro, Harneys 09 Cayman Islands: Jurisdiction information 10 Cayman Islands: Overview By James Wauchope, Partner, Mourant Ozannes 14 Guernsey: Jurisdiction information 15 Guernsey: Overview By Darren Bacon, Partner, Mourant Ozannes 19 Ireland: Jurisdiction information 21 Ireland: Overview By Dillon Eustace 27 Jersey: Jurisdiction information 28 Jersey: Overview By Ed Devenport, Partner, Mourant Ozannes 31 Luxembourg: Jurisdiction information 33 Luxembourg: Overview By Rémi Chevalier and Olivier Sciales, founding partners at Chevalier & Sciales 39 Malta: Jurisdiction information 42 Malta: Overview Based on information provided by the Malta Financial Services Authority Publisher Special Reports Editor: Simon Gray, [email protected] Sales Managers: Simon Broch, [email protected]; Malcolm Dunn, [email protected] Publisher & Editorial Director: Sunil Gopalan, [email protected] Marketing Director: Oliver Bradley, [email protected] Graphic Design: Siobhan Brownlow, [email protected] Published by: Global Fund Media Limited, 2nd Floor, Berkeley Square House, Berkeley Square, London, W1J 6BD Tel: +44 (0) Website: Copyright 2010 Global Fund Media Limited. All rights reserved. No part of this publication may 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

3 I n t r o d u c t i o n Introduction The Hedgeweek Guide to Setting up Alternative Investment Funds 2010 is the third edition of this unique online publication being made available to the 60,000-strong audience of investment managers, institutional investors and service providers that read Hedgeweek and its family of investment management newsletters daily. The focus of the Guide is to help managers, promoters and their advisers decide where best to list their alternative investment funds. This edition of the Guide draws together in one volume all the major current regulations covering the listing of alternative investment funds in a comprehensive treatment of the subject covering the following major jurisdictions BVI, Cayman Islands, 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 the Malta Financial Services Authority, Chevalier & Sciales, Mourant Ozannes, Dillon Eustace, and Harneys for their invaluable time and assistance in preparing a comprehensive overview of each jurisdiction in this edition, in conjunction with Custom House and the Channel Islands Stock Exchange, who also provided their support. We look forward to your feedback and participation in forthcoming editions of this Guide. Sunil Gopalan Publisher Global Fund Media Ltd Hedgeweek.com Globalfundwire.com Privateequitywire.co.uk Propertyfundsworld.com Etfexpress.com Assetadviser.co.uk FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

4 06: 00 07: 00 12: 00 13: 00 19: 00 CHICAGO CURACAO DUBLIN GUERNSEY LUXEMBOURG AMSTERDAM MALTA SINGAPORE Custom House Offers 24/5 Service Custom House Global Fund Services Limited now offers its clients a full round the world and round the clock hedge fund administration service through its network of offices which, following the merger om with House Equity Trust s fund Offers services business, 24includes 5 Service Amsterdam, Chicago, Dublin, Guernsey, Luxembourg, Malta, and Singapore. Custom House Custom House s Dublin office, which is authorised by the Irish Financial Regulator under Section 10 of the Investment Intermediaries Act 1995, achieved an exception-free SAS70 Type II and was the first hedge fund administrator to be awarded a Moody s Management Quality Rating. is proud to support For more information on Custom House, please review our website: Hedge Funds Care UK or contact Dermot Butler ([email protected]) a member of the Group of Companies

5 B r i t i s h V i r g i n I s l a n d s Tortola Custodians:...8 licensed Corporate service providers: licensed Accountants/auditors:...7 international firms Trustees:...93 Class I Trust license holders Insolvency Practitioners: licensed Local stock exchange: No Local fund industry body: The Association of BVI Mutual Fund Practitioners, PO Box 71, Road Town, 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 protected]; Tel: ; Fax: Double taxation treaties None Tax information exchange agreements Aruba; Australia; China; Denmark; Faroe Islands; Finland; France; Greenland; Iceland; Ireland; Netherlands; Netherlands Antilles; New Zealand; Norway; Sweden; UK; USA British Virgin Islands Fund legislation Securities and Investment Business Act, 2010 (SIBA) Number of funds As at 31 December 2009 (the latest available): Number of funds by category As at 31 December 2009: Private: Professional: Public: Only open ended funds are required to be registered or recognised under SIBA. No statistics are available for other types of funds. There is currently no distinction in the licensing process between directly invested hedge funds and funds of hedge funds and so no official figures exist for the break down. Domiciled and administered fund assets total: No figures currently available. Domiciled and administered fund assets by category: No figures currently available. Regulator Financial Services Commission, Investment Business Division. Contact: Broderick Penn, Director of Investment Business Division; Tel: or ; Fax: Address: BVI Financial Services Commission, Pasea Estate, PO Box 418, Road Town, Tortola, VG 1110, BVI Service providers Law firms:...7 multi-jurisdictional firms;...approximately 10 other BVI commercial firms Administrators:...82 licensed Alternative fund, manager and service provider information Types of alternative fund vehicle Open-ended or closed-ended investment company (see below), limited partnership, unit trust, common contractual fund, umbrella fund Types of Corporate Vehicle: l Company Limited by Shares, including: Restricted Purposes Company Segregated Portfolio Company (for recognised or registered funds and licensed insurance companies only) l Company Limited by Guarantee authorised to issue shares; l Company Limited by Guarantee not authorised to issue shares; l Unlimited Company authorised to issue shares; and l Unlimited Company not authorised to issue shares Types of regulatory fund category Public; Private; Professional Audit requirement l Public Funds: Financial statements must be audited by an auditor approved by the Financial Services Commission (no local sign off). l Private and Professional Funds: Financial statements must be audited by an auditor meeting certain prescribed criteria unless the fund is exempted from the audit requirement by the Financial Services Commission (no local sign off). Not applicable to financial years ending prior to 17 May Financial statement requirements l Public funds: Financial statements for each financial year must be prepared which comply with IFRS, US, UK or Canadian GAAP or such other accounting standards as may be approved by the Financial Services Commission on a case by case basis. FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

6 B r i t i s h V i r g i n I s l a n d s l Private and professional funds: Financial statements for each financial year must be prepared in accordance with one of the prescribed financial standards (UK, US or Canadian GAAP or IFRS) or internationally recognized and generally accepted accounting standards equivalent to such standards. Not applicable to financial years ending prior to 17 May l All funds regulated under SIBA must also submit an annual return to the Financial Services Commission containing summary prudential and governance information. Overall cost of fund establishment Private and Professional:...From US$12,000 Public:...From US$25,000 Regulatory approval time From submission of complete application: Private and Professional Funds: business days Public Fund: weeks Overall establishment time Private and Professional:...At least 2 weeks Public Fund:... At least weeks Cost of regulatory fees (by type of fund): Private and Professional:...US$350 pa (increasing to...us$1,000 from 1 January 2011). Public:...US$500 pa (increasing to...us$1,500 from 1 January 2011) The British Virgin Islands By Ross Munro, Harneys The British Virgin Islands is a leading jurisdiction for the formation of alternative investment funds, having approximately 2,800 funds registered or recognised under the Securities and Investment Business Act 2010 (SIBA). SIBA replaced the Mutual Funds Act, 1996 (the MFA) in May 2010 and has been welcomed with widespread praise by the industry. SIBA has retained the familiar and well liked framework of public, professional and private funds first established by the MFA but has updated the regime to codify long standing policy and practices as well as bringing the BVI fully into line with best practice and international standards. Funds recognised or registered under SIBA are regulated by the Financial Services Commission (the Commission), the financial regulator in the British Virgin Islands. SIBA requires all investment funds falling within its definition of fund to be recognised or registered with the Commission. SIBA restricts the definition of mutual fund to open-ended funds that entitle investors to demand redemption of their fund interests immediately or within a period of notice. Accordingly only such funds are regulated under SIBA. Closed ended funds are not subject to specific regulation although BVI established managers and other BVI established functionaries of closed ended funds will in many circumstances require a licence under SIBA. SIBA introduces a wide ranging licensing regime which requires any person carrying on investment business in or from within the BVI to hold a licence. The activities constituting investment business include acting as an investment manager, administrator, investment advisor or custodian with respect to a wide variety of financial instruments. It includes most functionaries of open and closed ended funds but the precise outcome depends on the services provided and the structure of the fund. It is important to note, however, that non-bvi functionaries of a BVI fund carrying on business from outside the BVI will not generally need to hold a license under SIBA. Fund vehicles Sponsors and fund managers considering setting up investment funds in the British Virgin Islands may choose from the following range of possible vehicles: l BVI Business Company FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

7 B r i t i s h V i r g i n I s l a n d s l Limited Partnership l Unit Trust The vast majority of British Virgin Islands investment funds are established as companies limited by shares under the BVI Business Companies Act, 2004 or as limited partnerships formed under the Partnership Act, Categories of fund The three categories of regulated fund are as follows: l Private fund. Restricted to either (a) having no more than 50 investors or (b) only making an invitation to subscribe for or purchase fund interests on a private basis. l Professional fund. May only issue fund interests to professional investors and the initial investment for all investors, other than exempt investors (as defined), may not be less than US$100,000 or equivalent in another currency. l Public fund. Greater regulation imposed as no restrictions on investors or minimum investment. Private funds and public funds must be recognised or registered under SIBA before they commence business whereas professional funds may commence business for a period of up to 21 days without being recognised provided that they otherwise comply with the requirements of SIBA as if they were recognised and that an application is submitted to the Commission within 14 days. A professional investor is a person either (a) whose ordinary business involves the acquisition or disposal of property of the same kind as the property or a substantial part of the property of the fund or (b) who has signed a declaration that he, whether individually or jointly with his spouse, has net worth in excess of US$1,000,000 and that he consents to be being treated as a professional investor. Functionaries / service providers All functionaries of funds regulated under SIBA must satisfy the Commission s fit and proper criteria. Functionaries of a public fund require the prior approval of the Commission. Every public fund must have a manager, administrator and custodian and each must be independent or functionally independent of the fund and each other. Private and professional funds must generally have a manager, administrator and custodian although an exemption from the requirement to appoint a manager and/or administrator is available upon application to the Commission. The Commission confirmed that functionaries of funds established and located in the BVI or any of the following countries may be recognised and accepted by the Commission for the purposes of acting as a functionary of a BVI fund (the notice extends the list of recognised countries which applied under the MFA the new countries are highlighted): Argentina, Australia, Bahamas, Bermuda, Belgium, Brazil, Canada, Cayman Islands, Chile, China, Denmark, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hong Kong, Ireland, Isle of Man, Italy, Japan, Jersey, Luxembourg, Malta, Mexico, Netherlands, Netherlands Antilles, New Zealand, Norway, Panama, Portugal, Singapore, Spain, South Africa, Sweden, Switzerland, United Kingdom and United States of America The Commission has also stated that it may recognise and accept a functionary from outside the BVI and the above countries if it is satisfied that the country has a system for the effective regulation of investment business, including funds. No restrictions on strategy, leverage or valuation There are no restrictions on the strategy a fund may pursue, provided it is not otherwise in breach of the laws of the British Virgin Islands. There are no limits on leverage taken by the funds. There are currently no rules imposed on funds as to how they value their assets. However, a Public Funds Code is currently in consultation and is expected to come into force later in As the name suggests, the Code only applies to registered public funds and imposes additional disclosure and governance requirements on public funds (including provisions relating to valuation policy and disclosure). Financial statements and audit Public funds: Financial statements for each financial year must be prepared which comply with IFRS, US, UK or Canadian GAAP or such other accounting standards as may be approved by the Financial Services Commission on a case by case basis. The financial statements must be audited by an auditor approved by the Financial Services Commission. There is no local sign off. Private and professional funds: Financial statements for each financial year must be prepared in accordance with one of the prescribed financial standards (UK, US or Canadian GAAP or IFRS) or internationally recognized and generally accepted accounting standards equivalent to such standards. The Financial statements must be audited by an auditor meeting certain prescribed criteria unless the fund is exempted from the audit requirement by the Financial Services Commission (no local sign off). The above provisions are not applicable to financial years ending prior to 17 May Annual return All funds regulated under SIBA must submit a return to the Commission no later than 30 June in each year in respect of the calendar year ending on 31 December of FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

8 B r i t i s h V i r g i n I s l a n d s the previous year. The return contains basic prudential and governance information and summary financial information. The return does not require any information on the identity of investors or the specific investments within the fund s portfolio. Such information is confidential to the Commission and may only be publicly disclosed on an aggregated basis. Fund documentation Public Funds: Public funds may not make an invitation to the public to subscribe for or purchase fund interests unless the offer is contained in a prospectus which has been approved by the fund s governing body and the prospectus has been registered (i.e. approved) by the Commission. The prospectus is required to provide full and accurate disclosure of all information as investors would reasonably require and expect to find for the purpose of making an informed investment decision. Additional minimum disclosure requirements for a prospectus are to be contained in the Public Funds Code (currently in consultation). Private / Professional Funds: A private or professional fund must submit a copy of its proposed offering document to the Commission upon application for recognition or provide an explanation as to why no offering document is to be issued. The prescribed investment warning must be included in a prominent place within an offering document (or if no offering document is issued, provided to each investor or potential investor in a separate document) but otherwise SIBA does not prescribe what should be included within the offering document. Copies of offering documents issued to investors or potential investors must be filed with the Commission. The constitutional documents of private and professional funds must contain prescribed statements referring to their status as private and professional funds respectively. Directors / authorised representative SIBA requires that every fund established as a company have at least 2 directors. Corporate directors are permitted for private and professional funds provided that at least one director is an individual but are not permitted for public funds. There are no requirements for local directors. However, with effect from 12 October 2010, each fund must appoint an authorised representative unless the fund has a significant management presence in the BVI. The authorised representative itself must be a person located in the BVI holding a certificate from the Commission authorising it to act in such capacity. Ongoing requirements Regulated funds are subject to a reasonable number of requirements to notify the Commission either before or after the occurrence of certain events such as appointment and resignation of directors and functionaries and changes to documents. Manager s and administrator s licenses A licence may be granted by the Commission to a person proposing to carry on business in or from within the BVI as the functionary of funds if the Commission is satisfied that, inter alia: a) the applicant, its directors and senior officers and significant shareholders satisfy the Commission s fit and proper criteria; and b) the organisation, management and financial resources of the applicant are, adequate for the carrying on of the relevant investment business. A holder of a licence under SIBA must comply with the requirements of the Act and, upon it becoming applicable to SIBA licensees, relevant sections of the Regulatory Code, AML All BVI funds, managers and administrators must comply with the Anti-Money Laundering Regulations, 2008 and the Anti-money Laundering and Terrorist Financing Code of Practice, However, BVI funds commonly outsource the majority of its obligations under such legislation to its administrator who is then required to comply with the AML laws of its home jurisdiction. Tax BVI funds and functionaries are exempt from BVI income tax. Furthermore, investors in BVI funds are not liable to any BVI income tax with respect to fund interests. 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

9 C ay m a n I s l a n d s Georgetown Cayman Islands Local stock exchange: Cayman Islands Stock Exchange Local fund industry body: There is no single fund industry body in the Cayman Islands although there are various professional associations such as, for example, the Cayman Islands Funds Administrators Association. The Alternative Investment Management Association also has a Cayman chapter which represents the Cayman Islands alternative investment community. Promotion agency for funds/financial sector: Cayman Finance, formerly known as the Cayman Islands Financial Services Association. Double taxation treaties None as the Cayman Islands is a zero tax jurisdiction. Tax information exchange agreements 17: United Kingdom; Aruba; Australia; Netherlands Antilles; France; New Zealand; Netherlands; Ireland; Denmark; Faroe Islands; Finland; Greenland; Iceland; Norway; Portugal; Sweden and United States. Cayman Islands Fund legislation l The Mutual Funds Law (2009 Revision), first enacted in 1993, is the principal legislation relevant to the regulation of investment funds in the Cayman Islands. l The Securities Investment Business Law (2004 Revision) regulates fund managers based in the Cayman Islands. Number of funds by category As at 31 March 2010, there were 9,370 funds (predominantly hedge funds) registered with the Cayman Islands Monetary Authority ( CIMA ) under the Mutual Funds Law. There are also significant numbers of private equity and other closed-ended alternative investment funds registered in the Cayman Islands but which are not required to register with CIMA. Consequently, figures are not available for these types of funds. The breakdown of CIMA registered funds is as follows: Registered...8,819 Administered Licensed (retail) Domiciled and administered fund assets total: This information is currently unavailable Domiciled and administered fund assets by category: This information is unavailable Regulator Cayman Islands Monetary Authority, PO Box 10052, 80e Shedden Road, Elizabethan Square, Grand Cayman KY1-1001, Cayman Islands. Tel: Fax: Web: Service providers There are currently 31 law firms, 35 accounting firms, 148 administrators, 259 licensed banks, 81 corporate service providers and 106 licensed trust companies. Types of alternative fund vehicle An alternative investment fund may be established as either a company, limited partnership or unit trust. Any of these vehicles may be formed on an open-ended or closed-ended basis and may also constitute umbrella funds with separate sub-funds permitted under their governing documents. Available types of corporate vehicle Cayman Islands companies may be set up as either ordinary companies or, most commonly, exempted companies. Such companies may be incorporated with limited liability or without limited liability (being known as unlimited companies). Limited companies may be limited by guarantee ( guarantee company ) and a guarantee company may be incorporated with or without a share capital. The vast majority of limited companies are limited by shares. An exempted company may be registered as a limited duration company or as a segregated portfolio company. Types of regulatory fund category l Licensed this is the least common type of regulated investment fund as it involves an approval process such that the investment fund itself is licensed (unlike the categories below). l Administered instead of applying for its own license, an investment fund may seek to rely on the existing license of a licensed mutual fund administrator based in the Cayman Islands. This type of investment fund is favoured by investment managers who wish to have a minimum subscription to invest that is lower than US$100,000 (or its equivalent in any other currency) but who prefer not to go through the approval process outlined above. l Registered this is the most common type of investment fund registered with CIMA. Registered funds are exempt from the requirement to be licensed or administered on the basis that either (i) each investor must subscribe at least US$100,000 or (ii) the equity interests of the fund are listed on a stock exchange recognised by CIMA. FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

10 C ay m a n I s l a n d s Audit requirement No requirement for funds to be audited locally but any regulated fund is required to have audited financial statements and such audited financial statements must be signed-off by a local firm of approved auditors. Financial statement requirements Annual audited financial statements for regulated funds. Cost of regulatory fees CIMA registration fee of CI$3,000 (US$3,658.54) and annual fee of same amount. Overall cost of fund establishment Typically in the range of US$10,000 US$20,000 (excluding disbursements) per fund. Regulatory approval time Licensed funds carry an approval time of 4-6 weeks. No approval process for Administered or Registered funds. Overall establishment time Save as mentioned above, no regulatory approval process so timetable dependant purely on how long it takes to settle fund documentation. The Cayman Islands By James Wauchope, Partner, Mourant Ozannes The Cayman Islands is one of the world s leading offshore jurisdictions for the establishment of investment funds. As at 31 March 2010, there were 9,370 funds (predominantly hedge funds) registered with the Cayman Island Monetary Authority ( CIMA ) under the Mutual Funds Law (the Mutual Funds Law ). There are also significant numbers of private equity and other closed-ended alternative investment funds registered in the Cayman Islands but which are not required to register with CIMA. Key features include: l The flexibility of the investment fund regime within a clear and effective regulatory environment. l The quality and experience of the legal, administrative and accounting service providers. l Ease of registration procedures. l No requirement to have Cayman-based directors or officers, managers, administrators or custodians. l No restriction on commercial matters such as investment objectives, trading strategies or leverage, trading or diversification limits. Such commercial matters are for the fund s sponsor to determine provided that full disclosure of such matters (and all associated risk factors) is made in the offering document. Regulation of investment funds The Mutual Funds Law is the principal legislation relevant to the regulation of investment funds in the Cayman Islands. Investment managers based in the Cayman Islands will also need to comply with the Securities Investment Business Law, and all investment funds and service providers must also comply with relevant antimoney laundering legislation and regulation. CIMA is the regulatory body responsible for compliance with these regulations and has broad powers to ensure the protection of investors. Definition of mutual funds The Mutual Funds Law refers to investment funds as mutual funds and as such defines a mutual fund as a company, unit trust or partnership incorporated or otherwise carrying on business in the Cayman Islands that issues equity interests for the purpose of pooling investor funds, with the aim of spreading investment risk and enabling investors to receive profits or gains from investments. Scope of the Mutual Funds Law The following exclusions or exemptions from the Mutual Funds Law apply: l Funds with only one investor fall outside the definition of a mutual fund, as there is no pooling of investor funds. l Closed-ended funds or private equity vehicles which do not permit redemption or repurchase of interests also fall outside the definition of mutual fund. l Investment funds with fifteen investors or less, the majority of whom have the power to appoint or remove the operators of the investment fund (i.e. the directors, the general partner or the trustee, as the case may be), are exempt from the licensing and registration provisions of the Mutual Funds Law. FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

11 C ay m a n I s l a n d s Categories of regulation Three categories of mutual funds are regulated by the Mutual Funds Law, referred to in this briefing as: (a) the registered mutual fund, (b) the administered mutual fund and (c) the licensed mutual fund. a) Registered mutual funds this is the most common type of investment fund registered with CIMA and comprises those funds which have a minimum investment per investor of at least US$100,000 (or its equivalent in any other currency) or whose equity interests are listed on a recognised stock exchange. Registration under this route is straight forward as it does not involve any discretionary approval process on the part of CIMA. Specifically, CIMA does not conduct a prior review of the offering document and there is no discretion for CIMA to refuse to register a registered mutual fund provided that the fund qualifies for registration and the application is properly made. b) Administered mutual funds an alternative route is for the mutual fund to designate its principal office in the Cayman Islands at the office of a licensed mutual fund administrator. An administered mutual fund is the only type of regulated mutual fund which must appoint a mutual fund administrator based in the Cayman Islands. This type of mutual fund is favoured by investment managers who wish to have a minimum subscription per investor that is lower than US$100,000 but who do not wish to pursue the licensing route described below. For an administered mutual fund, the selected administrator undertakes the responsibility of being satisfied of the same matters that CIMA considers for a licensed mutual fund (see below), and provides the principal office of the mutual fund at the administrator s office in the Cayman Islands. A licensed administrator must report to CIMA if it has reason to believe that a fund for which it provides the principal office is acting in breach of the Mutual Funds Law or may be insolvent or is otherwise acting in a manner prejudicial to its creditors or investors. c) Licensed mutual funds the third alternative is to apply to CIMA for a license for the mutual fund that may be issued at CIMA s discretion. This alternative would be appropriate for mutual funds wishing to accept subscription amounts below US$100,000 but which do not propose to appoint a Cayman Islands mutual fund administrator and are sponsored by reputable and well-known institutions. l All regulated mutual funds are required to file their offering document with CIMA, together with the prescribed particulars. The prescribed particulars are set out in forms which summarise certain details from the offering document, as follows: a) Registered fund : Form MF1 b) Administered fund: Form MF2 and MF2A c) Licensed fund: Form MF3 l All regulated mutual funds must, so long as there is a continuing offering, update their offering documents within 21 days of any material change, and must re-file the updated offering document and the prescribed particulars with CIMA within such 21 days. l All regulated mutual funds must have their accounts audited annually, and such audited financial statements must be filed with CIMA within six months of the year end of the relevant mutual fund in electronic format, together with an annual return form including prescribed details, signed by a director. l Such audited financial statements must be signedoff by an approved Cayman Islands-based auditor. In practice this causes little difficulty because all of the main accounting firms have offices in Cayman. The bulk of the preparatory work will invariably be done by the audit firm in the place in which the fund s records are physically located (usually the office of the manager or administrator) and then the Cayman audit firm will sign-off on the audited financial statements. l All regulated mutual funds must pay an application fee and an annual fee each year in January, currently US$3,660. Structures available A Cayman Islands investment fund may be open-ended, closed-ended or a hybrid of the two. In open-ended funds, the equity interest issued is capable of redemption at the option of the investor. A closed-ended fund or private equity fund will either have no redemption or repurchase rights or only restricted rights and will be used when the underlying assets of the fund cannot be easily realised or liquidated to meet redemption requests. A hybrid fund might begin life as a closed-ended fund but, following a liquidity event or a passage of time, may convert to an open-ended fund. Structures that are commonly used for open-ended investment funds include single class, multi-class (umbrella), master/feeder and side-by-side funds. Requirements under the Mutual Funds Law l All mutual funds must have a current offering document, which must describe the equity interests of the mutual fund in all material respects and must contain all material information to enable a prospective investor to make an informed decision as to whether or not to subscribe. Types of fund vehicle A Cayman Islands investment fund may be established as a company, a unit trust or a limited partnership. It is important to note that only a company enjoys separate legal personality, distinct from its investors. FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

12 C ay m a n I s l a n d s Companies Companies are the most common vehicle for open-ended investment funds. Companies are invariably incorporated with limited liability although, under Cayman Islands law, it is possible to form companies with unlimited liability or with limited liability by guarantee. The majority of Cayman Islands companies issue shares of a stated par value (although no par value shares are permitted). Cayman Islands law permits dividends or other distributions to be paid out of share premium account, subject to a solvency test, even if no profits are available. Shares in a Cayman Islands company may also be redeemed or repurchased out of capital, again subject to solvency considerations. Cayman Islands companies are invariably registered as exempted companies and can be incorporated on a same day basis and are subject to minimal local requirements. There must be a registered office in the Cayman Islands at which a register of directors and a register of mortgages and charges must be maintained. A register of shareholders must also be maintained although this can be kept either in or outside the Cayman Islands. None of these registers is open to public inspection. An exempted company may be registered as a segregated portfolio company ( SPC ). An SPC allows a number of segregated portfolios to be operated with the benefit of statutory segregation of assets and liabilities between segregated portfolios. A liability in respect of a particular segregated portfolio entitles a creditor to have recourse only to the assets attributable to that portfolio and not the assets of other segregated portfolios. Unit trusts Cayman Islands trust law is based on English common law and therefore interpreted according to English case law, as modified by any Cayman case law. Under a unit trust arrangement investors (or unit holders) contribute funds to a trustee which holds those funds on trust for the unit holders, and each unit holder is directly entitled to share pro-rata in the trust s assets. A unit trust is often used for investors in jurisdictions (such as Japan) where participations in a unit trust are more acceptable or tax-effective than shares in a company. The trust deed regulates the rights and obligations of unit holders and will usually give unit holders the right to redeem their units and to purchase further units. The trustee of a unit trust fund is invariably a licensed Cayman Islands trust company. Limited partnerships Limited partnerships are the most common vehicle for closed-ended funds or private equity funds. They are also sometimes used in master-feeder structures. Cayman limited partnerships are governed by a combination of equitable and common law rules (based on English common law) and also statutory provisions, pursuant to the Exempted Limited Partnership Law. An exempted limited partnership requires at least one general partner and at least one limited partner. There is no requirement for a capital contribution by a general partner. In most cases, the general partner is either a Cayman Islands company or an overseas company registered here as a foreign company although may be another Cayman Islands exempted limited partnership. There are no statutory restrictions on distribution of profits and returns of the partnership so long as it remains solvent. Taxation The Cayman Islands has no direct taxation of any kind. There are no income, corporation, capital gains or withholding taxes or death duties. Under the terms of relevant legislation it is possible for all types of fund vehicles - the company, the unit trust and the limited partnership to apply to the government of the Cayman Islands for a written undertaking that they will not be subject to various descriptions of direct taxation, for a minimum period, which in the case of a company is currently twenty years and, in the case of a unit trust and limited partnership, fifty years. AML compliance Cayman investment funds and their service providers must comply with relevant anti-money laundering legislation. In Cayman the relevant provisions are contained in the Proceeds of Crime Law, the Money Laundering Regulations and CIMA s Guidance Notes on the subject. Listing The Cayman Islands Stock Exchange ( CSX ) has become an important offshore listing facility and exchange for investment funds, specialist debt securities and warrants. The CSX is recognised by the London Stock Exchange and the UK Inland Revenue and is also an affiliate member of IOSCO and a full member of AIMA. The CSX has developed a set of listing rules specifically tailored to meet the needs of investment funds of all types. The Cayman Islands has long established itself both as a jurisdiction where hedge funds and other alternative investment vehicles can be set up on a tax-neutral basis and as a jurisdiction which, although well regulated, offers sufficient flexibility for setting-up fund structures suitable for institutional and sophisticated investors. This is the Cayman Islands niche and, although significant onshore regulatory changes are now regarded as inevitable, the Cayman Islands is expected to retain its position as one of the leading jurisdictions for offshore alternative investment funds. FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

13 Make waves, without the ripples. It's plain sailing offshore with our hedge funds team Best Offshore Legal Firm Hedgeweek Awards 2010 Ranked number one for hedge fund legal services in Cayman HFM Week Offshore Legal Services Report 2010 Jersey Law Firm of the Year International Law Office Client Choice Awards 2010 Mourant is one of the world's leading offshore law firms. From offices in the Cayman Islands, London, Jersey and Guernsey we specialise in providing legal advice to the world's leading financial institutions, corporations, fund managers and private clients. Our hedge funds advisory team has an international reputation as one of the leading offshore funds practices. The team specialises in providing legal advice in relation to funds domiciled in Cayman, Guernsey and Jersey, advising on: Fund formation Fund restructurings Distressed funds Fund litigation and insolvency The hedge funds advisory team is led by partners Neal Lomax (Cayman), Darren Bacon (Guernsey) and Edward Devenport (Jersey). This network gives us the ability to deliver advice to clients worldwide. To find out more, please contact: Neal Lomax (Cayman) T [email protected] Darren Bacon (Guernsey) T +44 (0) [email protected] Edward Devenport (Jersey) T +44 (0) [email protected] On 1 June 2010 Mourant du Feu & Jeune and Ozannes merged to create Mourant Ozannes - Cayman Guernsey Jersey London

14 Guernsey Local fund industry body: Guernsey Investment Fund Association and Guernsey International Business Association Promotion agency for funds/financial sector: Guernsey Finance Double taxation treaties 12: Australia, Denmark, Faroe Islands, Finland, Greenland, Iceland, Ireland, Jersey, New Zealand, Norway, Sweden and the United Kingdom. Tax information exchange agreements 15: Australia, Denmark, Faroe Islands, Finland, France, Germany, Greenland, Iceland, Ireland, Netherlands, New Zealand, Norway, Sweden, United Kingdom and the United States of America. GUERNSEY St. Peter Port JERSEY St Helier Types of alternative fund vehicle Open-ended or closed-ended investment company, limited partnership or unit trust. Available types of corporate vehicle Investment company, incorporated cell company or protected cell company. Guernsey Fund legislation The Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended. Number of funds Domiciled Domiciled and administered... 1,208 Number of funds by category Hedge...35 Private Equity Property Equities Venture Capital...45 Debt...70 Fund of Funds Domiciled and administered fund assets total: 184 billion Domiciled and administered fund assets by category: Assets by category not available Types of regulatory fund category Authorised (Class A, B or Q), registered or qualifying investor fund. Audit requirement Yes, local sign-off required. Financial statement requirements At least annually with open-ended funds half-yearly. Cost of regulatory fees GFSC application fee of 3,000 per fund. Overall cost of fund establishment Typically 20,000 (excluding disbursements) per fund. Regulatory approval time Authorised funds typically in 4 to 6 weeks and registered or qualifying investor funds in 3 working days. Overall establishment time As above, subject to the relevant promoter having the necessary track record and experience. Regulator Guernsey Financial Services Commission, PO Box 128, La Plaiderie Chambers, La Plaiderie, St Peter Port, Guernsey GY1 3HQ Service providers There are currently 16 law firms, 35 accounting firms (including the big four ), 42 licensed banks, 653 institutions licensed to carry on investment business and over 200 fiduciary licensees. Local stock exchange: The Channel Islands Stock Exchange FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

15 G u e r n s e y Guernsey By Darren Bacon, Partner, Mourant Ozannes Guernsey provides a robust, yet flexible, regulatory environment and an attractive tax regime for financial services businesses and investment funds. There is a strong corporate governance culture and understanding of central management and control issues. Guernsey retains jurisdictional independence from the UK, allowing the Island s government to make its own laws, set its own budget and determine its own levels of taxation. Regulation of investment funds The Guernsey Financial Services Commission (the Commission ) regulates investment funds to protect investors and to maintain the island s reputation. Guernsey has established a sophisticated infrastructure to foster the establishment of investment funds. The criteria for granting an authorisation or consent to a fund and the manner in which that fund will be regulated largely depends on whether the fund is open or closed-ended and the type of investor targeted. The Commission also regulates the licensing of fund service providers in Guernsey. The formation and operation of investment funds in Guernsey is regulated by the Commission pursuant to the Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended (the POI Law ) and certain rules and regulations made thereunder. In granting authorisation or consent, the Commission will consider the status, reputation and track record of the promoter, the scope of the fund s investment activities and the nature of its business. It will also consider the protection and/or enhancement of Guernsey s reputation as a financial centre. The two types of fund, open-ended and closed-ended, may make application for authorisation or consent under one of three routes: l Authorised Fund by standard application; l Authorised Fund by Qualifying Investor ( QIF ) application; l Registered Fund application. The distinction between opened-ended and closedended funds is based on redemptions; open-ended funds will allow investors to have their holdings redeemed or repurchased art a price related to the value of the underlying property or assets, whereas closed-ended funds will allow only discretionary redemptions, if any. There is no requirement to establish a Guernsey fund manager, but all Guernsey funds must have a local administrator. Open-ended funds, whether Authorised or Registered must also have a Guernsey-based custodian. An application fee is payable on submission of the initial fund application and an annual authorisation fee is payable on receipt of final consent or authorisation. New promoters Where the promoter of a fund is not known to the Commission, it must submit a new promoter check list, which gives information on the track record of the promoter or its principals, the proposed investment business to be undertaken in Guernsey and personal information on the directors, managers and shareholders of the promoter, the shareholders and directors of any management company and the directors of the proposed fund. Authorised funds by standard application The standard application for authorisation of an openended or closed-ended fund in Guernsey is a three-stage process, comprising outline, interim and final authorisation. Open-ended funds can be structured as one of the following which, to a large extent, will determine the applicable level of regulation: l Class A funds are regulated by the Authorised Collective Investment Schemes (Class A) Rules 2008 (the Class A Rules ), correspond to a UK authorised unit trust or OEIC and may be marketed to retail investors in specific jurisdictions, including the UK, following registration in the relevant jurisdiction. l Class B funds are regulated by the Commission under the Collective Investment Schemes (Class B) Rules 1990 (the Class B Rules ) and allow greater flexibility in investment and borrowing powers. Class B funds vary in scope from retail funds through to strictly private funds established as vehicles for a single institution, but have historically been targeted at institutional investors and high net worth individuals. Certain derogations from the Class B Rules are available on application to the Commission. l Class Q funds, regulated under the Collective Investment Schemes (Qualifying Professional Investors) (Class Q) Rules 1998 (the Class Q Rules ), are restricted to professional investors and allow the investment manager an even greater degree of flexibility. Closed-ended funds are regulated under the Authorised Closed-Ended Investment Schemes Rules 2008 (the Closed-Ended Rules ), which set out such matters as administration and custodian (if any) duties in relation to such funds, disclosures required to be made in the prospectus and the requirements to notify the FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

16 G u e r n s e y Commission in respect of changes to the fund or its service providers. Where a local fund manager is used in the structure of an authorised fund, it must apply for a licence to conduct restricted activities under the POI Law, the approval process for which typically takes four to six weeks. Authorised funds by QIF application Promoters of authorised funds which will be offered to professional or experienced investors, knowledgeable employees or persons willing to invest a minimum of US$100,000 may take advantage of the qualifying investor fund or QIF fast-track application process. An appropriately licensed Guernsey administrator must certify to the Commission that it has performed sufficient due diligence on the promoter and the procedures for offering the scheme (including procedures for effectively restricting the offer to qualifying investors) and that the requisite disclosures are made in the offering document of the scheme. By placing much of the onus of due diligence on the administrator, the Commission has been able to reduce substantially its period for processing such applications. Once all requisite documentation and the administrator s certification have been submitted, the Commission has a guaranteed response time of three working days. The QIF regime is complemented by a fast track process for consideration of any local fund manager s licence application. A local fund manager is not legally required, but where the fund structure includes a Guernsey fund manager or the fund is structured as a limited partnership and has a Guernsey general partner, the Commission will process the application for the licence of such entity (again with reliance on the administrator s certification) under the fast track licensee application process and put it before the Commission s Licensing Committee within ten business days of receipt. Open-ended Qualifying Investor Funds are subject to the Class A, Class B or Class Q Rules and the QIF Guidelines published by the Commission. Closed-ended Qualifying Investor Funds are subject to the Closed- Ended Rules and the QIF Guidelines. Registered funds Guernsey s Registered Fund regime provides a lighter regulatory touch and a fast-track process to obtain consent from the Commission. As with QIF applications, the Commission s reliance on the administrator s certificate of due diligence on the promoter and the principal documents of the fund reduces the Commission s response time to three working days. Registered funds may not be offered directly to the public in Guernsey, but may be offered to regulated entities in Guernsey or offered to the public by entities appropriately licensed under the POI Law. The Registered Fund regime is complemented by a fast track process for consideration of a licence application for a local fund manager (if any). Where the fund structure includes a fund manager or the fund is structured as a limited partnership and has a Guernsey general partner, the Commission will process the application (again with reliance on the administrator s certification) under the fast track licensee application process and put it before the Commission s Licensing Committee within ten business days of receipt. Registered funds, whether open-ended or closedended are subject to The Registered Collective Investment Scheme Rules 2008 and The Prospectus Rules 2008 (the Prospectus Rules ). The former set out such matters as administration and custodian duties (optional for closed-ended funds), disclosures required to be made in the prospectus and the requirements to notify the Commission in respect of changes to the fund or its service providers and the latter set out information for inclusion in the prospectus of any Registered fund. Structures available Funds in Guernsey can be structured as limited liability companies, protected or incorporated cell companies, unit trusts or limited partnerships. Companies All Guernsey companies, whether cellular or non-cellular are incorporated under the Companies (Guernsey) Law, 2008 (the Companies Law ), and are subject to that law and to their memorandum and articles of incorporation. Companies may elect a stated or unstated share capital and par or no par value shares. Protected Cell Companies (PCCs) In a PCC assets are segregated into cellular and noncellular assets and held in individually created cells, or the core respectively. The assets of each individual cell include the share capital and reserves (including retained earnings, capital reserves and share premiums) attributable to that cell. The noncellular assets are, in effect, the general assets of the company. Importantly, the assets of each individual cell are only available to the creditors of that particular cell. The segregation of assets and liabilities in one legal entity readily lends PCCs to be used for guaranteed or protected products. Incorporated Cell Companies (ICCs) An ICC is similar to a PCC but in an ICC each individual cell is an incorporated company with separate legal personality. The incorporated cells are not subsidiaries of the ICC and cannot bind the ICC but must contract in their own individual names. Each incorporated cell will have the same directors as the ICC. Only certain regulated FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

17 G u e r n s e y businesses may be incorporated as, or converted into, an ICC. The conversion provisions under the Companies Law are very flexible permitting an existing PCC or ICC to convert into a company and vice versa. Unit Trusts A unit trust is constituted by an instrument of trust, usually between the manager and the trustee (or in certain circumstances made by a managing trustee only) and is subject to the Trusts (Guernsey) Law, A unit trust is not a separate legal entity in itself but is based on the concept of a trustee who has legal title to the assets and who holds them on trust for the benefit of the unit holders. There is no capital duty on the establishment of a unit trust and no annual registration fee. A unit trust may obtain exemption from Guernsey tax on all income except income arising in Guernsey (other than bank interest). Distributions to unit holders are not subject to Guernsey tax unless the unit holder is Guernsey resident. Limited Partnerships The Limited Partnerships (Guernsey) Law, 1995 as amended provides an enabling framework for the establishment and operation of Guernsey limited partnerships. A Guernsey limited partnership is not a legal entity in its own right (unless it elects to have legal personality) but is a partnership managed by a general partner, the limited partners of which are not liable over and above the amounts which they have agreed to contribute to the partnership. There is no limitation on the number of limited partners and the general partner will ordinarily have unlimited liability for the debts of the partnership. Profits and losses of a partnership are attributed to the partners according to their proportionate share. A partner who is not resident in Guernsey will not be liable to any Guernsey income tax except to the extent that any part of that share is derived from Guernsey source income (other than bank interest), which includes profits from a trade carried on in Guernsey but excludes profits from international activities carried on outside of Guernsey. Limited partnerships are popular in the constitution of private equity funds and carried interest vehicles. Taxation The rate of corporation tax for companies registered in Guernsey is zero percent. This follows the introduction into Guernsey of a zero-ten tax regime. It is possible for open- or closed-ended funds (whether constituted as a company, a unit trust or a limited partnership) and their wholly-owned subsidiaries to apply to the Administrator of income tax for exempt status, which grants exemption from tax on all income, save for any income arising in Guernsey (other than Guernsey bank interest). The fee for exempt status is 600 per annum as an exempt company charge. There are no Guernsey withholding taxes on dividends other than those paid to Guernsey resident shareholders, and there is no Guernsey capital gains tax. There are no stamp duties or transfer taxes payable on the issue or transfer of shares or other securities. Similarly, there are no exchange control or currency restrictions in Guernsey. If the investment manager or adviser is structured as a company, and its activities are confined to acting within its licence under the POI Law, then it would currently be taxed in Guernsey at the rate of zero percent. There are no capital gains, inheritance taxes, goods and services tax or VAT payable in Guernsey. Listing The shares, units or interests of Guernsey investment funds may be listed on stock exchanges, but QIF schemes must have a mechanism to remove investors admitted via an exchange who do not fall within the Qualifying Investor definition. Guernsey has proven to be a popular choice of jurisdiction in which to establish funds that are to be listed on stock exchanges. Guernsey s focus on alternative asset class investment funds has made it a natural choice for AIM listings. The Dutch regulator, the Authority for Financial Markets, has ruled that Guernsey is one of the few jurisdictions to have the requisite adequate home supervision so Guernsey funds do not need any further licensing in order to list on Euronext. Changes to the main board LSE listing rules such as the removal of quarterly portfolio disclosures have favoured hedge funds and fund of funds, which have become niche businesses for Guernsey. Circulation of a prospectus The Prospectus Rules apply to regulate the content of the prospectus of a Registered fund and also to any offer of general securities or derivatives either made by a Guernsey entity (company, limited partnership or unit trust) or made to the public in the Bailiwick wherever the offeror is domiciled. The public is defined as an identifiable category of persons exceeding 50 in number. The Prospectus Rules do not apply to offers of investments which are listed on an exchange supervised by a member of the International Organization of Securities Commissions (IOSCO), such as the London Stock Exchange or AIM. Any prospectus circulated to the public in the Bailiwick of Guernsey or outside the Bailiwick by a Guernsey entity must meet the requirements of the Prospectus Rules and be delivered to the Commission for registration on payment of an application fee. Any changes to the contents of the prospectus must be notified to investors. FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

18 Hear views, insights and opinions from expert international speakers... Maya Bhandari Senior Economist, Lombard Street Research Roger Bootle City Economist and Economic Advisor to Deloitte Dr James Chu Managing Director and Chief Investment Officer, Blue Sky Asset Management Limited Key Investment Strategies & Economic Outlook Conference INVESTMENT STRATEGIES INVESTMENT STRATEGIES INVESTMENT STRATEGIES INVESTMENT STRATEGIES INVESTMENT STRATEGIES INVESTMENT STRATEGIES INVESTMENT STRATEGIES Hotel De France, Jersey on 10 September 2010 Topics for 2010 include: Strategies for Diversification & Durable Portfolios Regulatory Reform Managing Risk Engines of Global Growth Angela Knight, CBE Chief Executive, British Bankers Association Helena Morrissey Chief Executive Officer, Newton Investment Management Ltd Paul Mortimer-Lee Global Head of Market Economics, BNP Paribas Jon Moulton Chairman, Better Capital LLP Robert Parker Senior Advisor, Credit Suisse Securities (Europe) Ltd Colin Powell, OBE Chairman of the Offshore Group of Banking Supervisors (OGBS) and Advisor on International Affairs for the States of Jersey Chief Minister s Department Tajinder Singh Deputy Secretary General, International Organisation of Securities Commission (IOSCO) To find out more, and to register, please visit our website at Tel: +44 (0) [email protected] Delegate rate only 175 when you register before 31st July

19 I r e l a n d Ireland Dublin Fund legislation l UCITS: European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations, 2003 l Non-UCITS investment companies: Part XIII of the Companies Act, 1990 l Non-UCITS unit trust: Unit Trusts Act, 1990 l Investment Limited Partnerships (non-ucits): Investment Limited Partnerships Act, 1994 l Non-UCITS common contractual funds: Investment Funds, Companies and Miscellaneous Provisions Act, 2005 Number of funds l 4,704 Irish regulated funds as of May 31, 2010 (source; Financial Regulator) l 5,704 non-irish funds administered in Ireland as of December 31, 2009 (source; Irish Funds Industry Association) Number of funds by category All data as of May 31, 2010 and includes sub-funds (source: Financial Regulator) UCITS...2,792 Non-UCITS...1,912 Retail Non-UCITS Professional Investor Non-UCITS Qualifying Investor Non-UCITS... 1,245 Domiciled and administered fund assets total: The latest available data is as of December 31, 2009 shows that there were E1,441 billion in total net assets in funds administered in Ireland, comprising both Irish and non-irish funds (source; Irish Funds Industry Association). As of March 31, 2010 there were approximately E813 billion in total net assets in funds domiciled in Ireland (source: Financial Regulator). Domiciled and administered fund assets by category: All data as of March 31, 2010 (source: Central Bank of Ireland) Money Market:... E320 billion Bonds:... E118.6 billion Equities:... E223.9 billion Hedge:... E48.2 billion Mixed:... E61.8 billion Real Estate:...E2.2 billion Other:... E29.7 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 Financial Regulator 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 Irish Financial Services Regulatory Authority (commonly known as the Financial Regulator ). The Financial Regulator is a constituent part of the Central Bank and Financial Services Authority of Ireland, formerly knows as the Central Bank. Address: Irish Financial Services Regulatory Authority, Financial Institutions and Funds Authorisation, PO Box 9138, College Green, Dublin 2, Ireland Service providers There are a large number of law-firms which provide legal services to the alternative investment funds industry here, both the leading commercial firms and smaller niche practices. All of the main accountancy firms have large operations here. There are approximately 50 fund administrators active in Ireland, many of which have affiliated custodian operations in Ireland, the majority of which would have alternative investment fund servicing capabilities. There are no available statistics on Irish corporate service providers as generally these entities may not be required to be regulated in Ireland. Generally, fund administrators or specialised transfer agency companies would provide those services normally provided by corporate services provides, excluding company secretarial services which are also provided by corporate secretarial affiliates of the law-firms or certain independent firms. Investment banks involved in prime brokerage do not typically provide this service out of Ireland. There are no official statistics on the number of placement agents in Ireland. Local stock exchange: The Irish Stock Exchange Limited Local fund industry body: Irish Funds Industry Association Promotion agency for funds/financial sector: Industrial Development Agency and Irish Funds Industry Association Double taxation treaties Ireland has signed comprehensive double taxation treaties with 56 countries, of which 48 are currently in effect. The FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

20 I r e l a n d double taxation agreements which are currently in effect and having force of law cover the following countries: Australia, Austria, Belgium, Bulgaria, Canada, Chile, China, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Israel, Italy, Japan, Republic of Korea, Latvia, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Mexico, Netherlands, New Zealand, Norway, Pakistan, Poland, Portugal, Romania, Russia, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, United Kingdom, United States, Vietnam and Zambia. Ireland has also signed double taxation treaties with the following countries and the legal procedures to give these agreements force of law are at various stages: Albania, Bahrain, Belarus, Bosnia & Herzegovina, Georgia, Moldova, Serbia and Turkey. Negotiations for new agreements with Armenia, Hong Kong, Kuwait, Montenegro, Morocco, Saudi Arabia, Thailand and United Arab Emirates have been concluded and are expected to be signed shortly. In addition negotiations for new agreements with the following countries are at various stages: Argentina, Azerbaijan, Egypt, Singapore, Tunisia and Ukraine. Tax information exchange agreements Ireland has tax information exchange agreements and agreements for affording relief from double taxation with a number of jurisdictions including both the Isle of Man and Jersey. Under the European Savings Directive, all European Member States and a number of dependant territories are required to exchange certain information and/ or impose a withholding tax on particular types of payments made to certain individuals. Andorra, Liechtenstein, Monaco, San Marino and Switzerland are not participating in automatic exchange of information but are exchanging information on a request basis. Their participation is confined to imposing a withholding tax. The other dependant territories that are participating are Anguilla, Aruba, British Virgin Islands, Cayman Island, Guernsey, Isle of Man, Jersey, Montserrat, Netherlands Antilles and Turks and Caicos Islands. Types of alternative fund vehicle l Open-ended or closed-ended investment company with fixed or variable capital l Open-ended or closed-ended unit trust l Open-ended or closed-ended common contractual funds l Open-ended or closed-ended investment limited partnerships Each of the above may be established as single or multiportfolio funds. Investment companies and common contractual fund sub-funds have statutory ring-fencing. Each of the above may be established as single or multiclass funds. Available types of corporate vehicle l Single portfolio company l Segregated portfolio company (umbrella) l Variable or fixed capital company Types of regulatory fund category l UCITS (no minimum initial subscription requirement); l Retail Non-UCITS (no minimum initial subscription requirement except for private equity funds, in respect of which it is E12,500); l Professional Investor Non-UCITS (minimum initial subscription of E125,000); l Qualifying Investor Non-UCITS (minimum initial subscription of E250,000, investor wealth tests and risk acknowledgement). The following additional fund categories are not widely used either due to their tax status (non-designated funds) or the narrow investor requirements (collective investor funds): l Non-designated funds (no minimum subscription requirement; only available as variable capital investment companies and may not be sold to the public; these are private investment fund vehicles and are subject to Irish corporation tax at a rate of 10%/12.5% on income/capital gains); l Collective investor funds (available to life assurance companies, pension funds and other collective investors; tax exempt, does not have to be sold publicly). Audit requirement Yes, annual, local Financial statement requirements Yes, all semi-annual unaudited and annual audited. Corporate Qualifying Investor Funds do not have to prepare semi-annual unaudited accounts. Cost of regulatory fees E2,000 per year for each fund plus E450 per sub-fund up to a maximum of E4,250. This is reviewed on an annual basis by the Financial Regulator. Overall cost of fund establishment Legal costs will vary from law-firm to law-firm and depending on the type of fund and other factors. There is no up-front regulatory fee. There is a small government levy for incorporating corporate funds and other initial statutory filings. Regulatory approval time Qualifying Investor Funds: 24 hours following filing of prospectus, constitutive document, principal service agreements, application request, completed regulatory application forms and various confirmations assuming promoter, investment manager, administrator, custodian and directors have already been approved by the Regulator and the application is within normal prescribed parameters and any required derogations have been obtained in advance. Professional Investor Non-UCITS: if promoter approval is required, this must be obtained generally before the fund application is submitted to the Regulator. The promoter approval will generally take between one and two weeks. Once promoter approval is obtained, and the fund application is submitted, the Regulator endeavours to respond to the initial application within two weeks and subsequent responses from the fund each time within one week. Normally, two to three sets of comments can be expected, depending on the nature of the fund, resulting in the application spending around four weeks in total with the Regulator. Retail Non-UCITS: Similar to Professional Investor Fund above. UCITS: Similar to Retail Non-UCITS, but in addition, self- FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

21 I r e l a n d managed UCITS and UCITS common contractual fund and unit trust management companies must be approved as part of the process of seeking regulatory approval for the UCITS, which generally can result in the addition of two to four weeks to the overall timing. Overall establishment time In each case from a standing start (i.e. fund promoter, investment manager and directors have not been previously approved by the Financial Regulator, but fund service providers have been chosen) to fund authorisation. UCITS...tends to take approximately 3 months Non-UCITS Retail... approximately 2 months Professional Investor Funds... approximately 2 months Qualifying Investor Fund... approximately 1 month Ireland By Dillon Eustace Answers to frequently asked questions pertaining to setting up investment funds in Ireland 1. What if any are the investor restrictions (number, by category)? Irish Funds are not required to have a minimum number of investors, however, on the whole, Irish regulated tax exempt funds must, depending on the category of fund, and the specific wording of the legislation, be offered directly or indirectly to the public or must be available to the public. The following additional fund categories are not widely used either due to their tax status (non-designated funds) or the narrow investor requirements (collective investor funds): l Non-designated funds (no minimum subscription requirement; only available as variable capital investment companies and may not be sold to the public; these are private investment fund vehicles and are subject to Irish corporation tax at a rate of 10%/12.5% on income/capital gains); l Collective investor funds (available to life assurance companies, pension funds and other collective investors; tax exempt, do not have to be sold publicly). 2. What if any are the investor restrictions (minimum investment, qualifications, by category)? UCITS must be offered in European Economic Area, but may also, but not alternatively, be offered elsewhere. UCITS and Non-UCITS established as common contractual funds may not be offered to natural person investors. Apart from that, there are no substantive Irish restrictions in relation to the nature or quality of UCITS investors outside of those related to contractual capacity. There are no Irish restrictions in relation to the offering of Irish Non-UCITS retail funds other than that retail funds which are authorised by the Financial Regulator as private equity funds must impose a minimum initial subscription requirement of E12,500 on each investor and other than as provided above in relation to common contractual funds. Non-UCITS Professional Investor Funds are required to impose a minimum initial subscription requirement of E125,000 otherwise there are no Irish restrictions. Non-UCITS Qualifying Investor funds are required to apply a minimum initial subscription requirement of E250,000 and investors must meet a wealth test on a self-certification basis; natural persons must have minimum net worth (which excludes main residence and household goods) in excess of E1,250,000 and non-natural persons must own or invest on a discretionary basis at least E25,000,000 or have beneficial owners which are qualifying investors in their own right. In relation to Professional Investor Funds and Qualifying Investor Funds, an exemption from the minimum initial subscription requirement and, in the case of Qualifying Investor Funds, the investor criteria, is available to directors of the fund, the investment management company, directors of the investment management company, the promoter and its affiliates, and employees of the investment management company who are directly involved in the fund s management or are senior employees with experience in the provision of investment management services. All Qualifying Investor Fund investors must certify in writing to the fund that they meet the minimum criteria listed above and that they are aware of the risk involved in the proposed investment and of the fact that inherent in such investments is the potential to lose the entire sum invested. Please see 1 above in relation to nondesignated funds and collective investor funds. 3. Is there a requirement for an Irish fund s sponsor to be approved by the Irish Regulator? Before the Financial Regulator will accept an application FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

22 I r e l a n d for the authorisation of an Irish investment fund, the Financial Regulator must be satisfied that the fund sponsor or promoter is of good repute, has a minimum level of financial resources and a relevant track-record in collective investment schemes. With limited exceptions, the promoter is required to be regulated by a supervisory authority recognised by the Financial Regulator. Promoters are required to have audited shareholder funds of not less than E635,000 on an ongoing basis (though there is no requirement to submit audited accounts on an ongoing basis). The requirements are essentially the same for all categories of Irish fund though for retail funds, experience in the distribution of retail funds or access to a retail distribution network will be an additional consideration. 4. Is there a requirement for the investment manager of an Irish fund to be approved by the Irish Regulator? Before the Financial Regulator will accept an application for the authorisation of an Irish investment fund, the proposed discretionary investment management company(ies) of the fund must be cleared in advance. Acceptable investment management firms include those which are regulated under the Markets in Financial Instruments Directive (MiFID) (Directive 2004/39/EC) and non-eu firms regulated by a supervisory authority recognised by the Financial Regulator. In relation to all Irish funds, non-eu investment managers must confirm in writing to the Financial Regulator, as a condition of being approved, that they have and will maintain net shareholders funds of not less than E125,000 or its equivalent in another currency. In relation to Irish UCITS, the investment managers must be authorised or registered for the purpose of asset management and must be subject to prudential supervision. In addition, where a non-eu investment manager is proposed to be appointed, there must be a form of co-operation agreement in place between the Financial Regulator and the supervisory authority of the third country that regulated the investment manager. 5. What are the custodian/depository bank requirements for an Irish fund? The assets of Irish regulated funds must be entrusted to a depository for safe-keeping. The depositary must be a credit institution authorised in Ireland, an Irish branch of an EU credit institution or an Irish incorporated company which is wholly owned by an EU credit institution (or equivalent from a non-eu jurisdiction) provided that the liabilities of the Irish company are guaranteed by its parent. The prescribed role of the depositary is to ensure, as a general rule, legal separation of non-cash assets and to ensure that certain core aspects of the management of the fund are carried out in accordance with applicable legislation, regulatory conditions and the fund s constitutive documents, for example, valuation, sale, issue, repurchase and cancellation of fund units. In addition, the depositary must enquire into the conduct of the management company, investment company or general partner in each annual accounting period and reporting thereon to the fund s unitholders. 6. What are the local Director requirements? Both UCITS and non-ucits investment companies are required to have a minimum of two Irish resident Directors on their boards. Common contractual funds and unit trusts are required to have an Irish management company and such management companies are required to have at least two Irish resident Directors on their boards. Investment limited partnerships are required to have an Irish General Partner and such entity is required to have at least two Irish resident Directors on its board. The board of Directors of a fund or its management company/general partner cannot have Directors in common with the board of the depositary of the fund. All Directors appointed to such entities must be approved in advance by the Financial Regulator pursuant to a fitness and probity regime applicable to all regulated financial services sectors in Ireland on the basis that the Regulator is satisfied that each has appropriate expertise and integrity and is of good repute. The names and biographies of the directors must appear in the fund s Prospectus. Resignations of Directors from Irish funds and their management companies/general partners must be notified immediately to the Financial Regulator. 7. What are the Prospectus/offering document/ constitutive document requirements? All UCITS and Non-UCITS must issue a prospectus, which must be dated, and the essential features of which must be kept up to date. Investors must be offered a copy of the Prospectus, free of charge, prior to subscribing for units in the relevant fund. Any changes to the Prospectus must be made by prior approval of the Financial Regulator or, in the case of Qualifying Investor Funds, provided that the changes fall within certain parameters, prior notification to the Financial Regulator. Any material changes to the Prospectus must be notified to investors in the fund s subsequent periodic reports. The overriding regulatory consideration is that the Prospectus should contain sufficient information to enable investors to make an informed decision whether to invest in the fund. In particular, the investment objectives and policies of a fund must be clearly described in the prospectus with sufficient information to enable investors to be fully aware of the risks associated with an investment in the fund. Separate prospectuses may be issued by funds established as FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

23 I r e l a n d umbrella funds in respect of each of their sub-funds. Separate prospectuses may not be issued in respect of separate share classes, other than in the context of Qualifying Investor Funds, provided that the Prospectuses are consistent with the other Prospectus(es) for the fund/ sub-fund of an umbrella fund (except in relation to that information which is class specific). 8. Are Irish funds required to be licensed? Broadly speaking, units of Irish investment funds that are available for public participation may not be sold or purchased nor may sales or purchases be solicited without the fund having sought and obtained authorisation of the Financial Regulator under Irish funds legislation. 9. What are the regulatory requirements before an Irish fund can launch? Before an Irish investment fund can launch, the fund must be in possession of a written authorisation from the Financial Regulator pursuant to the relevant Irish legislation. There are no minimum capitalisation requirements except in the case of UCITS investment companies which have not appointed Irish UCITS management companies, which must have a minimum capital of E300,000 prior to authorisation by the Financial Regulator. 10. What ongoing regulatory requirements apply to Irish funds? The ongoing core regulatory requirements can be broken down into: Disclosure Please see 7 above in relation to the Prospectus. Each fund must issue annual audited financial statements and (other than in the case of corporate Qualifying Investor Funds) semi-annual financial statements, comprising a balance sheet, income statement (in the case of the annual audited financial statements only), a portfolio statement and statement of changes in the composition of the portfolio during the period and any significant information which will enable investors to make an informed judgement on the development of the fund and its results. Valuation and pricing Fund assets must be valued on the basis of market prices where available or, where unavailable, generally at probable realisation value calculated by a competent third party appointed by the fund or its management company/general partner with the objective of achieving fair value, the appointment of which is approved by the depositary. The valuation rules must be set out in the fund s Prospectus and must be set out, or referred to, in the fund s constitutive document. The calculation of the fund s net asset value, including the updating/ confirmation of the prices of the underlying securities must be carried out in Ireland by staff located in Ireland, in the absence of a derogation from the Regulator. Valuation rules must be applied consistently throughout the life of a fund. The valuation policy is ultimately the responsibility of the board of Directors of the fund/ management company/general partner. Client asset protection; independent custody of assets The applicable rules are outlined in 5 above. Trustee as fiduciary of investors The applicable rules are outlined in 5 above. Portfolio regulation The Regulator imposes diversification requirement and concentration requirements on Irish UCITS, non-ucits retail funds and Professional Investor Funds. A retail Non-UCITS general investment restrictions prohibit it from investing more than 10% of its net asset value in securities which are not listed or traded on an approved market, more than 10% of net asset value in the securities of any one issuer, no more than 10% of its net asset value in any class of security issued by a single issuer and net maximum potential exposure through efficient portfolio management techniques and borrowings cannot exceed 25% of net asset value. There are exceptions and specific restrictions for retail Non-UCITS funds of funds including funds of unregulated funds, feeder funds, real estate funds, private equity funds and managed futures funds. In the case of Professional Investor Funds, the standard investment and borrowing restrictions applicable to retail Non-UCITS can be disapplied to the extent agreed with the Regulator. As a general rule of thumb, the quantitative limits are doubled. The Regulator disapplies all but a small number of normally insignificant restrictions in relation to Qualifying Investor Funds. Duty to act in investors best interest and to avoid conflicts of interest The fund s prospectus must contain a description of the potential conflicts of interest which could arise between the management of the fund and the fund, with details, where applicable, of how these are going to be resolved. Any transaction carried out with a fund by a promoter, manager, depositary, investment adviser and/or associated or group companies of these must be carried out as if effected on normal commercial terms negotiated at arms length and transactions must be in the best interests of the investors. Regulatory Reporting The fund must submit a monthly report within ten days of its effective date, setting out the fund s net asset value, net asset value per unit and net subscription and redemptions in the fund s units during the month. The annual and semi-annual financial statements of the fund must be submitted to the Financial Regulator within four and two months respectively of the balance sheet date. FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

24 I r e l a n d Reporting to investors The annual audited financial statements and semi-annual unaudited financial statements (where required) must be made available to investors free of charge upon request and must be available for inspection at a specified location. Qualifying Investor Funds in the form of investment companies are not required to produce semiannual unaudited financial statements. Changes to the Fund Any change to the Prospectus or any material service agreement of the fund is subject to approval by the Regulator. Any change to the investment policy of the fund as disclosed in the prospectus must be notified in advance to investors enabling them to redeem their units in the fund prior to the implementation of the change. Material changes to the investment policy of the fund or any change to the fund s investment objective are subject to prior investor approval. Enforcement The Financial Regulator has independent statutory powers of enforcement that are not dependent upon judicial action. The Regulator enforces on the basis of periodic reporting requirements, a requirement for the Directors/management company/general partner and depositary to deal with the Regulator in an open and co-operative manner and inspections, the frequency of which is based on risk assessment or on complaint. 11. What are the regulatory requirements applicable to service providers to Irish funds? All Irish investment funds are required to appoint an Irish Administrator (or Irish management company) which will perform certain minimum activities in Ireland such as the calculation of the net asset value of the fund and its dealing price, maintenance of the books and records of the fund and maintenance and updating of the fund s shareholder register. Irish investment funds are also required to appoint a depositary. The depositary must have its registered office within Ireland or have established a place of business in Ireland if its registered office is in another Member State of the European Union. The depositary s fiduciary duties may not be delegated to a third party and must be performed by the depositary appointed in Ireland. The custody functions may however be delegated to a custodian located (inside or) outside of Ireland. All Irish funds are required to appoint an investment manager (or Irish management company) that will be responsible for the investment management of the Irish fund s assets. The conditions applicable such companies clearance to act by the Financial Regulator as described in 4 above. Irish Professional Investor Funds and Qualifying Investor Funds are entitled to appoint prime brokers. Prime brokers must be regulated to provide prime brokerage services and each prime broker or its parent company must have financial resources of not less than E200 million and a credit rating of not less than A1/P What is the regulatory procedure in getting an Irish fund licensed? All fund authorisations must be obtained pre-launch. Post-authorisation changes to fund documentation require the approval of the Regulator. To obtain this authorisation, the fund, or in the case of a unit trust, common contractual fund or limited partnership, its management company or general partner, must apply to the Financial Regulator in writing. In the case of UCITS and Non-UCITS retail and Professional Investor Funds, this application is initially made in draft form. In the case of Qualifying Investor Funds, application is made on the business day prior to the proposed date of authorisation and no formal review of the documentation is undertaken by the Regulator. In all cases, before making an application, the proposed promoter of the fund must have been cleared by the Financial Regulator, as must the proposed investment manager. Non-discretionary investment advisers are not required to be cleared by the Financial Regulator. The Directors of the proposed fund must be approved in advance by the Regulator. Any management company or general partner being appointed must be approved in advance by the Regulator. In the case of a UCITS, the risk management procedures of the UCITS relating to the fund s use of derivatives must be approved in advance and must the fund s management company or, if it is not appointing a management company, the fund s business plan. The proposed administrator and depositary of the Fund must be in possession of the relevant license or approval from the Regulator, and this will be an approval under investment services legislation or banking regulation. Any derogations from the regulatory requirements that a fund requires must be obtained in advance of submitting the formal application for authorisation. 13. What is the role of the service providers in authorisation/ongoing regulation? Authorisation UCITS, retail Non-UCITS and Professional Investor Funds are authorised by application from the fund, or in the case of a unit trust, common contractual fund or limited partnership, its management company or general partner as appropriate. The depositary and administrator will be required to make certain certifications to the Regulator as part of the authorisation process. In the case of Qualifying Investor Funds, which are FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

25 I r e l a n d effectively authorised by means of a self-certification process, the fund/management company/general partner makes the formal application, which is undertaken by its Irish legal advisers; the depositary certifies that the information contained in the application, as it relates to the depositary, is accurate. Ongoing The Irish administrator/management company will be generally be responsible for carrying out the minimum activities referred to in 11 above and for preparing the regulatory reporting and financial statements referred to at 10 above. The depositary will prepare the report referred to in 5 above for inclusion in the fund s annual audited financial statements. The administrator, depositary and management company are each expected to deal in an open and co-operative manner with the Financial Regulator and to participate in such meetings as the Financial Regulator considers necessary to review its operations and its business developments. 14. What leverage restrictions apply to Irish funds? l UCITS: UCITS may not borrow except for temporary purposes subject to a limit of 10% of net asset value and have a global exposure limit that is applicable to the UCITS use of derivatives. In calculating their global exposure, UCITS currently have the choice whether to use the so-called commitment approach, a simple but conservative method of calculating global exposure, or Value-at-Risk ( VaR ), an advanced risk-measurement methodology, to determine global exposure. VaR may be calculated using an acceptable proprietary or commercially available model. The commitment approach methodology is normally used by non-sophisticated users of derivatives and the latter by sophisticated users of derivatives. The commitment approach calculates risk exposure based on the marked to market value of the underlying assets to which the derivative contract refers, and this risk exposure may not represent more than 100% of the net asset value of the UCITS (in other words, a UCITS total exposure may be 210% of the net asset value of the UCITS). If VaR is used, the UCITS may not have an exposure greater than 20% of the net asset value (known as absolute VaR ) based on a confidence level of 99% and a holding period of twenty days or a lesser holding period (for example, one day) may be agreed subject to the scaled down VaR limit (for example, 5%), or the UCITS may not have a VaR greater than twice the VaR of a relevant benchmark or a corresponding, derivative-free portfolio (known as relative VaR ). The degree of exposure that a UCITS has may be reduced by the use of allowable position netting and hedging positions. At the time of writing, the Commission of European Securities Regulators (CESR) was shortly due to release detailed guidelines on risk measurement and the calculation of global exposure and counterparty risk for UCITS. l Retail Non-UCITS: 25% of net asset value other than managed futures which in respect of which leverage is controlled by a margin to equity restriction of 50%; l Professional Investor Funds: 100% of net asset value; l Qualifying Investor Funds: unlimited In each case, the extent of leverage must be disclosed in the Prospectus of the Fund. 15. What is the tax status of Irish funds in Ireland? A fund that is authorised in Ireland is not subject to Irish tax on its income or gains with the exception of non-designated funds in respect of which please see 1 above. There are no Irish withholding taxes on distributions to investors provided they have made the appropriate tax declaration of non-irish residence to the fund. There are no Irish withholding taxes on distributions made to certain categories of Irish investors. There is no stamp duty or subscription tax is payable in Ireland on the issue, transfer, repurchase or redemption of units in a fund. Most of the key services provided to Irish funds (eg. fund administration, investment management, etc) are exempt from Irish VAT. 16. What tax applies to Irish investment managers? Generally 12.5% on fee income derived from investment management services. The Irish tax authorities impose a 20% withholding tax on dividends and other profit distributions. However there are significant exemptions under domestic law from this withholding tax in relation to (i) payments made to persons resident in EU Member States and/or tax treaty countries (including countries with whom a tax treaty has been signed but not yet ratified and effective) and (ii) payments made to companies resident outside the EU or a non-tax treaty country provided more than 50% of the recipient company is ultimately controlled by persons resident in a treaty country (including countries with whom a tax treaty has been signed but not yet ratified and effective) and/or EU member state (other than Ireland), once certain declarations are put in place. 17. What are the asset valuation rules applicable to Irish funds? These are described in 10 above. FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

26 We can......see the wood Dillon Eustace provides innovative advice on alternative investment products such as single and multi-strategy hedge funds, FoHFs, and UCITS alternatives. With the largest alternative investment legal team in Ireland and benefitting from experience from all sectors of the industry, Dillon Eustace advises international and domestic asset managers, banks, prime brokers and other service providers on all aspects of alternative investment products including product design, launch, listing, tax and compliance HFM Week European Hedge Fund Services Award Best UCITS Advisory Firm. For more information please contact: Andrew Bates or Donnacha O Connor Dillon Eustace, 33 Sir John Rogerson s Quay, Dublin 2. Tel: Fax: [email protected] [email protected]

27 Jersey reported by Jersey Finance to be broken down into the following investment policies: Hedge/Alternative Investment Funds billion Venture Capital/PE/Emerging Markets billion Real Estate billion Equity billion Bond billion Mixed Equity & Bond billion Money Market billion Other billion Regulator Jersey Financial Services Commission, PO Box 267, Castle Street, St Helier, Jersey, JE4 8TP, Channel Islands; Tel: +44 (0) ; GUERNSEY St. Peter Port JERSEY St Helier Jersey Fund legislation The Collective Investment Funds (Jersey) Law 1988 is the principal law governing the establishment of publicly offered collective investment funds. Most Jersey based service providers to collective investment funds will be required to be regulated under the Financial Services (Jersey) Law Number of funds As at 24 May 2010 there were 744 Jersey domiciled publicly offered collective investment funds. In addition, there are approximately 200 COBO only funds, which may only be offered to no more than 50 investors, and approximately 65 unregulated funds, which are Jersey domiciled but which are not regulated by the Jersey Financial Services Commission. There are also approximately 350 non-jersey domiciled funds administered from Jersey. Number of funds by category Please refer to the breakdowns provided above and below. Domiciled and administered fund assets total As at 31 December 2009, the total net asset value of Jersey domiciled and serviced funds was reported by Jersey Finance (see below) to be 166 billion. Domiciled and administered fund assets by category As at 31 December 2009, the total net asset value of Jersey domiciled and serviced funds of 166 billion was Service providers Law firms:... Approx 10 firms dealing with fund matters Administrators/corporate service providers:... Approx 30 Custodians:... Approx 15 Audit firms:... Approx 15 firms dealing with fund matters Local stock exchange: The Channel Islands Stock Exchange, Local fund industry body: The Jersey Funds Association, Promotion agency for funds/financial sector: Jersey Finance Ltd, Double taxation treaties 11 countries Tax information exchange agreements 15 countries Types of alternative fund vehicle Corporate, limited partnerships and unit structures are all commonly used as Jersey fund structures. Available types of corporate vehicle Protected and incorporated cell vehicles are available as well as conventional companies. Limited partnerships possessing legal personality will shortly also be available. Types of regulatory fund category Publicly offered Jersey domiciled funds are either unclassified, recognised or unregulated. Unclassified funds may be subcategorised into Expert Funds (which are only available to expert/high net worth investors), Listed Funds (which must be closed ended and listed on an exchange recognised by the Jersey Financial Services Commission) and unclassified funds offered to retail investors (and which are therefore subject to a more stringent regulatory policy). Recognised funds may be offered to retail investors and are recognised in the UK for distribution there. They are the subject of detailed regulatory requirements laid down by statute. Unregulated funds may be eligible investor funds (for which the investor eligibility criteria are generally stricter than those in respect of Expert Funds), or exchange traded funds (which must be closed ended and listed on a prescribed stock exchange). Privately offered funds (i.e. funds not offered to more than 50 investors) are known as COBO only funds and FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

28 J e r s e y are the subject of a distinct regulatory policy focussing on the promoter of the fund. Audit requirement Publicly offered funds will be required to be audited. There is no local audit requirement though auditors must possess certain prescribed qualifications. Financial statement requirements Financial statements will usually be prepared in accordance with UK GAAP though it is possible to select the GAAP of other territories. Cost of regulatory fees Publicly offered funds (other than unregulated funds) must pay an application fee of a minimum of 2,000 (depending on the number of Jersey service providers) and an annual fee of a minimum of 2,000 (depending on the number of separate pools of assets). Such application and annual fees do not apply to unregulated funds. No application or annual fees are payable in respect of COBO Only funds. In all cases there may be other minor disbursements depending on the nature of the fund structure. Overall cost of fund establishment This varies enormously depending on the complexity of the structure and the service providers involved. Regulatory approval time Expert and Listed Funds: 3 Business Days (provided all principal persons, including directors have already been approved by the Jersey Financial Services Commission`). Unclassified funds offered to retail investors and recognised funds: 4 to 6 weeks. Unregulated funds: no approval time (as such funds are not submitted to the Jersey Financial Services Commission for approval). Overall establishment time This varies enormously depending on the complexity of the structure and the service providers involved. However, a typical timescale would be 2 to 3 months in total (including the time taken to draft the fund documents and identify and appoint the service providers). Jersey By Ed Devenport, Partner, Mourant Ozannes The Jersey financial services regulator, the Jersey Financial Services Commission (the JFSC ), uses its regulatory powers to protect investors and to maintain the Island s reputation. Jersey has steadily established a sophisticated infrastructure to foster the establishment of investment funds both at a regulatory and professional level. The criteria for granting approval and the manner in which the fund will be regulated largely depends on whether the fund is private or public and whether it is open or closed ended. In particular, a light regulatory touch is applied in the case of funds created for the benefit of sophisticated or institutional investors or where the fund has a high minimum level of investment, provided that the appropriate risk warnings are included in the offer document. Private funds are authorised by the issue of a consent under the Control of Borrowing (Jersey) Order 1958 and are regulated by the conditions on such consent. Publicly offered investment funds are regulated under the Collective Investment Funds (Jersey) Law 1988, in the case of recognized funds (offered to retail investors in the UK) pursuant to a detailed series of statutory rules, and in the case of all other publicly offered funds, through the JFSC s regulatory policies. There is a streamlined process for certain types of funds (such as Expert, Listed and Unregulated Funds) which are constructed within specified frameworks and offered to sophisticated investors. Most alternative investment funds domiciled in Jersey are set up as Expert Funds and therefore the remainder of this article focuses on them. Expert Fund Guide The JFSC s policy on Expert Funds is contained in its Expert Fund Guide. Although the Guide is reasonably comprehensive, derogations from certain requirements of the Guide may be granted where the JFSC considers that that would be appropriate. Investor restrictions An Expert Fund may only be offered to Expert Investors, which includes: l an investor who makes an initial minimum investment of US$100,000 (or equivalent); or FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

29 J E R S E Y l a person or entity (or an employee thereof) whose ordinary business or professional activity includes acquiring, managing or giving advice on investments; or l an individual with a net worth greater than US$1,000,000 (or equivalent) (excluding principal residence); or l an entity with assets available for investment of not less than US$1,000,000 (or equivalent) or every member, partner or beneficiary of which is an Expert Investor; or l a fund service provider or an associate of a fund service provider to the Expert Fund (or an employee or shareholder thereof). A discretionary investment manager is an Expert Investor for the purposes of the Expert Fund Guide and may invest on behalf of non-expert investors provided that it ensures that an investment in the Expert Fund is suitable for the underlying investors. Any application to include other types of carried interest investor within the definition of Expert Investor is likely to be treated sympathetically by the JFSC. Transfers of interests may only be made to other Expert Investors. Investment warning Each investor must acknowledge, in writing, receipt and acceptance of a prescribed investment warning in the offer document, and this typically forms part of the fund s standard subscription documentation. Listing Expert Funds may be listed if the holding of interests in the fund is always restricted to Expert Investors. Investment manager requirements There are no requirements as to promoters, but the investment manager must be qualified in accordance with published criteria and sign a statement confirming its regulatory position and stature (it must be established in an OECD member state or another jurisdiction with which the JFSC has entered into a memorandum of understanding). The statement must be counter-signed by a Jersey fund service provider (typically the administrator of the fund) confirming that it has conducted its own general due diligence on the investment manager and has no reason to believe the investment manager s statement to be incorrect. The JFSC has demonstrated a willingness to approve applications in respect of funds whose investment manager or adviser is unable to comply fully with the criteria if it can be satisfied as to the ability of the manager to fulfil its functions in relation to the fund. Service provider conditions Each Jersey fund service provider to an Expert Fund (including, in the case of a limited partnership fund, the general partner) must be registered under the Financial Services (Jersey) Law 1998 to carry on fund services business. All registered fund service providers are required to comply with codes of practice for the conduct of fund services business. One of the Jersey fund service providers (typically the administrator) must take responsibility to the JFSC to monitor the investment manager s compliance with investment and borrowing restrictions (if any) and to maintain adequate records in Jersey. Director/general partner/trustee requirements The fund company, general partner or trustee (as the case may be) must have at least two Jersey-resident directors. An Expert Fund which is a unit trust or limited partnership must have a Jersey trustee/general partner. Structural/investment/leverage restrictions An Expert Fund can be open or closed ended, can be established using any of the common forms of investment vehicle (i.e. corporate, limited partnership or unit trust) and no investment or borrowing restrictions are set by the JFSC. If the fund is permitted to borrow money in excess of 200% of its NAV, the JFSC will require to be provided with detail on the manner in which the risk posed will be managed. Valuation rules No particular valuation methodologies are prescribed by the JFSC. Custody/prime broker requirements Requirements for custody arrangements are flexible, especially for closed ended vehicles and for hedge funds. Every Expert Fund must have adequate arrangements for the safe custody of the property of the fund and, in the case of open ended funds, the custodian should be Jersey based. However, in the case of a hedge fund, the need for a Jersey custodian will be waived provided a prime broker with a credit rating of A1/P1 is appointed. Authorisation process for an Expert Fund In order to establish an Expert Fund, a standard application form must be completed, signed on behalf of the Expert Fund and the relevant Jersey fund service provider and filed with the JFSC, together with the offer document, fees and a declaration certifying that the Expert Fund complies with the requirements of the Expert Fund Guide. The process concludes with the issue by the JFSC of a fund certificate in relation to the Expert Fund. Conditions relating to the Expert Fund will be attached to the Fund Certificate which will be granted to the fund itself if the fund is a company, to the general partner if FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

30 J e r s e y the fund is a limited partnership or to the trustee if the fund is a unit trust. Timescale for authorisation The JFSC s published timescale for authorising an Expert Fund is 72 hours. This timescale is based on the JFSC receiving a fully completed application and satisfactory responses to enquiries, and on the JFSC having already given approval to the proposed directors/principals of the fund and of the Jersey regulated service providers. Statutory fees A fee of 1,000 is payable on application for the fund certificate plus 1,000 in respect of each of the fund s Jersey fund service providers. The amount of annual fees depends on the total number of pools of assets (e.g. sub-funds) in the fund. This ranges from 2,000 if there is only one pool of assets to 20,000 if there are 200 or more pools of assets. Statutory fees are also payable by the Jersey fund service providers. Prospectus/offering document requirements The Expert Fund Guide prescribes basic information which must be contained in an Expert Fund s offer document. This includes all the information that investors would reasonably require for the purposes of making an informed judgement about whether to participate in the Expert Fund. The requirements are not unduly burdensome and also benefit Expert Fund promoters in providing clear guidance as to the requirements for offer documents. In addition, an open ended Expert Fund structured as a company or a unit trust and a closed ended Expert Fund structured as a company may be required to comply with certain additional statutory content requirements, but these are also not onerous. Offer documents for Expert Funds need to include an investment warning in the prescribed form, and each investor must acknowledge in writing that he has received and accepted this warning. Ongoing regulation requirements Changes made to an Expert Fund (other than changes to service providers) do not require the prior approval of the JFSC provided the criteria in the Expert Fund Guide continue to be met. Taxation The Expert Fund will typically be tax neutral in Jersey. However, specific rules apply to Jersey resident investors. The investment manager will typically not be based in Jersey and will therefore not be subject to taxation there. However, for managers of Expert Funds that are based in Jersey, a 0% rate of income tax for companies may be applicable. FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

31 L U X E M B O U R G SIF FCP SICAV Others Total (situation as for 30/04/10) Luxembourg Luxembourg Major Fund Legislation and circulars l Law dated 20 December 2002 (2002 Law) relating to undertakings for collective investment and amending the law of 12 February 1979 concerning the value added tax as amended; l Law dated 13 February 2007 (SIF Law) relating to Specialised Investment Funds; l CSSF Circular 02/80 relating to funds pursuing alternative investment strategies; l CSSF Circular 91/75 relating to undertakings for collective investment; l Grand-ducal regulation of 8 February 2008, concerning certain definitions of the law of 20 December 2002 relating to undertakings for collective investment (as amended). Number of funds Overall...3,521 funds By category Total FCP...1,913 Total SICAV:... 1,586 Total Others...22 Total...3, Law, Part I FCP...1,182 SICAV Others...0 Total... 1, Law, Part II FCP SICAV Others...7 Total Administered fund assets Total FCP ,392 SICAV...1,376,279 Others... 6,216 Total...2,012, Law, Part I FCP ,179 SICAV...1,142,759 Others...0 Total...1,611, Law, Part II FCP...82,719 SICAV...143,908 Others Total ,551 SIF FCP... 78,494 SICAV...89,612 Others...5,292 Total...173,398 (in bn EUR, situation as for 30/04/10) Regulator Commission for the Supervision of the Financial Sector (CSSF), 110 route d Arlon, L-2991 Luxembourg. Double Taxation Treaties With 57 countries (as at June 2010): Austria; Azerbaijan; Belgium; Brazil; Bulgaria; Canada; China (P.R.); Czech Republic; Denmark; Estonia; Finland; France; Georgia; Germany; Greece; Hong Kong; Hungary; Iceland; India; Indonesia; Ireland; Israel; Italy; Japan; Korea (Republic of); Latvia; Lithuania; Malaysia; Malta; Mauritius; Mexico; Moldavia; Mongolia; Morocco; Netherlands; Norway; Poland; Portugal; Romania; Russia; San Marino; Singapore; Slovakia; Slovenia; Spain; South Africa; Sweden; Switzerland; Thailand; Trinidad & Tobago; Tunisia; Turkey; United Arab Emirates; United Kingdom; United States of America; Uzbekistan; Vietnam. There are currently 17 new double taxation treaties under negotiation or awaiting for approval by the Luxembourg Parliament (i.e. Albania; Argentina; Armenia; Bahrain; Barbados; Cyprus; Kazakhstan; Kuwait; Kirghizstan; Lebanon; Macedonia; Pakistan; Qatar; Serbia and Montenegro; Syria; Ukraine; United Kingdom (new conventions under discussion)). Types of alternative fund vehicle Open-ended investment company l Investment company with variable capital (société d investissement à capital variable) (SICAV); l Investment company with fixed capital (société d investissement à capital fixe) (SICAF). Close-ended investment company l Close-ended SICAF; FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

32 L U X E M B O U R G Common Contractual Fund (similar to unit trust in UK law) l Common fund (fonds commun de placement) (FCP). Available types of corporate vehicle Under the 2002 Law SICAVs under the 2002 Law must be set up as public limited companies (S.A.s). Under the SIF Law SICAV / SICAF may be set up as a: l Public limited company (S.A.) l Partnership limited by shares (S.C.A.) l Private limited liability company (S.à.r.l.) l Co-operative organised as an S.A. EUR 2,500 for 1st line of quotation EUR 1,875 for 2nd line of quotation EUR 1,250 for 3rd line of quotation EUR 625 for 4th and following line of quotation Regulatory approval time (by the CSSF) Funds set up under the 2002 Law 4/8 weeks. Funds set up under the SIF Law No prior authorisation required. Audit requirement l Audit requirements governed by Article 113 of the 2002 Law and Circulars 02/77 and 02/80 l Luxembourg regulation requires that all Luxembourg Funds be audited at least annually by a Luxembourg auditor, approved by the CSSF (for certain funds semiannually) l The auditor must be a member of the Luxembourg Institute of Auditors (Institut des Réviseurs d entreprises IRE) Financial statement requirements 2002 Law l Audited annual financial statement (is to be published within 4 months of the financial year end, and be available 15 days prior to the annual general meeting of shareholders) l Unaudited semi-annual financial statement is to be published and sent to the CSSF within 2 months of the period end SIF Law l Audited annual financial statement (must be available to investors within 6 months of the end of the financial year) Regulatory fees CSSF fees Funds set up under the 2002 Law and under the SIF Law l EUR 2,650 for a single compartment fund l EUR 5,000 for a multiple compartment fund Overall cost of fund establishment Regulatory fee: Funds set up under the 2002 Law and under the SIF Law l EUR 2,650 for a single compartment fund l EUR 5,000 for a multiple compartment fund Luxembourg and EU-domiciled UCIs l Listing fee: EUR l Visa fee (for EU-domiciled funds other than in Luxembourg): EUR 1,250 l Maintenance fee EUR 1,875 for 1st line of quotation EUR 1,250 for 2nd line of quotation EUR 875 for 3rd line of quotation EUR 500 for the 4th and following lines of quotation Non EU-domiciled UCIs l Listing fee: EUR 2,500 l Visa fee: EUR 2,500 l Maintenance fee FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

33 L U X E M B O U R G Luxembourg By Rémi Chevalier and Olivier Sciales, Chevalier & Sciales Why Luxembourg? The Grand Duchy of Luxembourg became in a few decades one of the leading locations for investment funds, being today the world s second fund centre, overtaken only by the USA. Since 1959, when the first fund was established, the investment fund industry hugely expanded, counting 3,521 funds at the end of April This success originated with the authorities encouraging attitude to foreign capital and investment, and was considerably strengthened by its prime location in the heart of Europe close to the main markets targeted by investment funds by its highly qualified multilingual workforce, as well as by its political, economic and social stability. An appropriate tax regime and the enactment of a favourable and well-defined legislation resulted in Luxembourg consolidating in recent years its position as an international investment fund distribution hub, with around EUR 2 trillion (about US$ 2.4 trillion) in net assets at the end of April Legal and regulatory framework The ground breaking Law of 20th December 2002 shaped the Luxembourg investment fund market, differentiating between undertakings for collective investment in transferable securities (UCITS, Part I of the 2002 Law) and undertakings for collective investment (UCIs, Part II of the 2002 Law). Following the enactment in February 2007 of the Law relating to Specialised Investment Funds (the SIF Law ), the Luxembourg investment funds are now divided into three categories: l Undertakings for Collective Investment (UCIs, 640 in April 2010); l Undertakings for Collective Investment in Transferable Securities (UCITS, 1842 in April 2010); and l Specialised Investment Funds (SIFs, 1039 in April 2010). UCITS UCITS are designed for retail investors, and benefit from the European Passport, enabling them to be freely marketable throughout the EU countries with a minimum of formalities. Transferable securities are defined in Article 1 of the 2002 Law as either shares or other securities equivalent to shares, bonds and other forms of securitised debt, or any other negotiable securities which carry the right to acquire such transferable securities by subscription or exchange. In this context, four categories of funds are excluded from Part I of the 2002 Law: l Funds of the closed-ended type; l Funds which raise capital without promoting the sale of their units to the public within the European Union or any part of it; l Funds the units of which, under their constitutional documents, may be sold only to the public in countries which are not member of the European Union; and l Categories determined by the CSSF, for which the investment policy rules laid down in Chapter 5 of the 2002 Law are inappropriate in view of their investment and borrowing policies. UCIs In contrast, UCIs established under Part II of the 2002 Law may only market their units in other EU countries after complying with the specific conditions stipulated by the authorities in the country concerned. The criterion defining whether a UCI is subject to Part I or Part II of the 2002 Law is the planned investment objective, as Part I of the 2002 Law applies only to UCI the sole objective of which is the investment in transferable securities, whereas a UCI may invest in activities such, inter alia, alternative investments (i.e. Hedge Funds), venture capital, and real estate. SIFs The SIF Law replaces the legal framework previously applicable to institutional UCIs (the 1991 Law ) by providing for a separate statutory regime specifically designated for investment funds dedicated to sophisticated investors. The SIF is a lightly regulated and tax efficient fund which gives an on-shore alternative to consider (as compared to traditional off-shore jurisdictions such as the Cayman Islands or the BVI) when deciding on the jurisdiction for setting up a fund and the type of fund vehicle to use. Investment funds created under the SIF Law are subject to each country s distribution rules. Regulatory body The regulatory body is the Commission for the Supervision of the Financial Sector, the CSSF, which authorises and monitors all Luxembourg registered funds. Its annual regulatory fees will be, under the 2002 Law and the SIF Law, EUR 2,650 for a single compartment fund, and EUR 5,000 for a multiple compartment fund. Moreover, a single lump sum of EUR 2,650 applies for the examination of each authorisation request by an FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

34 L u x e m b o u r g investment fund; this fee amounts to EUR 5,000 in case of an investment fund with multiple compartments. Constitution of a fund / Legal structures available Investment funds may take the form of an open-ended legal entity (investment company with variable capital, SICAV, 1,586 in April 2010) a closed-ended legal entity (investment company with fixed capital, SICAF, 22 in April 2010), or of a common contractual fund which has a management company (FCP, 1,913 in April 2010). All those different entities may create sub-funds, each with a different investment policy. In this context, each compartment will be deemed to be a separate entity, which implies that the assets of a compartment are exclusively available to satisfy the rights of investors in relation to that compartment. A total of 2,149 entities have adopted an umbrella structure, which represents 11,146 sub-funds. When adding the 1,367 entities with a traditional structure to the previous figure, a total of 12,513 entities are active in the financial centre as at 30 April SICAV / SICAF A SICAV is a limited liability company whose capital is at any time equal to its net assets, and no formalities are required for increases and decreases in capital, whereas a SICAF is a limited liability company with fixed capital, open-ended only if the investors can buy and sell shares at their request and at a price equal to the net asset value per share. FCP In contrast, a FCP is a co-proprietorship whose joint owners are only liable up to the amount they have contributed. A key feature to be noted is that a FCP is deprived from a legal personality and must therefore be managed by a Luxembourg management company, whereas SICAVs can be managed by their Board of Directors. UCITS in the form of FCPs are managed by management companies under the conditions laid down in Chapter 13 of the 2002 Law, whereas Chapter 14 of the 2002 Law lays down the conditions under which management companies are ruling UCIs and SIFs. Choosing a legal structure The choice of whether to create a fund as a FCP or as an investment company is mainly based on tax considerations, as a FCP is tax transparent, this concept of transparency being guaranteed in the Luxembourg tax legislation. Marketing and operational considerations are also relevant in this vehicle as a FCP, being domiciled in Luxembourg, benefits from the high standard of service provided by managers, custodians, legal and tax professionals present in Luxembourg. In contrast, the two other forms, because of their flexibility, are more often reserved for funds investing in transferable securities or derivatives, and for funds where shareholders/unitholders need to purchase or redeem their shares/units freely. Interestingly, the cultural background of each country seems to influence the choice as whether to create a fund as a FCP or as an investment company, as the FCPs are traditionally widely used in Germany, especially compared to a country like France, where investors prefer to have recourse to SICAVs. Formation expenses The formation expenses will consist for all funds in a fixed capital duty amounting to EUR 75, notary fees, legal fees, a CSSF filing duty, fixed at EUR 2,650 for a single compartment UCI and EUR 5,000 for a multiple compartment UCI. The formation expenses may also comprise, if a listing to the Stock Exchange is contemplated, its admission fee, fixed at EUR 1,250. Minimum capitalisation The minimum capitalisation required under both Laws, namely EUR 1,250,000, must, in the case of a SIF, be reached within 12 months from the approval by the CSSF, in contrast with 6 months in the case of an investment fund set up under the 2002 Law. Regulatory control If it is subject to a continuous control by the CSSF, a fund set up under the SIF Law does not need its prior approval for being incorporated, while it is still a condition sine qua non for funds set up under the 2002 Law. If there is no more a requirement for a fund established under the SIF Law to have a promoter, the directors of the fund will still be subject to the CSSF approval. This implies that the directors must have good repute and justify of adequate experience. To comply with the setting-up requirements, investors will benefit from the financial facilities offered by the highprofiled Luxembourg economic environment, counting 149 banks registered as of 8 June 2010 which offer their services in this field. Investors eligibility Investment funds set up under the 2002 Law are available to public distribution. Hence, no restriction applies upon eligible investors, whereas the SIF Law introduces a qualified investor scheme. In this context, SIFs are reserved for well-informed investors who are able to understand and assess the risks associated with investments in such a fund, well-informed investor meaning either an institutional investor, a professional investor, or any other investor who has declared in writing that he is an informed investor and either invests a minimum of EUR 125,000 or has an appraisal from a bank, an investment FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

35 L u x e m b o u r g firm or a management company certifying that he has the appropriate expertise, experience and knowledge to adequately understand the investment in the fund. Investment restrictions Under the broad principle of risk spreading, all funds are subject to different rules restricting the scope of their investment policy. Those rules are quite restrictive towards UCITS, somewhat lighter concerning UCIs, and much lighter when it comes to SIFs. UCITS The 2002 Law provides for numerous restrictions upon investments by UCITS, restrictions which have been clarified in recent regulatory developments: l Circular CSSF 07/308 lays down rules for the implementation of a risk management framework, relating, inter alia, to the conduct to be adopted by UCITS with respect to the use of derivative financial instruments. Those rules, rendered necessary following the extension, in the 2002 Law, of the list of financial instruments in which UCITS may invest, precise that a UCITS must self-assess itself as either sophisticated or non-sophisticated. A sophisticated UCITS, being in the obligation of entrusting to a developed risk management unit, is able to make a significant use of derivative financial instruments. In contrast, nonsophisticated UCITS, with a much less developed risk management unit, can make use of derivative financial instruments only for hedging purposes. This Circular also specifies some valuation rules stating, inter alia, that overall risk exposure related to financial derivative instruments should not exceed the total net asset value, the net asset value being the total value of the fund s portfolio less its liabilities. Consequently, the UCITS overall risk exposure may not exceed 200% of the NAV on a permanent basis; l The Grand-ducal regulation of 8th February 2008 clarifies the notion of UCITS as provided in the 2002 Law, in light of the Commission Directive 2007/16/EC; and l The Circular CSSF 08/339 (as amended by Circular 08/380) displays the guidelines given by the CESR in relation to eligible assets for investment by UCITS, and in this context provides additional provide additional clarifications relating to eligible assets for investment by UCITS covered by Directive 85/611/ EEC, as amended. As a result, the range of financial instruments that a UCITS may invest in was expanded to include transferable securities and money market instruments, bank deposits, fund of funds, financial derivatives and, finally, index tracking funds. Non-UCITS Part II Funds If there are no restricted eligible assets for a UCI, its investment policy is subject to the CSSF approval, and specific rules are laid down in Circular IML 91/75 (as amended by Circular CSSF 05/177), whilst others are specifically applicable to UCIs pursuing alternative investment strategies. Those rules are laid down in Circular CSSF 02/80 which states, inter alia, that: l Aggregate commitment in terms of short selling may not exceed 50% of assets, and no more than 10% of the same type issued by the same issuer may be sold short; l Borrowings must not exceed 200% of the net assets; l Counterparty risk, defined as the difference between the value of assets given as guarantee and the amount borrowed, cannot represent more than 20% of the UCI s assets per lender. SIFs Specialised investment funds set up under the SIF Law are not required to comply with any detailed investment restrictions or leverage rules, the SIF Law merely stating that a SIF should apply the principle of risk diversification. This principle provides that the collective investment of funds must be made in assets in order to spread the investment risks. The CSSF clarified in its Circular 07/309 that: l A SIF may not invest more than 30% of its assets or commitments to subscribe securities of the same type issued by the same issuer; l Short sales may not result in the SIF holding a short position in securities of the same type issued by the same issuer representing more than 30% of its assets; l When using financial derivative instruments, the SIF must ensure, via appropriate diversification of the underlying assets, a similar level of risk-spreading. However, it should be noted that the CSSF may, upon appropriate justification, grant exemptions to these rules on a case-by-case basis. Reporting and audit requirements Prospectus Funds are also in the obligation to issue a prospectus containing information concerning the fund and its management company (presentation, economic and commercial information, etc.. The Law of 10th July 2005 on prospectus for securities specified that the obligation to publish a full prospectus shall not apply to undertakings for collective investment of the closedended type, meaning funds excluded from Part I of the 2002 Law. In this context such a fund is still in the obligation to publish a simplified prospectus. According to the 2002 Law, both the simplified and the full prospectus must include the information necessary for investors to make an informed judgment of the investment proposed to them, and especially of the risks attached thereto. The simplified prospectus is however somewhat more basic, FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

36 L u x e m b o u r g as it must be structured in such a way so as to be easily understood by the average investor. Issuing document In line with a somewhat lighter regulatory regime than UCIs governed by the 2002 Law, funds subject to the SIF law are only required to produce an issuing document, displaying, with no minimum content, the information necessary for investors to be able to make an informed judgment about the investment proposed to them. The issuing documents and any modifications thereto must be communicated to the CSSF. Financial statement A final obligation is to publish regularly a financial statement, which must describe adequately the General chart Prior approval of CSSF needed for incorporation UCITS III (Part I of the 2002 Law) Other UCIs (Part II of the 2002 Law) Yes Yes No Control by CSSF Yes Yes Yes European Passport Yes No No Eligible assets Transferable securities Bank deposits Money market instruments Fund of funds Financial derivatives Index tracking funds Unrestricted, but subject to CSSF approval SIF under SIF Law Unrestricted Eligible investors Unrestricted Unrestricted Well-informed investors Institutional investors Professional investors Investors who confirm in writing that they adhere to the status of wellinformed investors and either (i) invest a minimum of EUR 125,000 or (ii) benefit from an assessment made by a credit institution, an investment firm or a management company certifying their capacity to appraise the contemplated investment in the fund Need for a promoter Yes Yes No Investment restrictions Tax Treatment Issue and redemption of securities Disclosure of portfolio Provisions of the 2002 Law Provisions of the Circular CSSF 08/339, investment possible in: Transferable securities Deposits Money market instruments Liquid financial assets Other undertakings for collective investment No income tax Annual subscription tax of 0.05% of the NAV Fixed capital duty of EUR 75 No WHT on dividend distributions and interest payments For a SICAV or a FCP, requirement that the issue, redemption or repurchase price be based on NAV Circular IML 91/75 (as amended by Circular CSSF 05/177) UCIs pursuing alternative investment strategies (Circular CSSF 02/80), relating to short sales, borrowing and investment restrictions in UCIs No income tax Annual subscription tax of 0.05% of the NAV Fixed capital duty of EUR 75 No WHT on dividend distribution and interest payments For a SICAV or a FCP, requirement that the issue, redemption and repurchase price be based on NAV Yes Yes No Compliance with risk-diversification rules: SIF may not invest more than 30% of its assets or commitments to subscribe securities of the same type issued by the same investor Short sales may not result in the SIF holding a short position in securities of the same type issued by the same issuer representing more than 30% of its asset When using financial derivative instruments, the SIF must ensure, via appropriate diversification of the underlying assets, a similar level of risk-spreading No income tax Annual subscription tax of 0.01% of the NAV Fixed capital duty of EUR 75 No WHT on dividend distributions and interest payments No requirement that the issue, redemption or repurchase price be based on NAV Can issue shares at a pre-determined fixed price Can repurchase shares below NAV FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

37 L u x e m b o u r g financial situation of the fund. It must be audited by a Luxembourg authorised independent auditor, member of the Luxembourg Institute of Auditors (Institut des Réviseurs d Entreprises IRE), who is suitably qualified in terms of relevant experience. This auditor is in the obligation, if any information provided to investors does not truly describe the financial situation of the fund, to report promptly to the CSSF. The same obligation applies if the auditor becomes aware during the audit that any fact or decision is liable to constitute a material breach of the Law or regulations, or to affect the continuous functioning of the UCI. A difference to draw between the 2002 Law and the SIF Law is that the obligation to publish a financial statement is only annual in the case of a SIF, whereas an investment fund subject to the 2002 Law must publish such an audited financial statement annually and semi-annually. A confidentiality feature in the case of a SIF is also to be pointed out, as a SIF does not necessarily have to disclose details of the portfolio in addition to the information necessary for investors to make an informed judgment about the evolution of the activity of the fund, and there is no more a requirement to publish the net asset value per share, as it is the case for UCITS and UCIs. Taxation of funds A first point to make is that Luxembourg UCITS, UCIs and SIFs do not pay Luxembourg income and capital gain taxes, nor is a stamp duty on share issues or transfers to be paid. However, in addition to a fixed capital duty of EUR 75 to be paid upon incorporation, some funds are also subject to an annual subscription tax. Under the SIF Law this annual subscription tax has been fixed at 0.01% of net assets, compared to 0.05 % for funds under the 2002 Law. It is however only of 0.01% for UCIs whose exclusive policy is the investment in money market instruments or deposits with credit institution. Other funds, such as certain institutional cash funds and pension pooling funds, are exempted from this subscription tax, no matter under which Law they are set up under. It should be noted that investors may invest in a SIF by means of equity or debt, hence benefiting from an effective tax optimisation, and that there is no debtequity ratio to be respected in the case of a SIF. In order to avoid double taxation, Luxembourg has signed double taxation treaties with 57 countries, and 17 others are under negotiation or awaiting approval of the Luxembourg Parliament or the foreign country. The object of such agreements is to eliminate or reduce withholding taxes on foreign income or capital gains. However, it has to be emphasised that only 32 of these treaties are applicable to SICAVs, whether in the form of a UCITS, UCI or SIF. Luxembourg Stock Exchange Listing Both Luxembourg funds (UCITS, UCIs and SIFs) and foreign funds may be listed on the Luxembourg Stock Exchange (LSE). A few conditions have been imposed for a foreign fund to be listed on the LSE, mainly that the fund promoter must be of good repute, have adequate professional experience, and that the functions of investment manager, management company, custodian and transfer agent must be carried out by a separate entity. The Stock Exchange maintenance fee has been fixed at EUR 1,875 for the 1st line of quotation, EUR 1,250 for a 2nd one, EUR 875 for a 3rd one, and EUR 500 for the 4th and the following lines of quotation. A listing fee of EUR 1,250 also applies indecently of the number of line to be listed. Conclusion The Luxembourg investment fund industry, largely benefiting from its location in a strong financial centre, is now an internationally recognised label for investment funds. The greatest asset of Luxembourg is undoubtedly political voluntarism, demonstrated by a constant anticipation of the need of investors either in the transposing of European legislation or in the shaping of national legislation in order to create a stable, protective, and favourable environment according to the expected development of the market. This continuous pragmatism on the part of the Luxembourg authorities, exemplified by the way the CSSF dealt with the global financial turmoil, is invaluable when shepherding investors in days of global uncertainty. Lastly, the increasingly important issue of transparency is covered by national and European regulations and provides new investors with an especially protective framework, especially when compared to traditional off-shore jurisdictions. The European Commission has indeed recently proposed a Directive on Alternative Investment Fund Managers (AIFMs), which intends to introduce a harmonised regulatory framework for AIFMs within the EU and provides for a broadening of the disclosure requirements generally expected for such managers. Such text is still under discussion. Rémi Chevalier (founding partner) Tel: Mobile: [email protected] Olivier Sciales (founding partner) Tel: Mobile: [email protected] FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

38

39 M a lta Malta Valetta Fund legislation: Investment Services Act, (Cap. 370 Laws of Malta); Number of funds As at end March 2010 UCITS...45 Non-UCITS...60 Professional Investor Funds (PIFs)* (*including hedge funds) Domiciled and administered fund assets total: Net Asset Value of Locally Based CISs in March 2010: EUR7.3 billion. Regulator Malta Financial Services Authority (MFSA), Notabile Road, Attard BKR 3000, Malta, tel. (+356) ; . [email protected] Service providers Recognised Fund Administrators There are 15 firms in possession of recognised fund administrator certificate: l APEX Fund Services (Malta) Ltd l Calamatta Cuschieri Fund Services Limited l Custom House Global Fund Services l Folio-ITL Fund Services Limited l GlobalCapital Financial Management Limited 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) Ltd l TMF FundServices (Malta) Limited l Valletta Fund Management Limited l Valletta Fund Services Limited Custodians/Trustees of Collective Investment Schemes l HSBC Bank (Malta) plc l Bank of Valletta plc l Custom House Global Fund Services l Sparkasse Bank Malta plc l Mediterranean Bank plc Lawyers, Accountants and Auditors There are 55 law firms in Malta although only around 12 undertake fund-related work. There are around 40 accountancy and auditing firms listed by the Malta Institute of Accountants. These include the big four. Local Stock Exchange: Malta Stock Exchange, Garrison Chapel, Castille Place, Valletta VLT 1063, Malta: CEO: Mr Mark Guillaumier Local fund industry body: Malta Funds Industry Association (MFIA) c/o Level 6, The Mall Offices, The Mall, Floriana, VLT 16, Malta. Promotional bodies for funds/financial sector: Malta Funds Industry Association (MFIA) c/o Level 6, The Mall Offices, The Mall, Floriana, VLT 16, Malta, and FinanceMalta, Garrison Chapel, Castille Place, Valletta VLT 1063, Malta Double taxation treaties Malta has an extensive double taxation treaty network. The following are the agreements currently in force with the respective countries: Albania, Australia, Austria, Barbados, Belgium, Bulgaria, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Korea, Kuwait, Latvia, Lebanon, Libya, Lithuania, Luxembourg, Malaysia, Montenegro, Morocco, Netherlands, Norway, Pakistan, Poland, Portugal, Qatar, Romania, San Marino, Singapore, Slovakia, Slovenia, South Africa, Spain, Sweden, Switzerland 1, Syria, Tunisia, U.A.E., United Kingdom, United States of America 2. Tax information exchange agreements Tax information exchange provisions are included in the Double Tax Treaties. (See above) Memoranda of Understanding with other Regulators: The Malta Financial Services Authority (MFSA) has signed over 35 bilateral or multilateral Memoranda of Understanding or other agreements with other regulatory authorities. These MoUs cover regulatory co-operation and exchange of regulatory information in a number of sectors. A full list of these agreements may be found on (Memoranda of Understanding) Footnotes: 1. Agreement limited to profits derived from the operation of ships or aircraft in international traffic. Full agreement signed but not yet in force. 2. Agreement limited to profits derived from the operation of ships or aircraft in international traffic. Full agreement negotiated and in the process of being signed. FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

40 M a lta Types of fund vehicle l Open-ended investment company (SICAV) l Close-ended investment company (INVCO) l Unit Trust l Contractual fund l Limited Liability Partnership Available types of corporate vehicle: Segregated fund and portfolio structures are available under the Companies Act. Types of licences available: Collective Investment Scheme (single or divided into subfunds), authorised as: l a Professional Investor Fund of which there are 3 Categories: (i) Experienced Investor Fund, (ii) Qualifying Investor Fund, (iii) and Extraordinary Investor Fund l a Maltese UCITS 3 Scheme; l a Maltese Non-UCITS Scheme (retail); l an Overseas Non-UCITS Schemes (retail) Funds may be licensed both as self-managed funds or funds managed by a licensed third party manager. Audit requirement Yes Financial statement requirements Directors are required by law to prepare financial statements for each financial period in accordance with the IFRS (International Financial Reporting Standard) requirements. Regulatory fees Collective Investment Schemes (Maltese UCITS Schemes, Maltese Non-UCITS Schemes and Overseas Based Non-UCITS Schemes) Application Fee Annual Fee Scheme... E E2500 Up to fifteen sub-funds (per sub-fund)... E450...E400 Sixteen sub-funds and over (per sub-fund).e E150 European UCITS Schemes Application Fee Annual Fee Scheme... E E2500 Up to fifteen sub-funds (per sub-fund)... E450...E450 Sixteen sub-funds and over (per sub-fund).e E150 Professional Investor Funds Application Fee Annual Fee Preliminary indication of acceptability... E Nil Scheme... E E1500 Additional sub-funds (per sub-fund)... E E500 Regulatory approval time The MFSA is used to working within agreed timeframes and deadlines. These may vary according to circumstances such as the prompt submission of information and feedback required from the fund promoter and the nature and complexity of the funds and the verification process. However the following are indicative response times: Collective Investment Schemes (Retail UCITS/Non-UCITS): The MFSA will review the draft application form and the supporting documentation and will provide feedback within three weeks from submission of the application documents. Professional Investor Funds for Experienced or Qualifying Investors: The MFSA will review within seven business days from receipt of the application documents. Professional Investor Funds for Extraordinary Investors: The MFSA will review within three business days. Alternative Investment Funds Alternative investment funds, including hedge funds, may be licensed as Professional Investor Funds (PIFs) The Investment Services Rules for Professional Investor Funds classify these funds into three types, depending on the experience and sophistication of the end investor and the level of protection required. Investor restrictions Experienced Investor Funds:...Min investment E10,000 Qualifying Investor Funds:... Min investment E75,000 Extraordinary Investor Funds:... Min investment E750,000 The total amount invested may not fall below this threshold unless this is the result of a fall in the net asset value. In the case of an umbrella fund comprising of subfunds each of which is set up as a Professional Investor Fund, the minimum investment threshold may be applicable on a per scheme basis rather than on a per sub-fund basis. Investment Advisor The role of the investment advisor is that of providing financial advice to the scheme/fund or its Manager with regards to the investment and re-investment of the assets of the Scheme/Fund. The Investment Advisor will not have any discretion with respect to the investment and re-investment of the assets of the Scheme/Fund. Professional Investor Funds are generally not required to appoint a third party Investment Adviser. Fund Manager In the case of Professional Investor Funds, where a third party Manager is to be appointed and the proposed Manager is established in Malta, the Manager should be in possession of a Category 2 Investment Services Licence issued in terms of Article 6 of the Act and should be duly licensed and authorised by the MFSA to provide management services to collective investment schemes. The MFSA expects the Manager to exercise care and diligence in the selection of a Sub-Manager and to assume responsibility for the acts of the Sub-Manager The Minimum Own Funds Requirement for an Investment Management Company (Category 2 Licence Holder) is E125,000. Custodian/depository bank requirements An Experienced Investor PIF should appoint a third party Custodian responsible for the safe keeping of the assets of the PIF and for undertaking monitoring duties over the PIF s Manager. Qualifying Investor PIFs do not have this requirement. The Custodian may be: Footnote: 3. Undertakings for Collective Investment in Transferable Securities. FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

41 M A LTA l an entity holding a Category 4 licence under the Investment Services Licence issued under the Investment Services Act, 1994; l an entity authorised to provide such services in an EU/EEA Member State; or l an entity of sufficient standing and repute and having the experience and expertise deemed necessary to act as Custodian. The Minimum Initial Capital Requirement in the case of Custodians/Depositaries is E125,000. Director requirements Every public company is legally bound to have at least 2 directors whereas private companies must have at least 1 director. Prospectus/offering document A Professional Investor Fund promoted to Experienced or Qualifying Investors is required to draw up an Offering Document which should at least include the prescribed information. A Professional Investor Fund targeting Extraordinary Investors may either draw up an Offering Document or a Marketing Document which should at least include the minimum specified information. Fund ongoing regulation requirements Once licensed, the fund is subject to ongoing supervisory and general reporting requirements. Service provider conditions The Investment Services Act prescribes that any person wishing to carry out an investment service in Malta needs a licence in terms of the Act. Service Providers generally include, amongst others, a Manager, a Custodian, an Administrator and an Investment Adviser. A Professional Investor Fund may appoint any Service Provider as it may deem necessary although PIFs promoted to Experienced Investors are required to appoint a Custodian. Service Providers should be established and regulated in a Recognised Jurisdiction. Recognised Jurisdictions include EU and EEA Members, and signatories to a Multilateral MoU or Bilateral MoU with the MFSA covering the relevant sector of financial services. The MFSA may, in the following scenarios, also accept Service Providers which may not be established and regulated in a Recognised Jurisdiction: l where the Service Provider is the subsidiary of a firm that is regulated in a Recognised Jurisdiction, that retains control of its subsidiary and undertakes to provide all the necessary information to the MFSA; or l where the MFSA considers that the Service Provider is subject to regulation to an equal or comparable level in the jurisdiction concerned. In the latter case, it is recommended that prior to the submission of an Application for a PIF Licence, the promoters submit an application for preliminary indication of acceptability of a PIF as outlined below. The Authority expects all services providers to be fit and proper that is to be able to show high degrees of competence, integrity and solvency. Regulatory procedure Professional Investor Funds - Preliminary Indication of Acceptability The promoter of a Professional Investor Fund may apply for a preliminary indication of acceptability on the basis of the proposed structure of the PIF and service providers. In such case, the MFSA will review the proposed structure of the PIF and its prospective Service Providers and will inform the applicant whether the proposed structure of the PIF and its Service Providers are acceptable to the MFSA. This does not substitute the application for a PIF Licence. Applications for a Collective Investment Schemes Licence/ Professional Investor Fund Licence: When submitting an application for a licence under the Investment Services Act, the promoter should ensure that the appropriate Application Form is completed. Phase One Preparatory The MFSA recommends that the promoters meet up with the regulatory authority to describe their proposal. This meeting should take place prior to the actual submission of the application. After preliminary discussions, the promoters should submit a draft Application Form, together with the supporting documents specified in the Application Form itself. The fit and proper checks which entail following up the information which has been provided in the Application documents begin at this stage. The MFSA will consider the nature of the proposed Scheme/Fund and a decision will be made regarding which Standard Licence Conditions (SLCs) should apply. The licence conditions represent the ongoing requirements to which the Applicant will be subject, if and when licensed. Phase Two Pre-Licensing Once the review of the draft Application and supporting documents has been completed, the Authority will issue its in principle approval for the issue of a licence. At this stage, the Applicant will be required to finalise any outstanding matters. A licence will be issued as soon as all pre-licensing issues are resolved. Phase Three - Post-Licensing/Pre-Commencement of Business The Applicant may be required to satisfy a number of post-licensing matters prior to formal commencement of business. Leverage restrictions Qualifying Investor Funds and Extraordinary Investor Funds are not subject to any investment or borrowing (including leverage) restrictions other than those which may be specified in their Offering Document/Marketing Document. Professional Investor Funds promoted to Experienced Investors are not subject to any investment restrictions. Whilst borrowing on a temporary basis for liquidity purposes is permitted and not restricted, borrowing for investment purposes or leverage via the use of derivatives is restricted to 100% of NAV. Valuation rules Valuation rules are normally dealt with in the offering prospectus. FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

42 M a lta Tax Framework Malta has an internationally accepted and EU-recognized tax regime, with an extensive network of bilateral tax treaties 4. There are 55 of these treaties currently in force. These include all European Union Member States and many other countries in North Africa, the Middle East and Asia, as well as Canada and Australia. The Treaty with the US has been signed and is expected to come into force in the near future. Taxation of funds Collective Investment Schemes (fund vehicles) are exempt from tax on income and capital gains, so long as these are not investing in immovable property situated in Malta. 5 In the case of Value Added Tax, the activities of a CIS are considered exempt without credit for VAT purposes. Taxation of investment service providers Malta s tax imputation system is designed to eliminate the double taxation of corporate profit and dividend in the hands of shareholders. All companies incorporated in Malta (including investment management, custody services and fund administration companies) pay a 35% income tax on company profits. Upon distribution of dividends however shareholders are entitled to a refund of tax on the underlying profits. The amount of the tax refund to the shareholder is set at 6/7ths of the tax paid by the company on the underlying profit (5/7ths in the case of passive interest and royalties). Footnotes: 4. In April 2009, Malta was among the first group of countries placed on the OECD/G20 White List as one of the jurisdictions that have substantially implemented the international tax standard. Malta s agreement on tax co-operation with the OECD in fact predates the OECD blacklist published in June Certain Malta-based funds, with a value of assets situated in Malta which amounts to at least 85% of the value of the total assets of the fund, may be taxed on their investment income at the rate of 35%. Malta Based on information provided by the Malta Financial Services Authority Malta became a member of the European Union in 2004 and is one of the 15 members of the Eurozone. The official language is Maltese, although English is the most commonly used language in business, while Italian and other European languages are fluently spoken by a good part of the population. The financial sector has been able to restructure and internationalise itself successfully in recent years and has reached a high level of integration with the single market. Despite the financial crisis, the financial services sector grew by 22% (in terms of its contribution to GDP) in Maltese banks have remained strongly capitalised and stable throughout the crisis while the local deposit base also remained strong, shielding the banks from the liquidity pressures which they would most certainly have had to face if they had to rely on the international market. The fall in the international markets in 2008 had a negative impact on the investment portfolios of a number of financial institutions, however, most of this ground has now been recovered and to date the country is not facing any business model or profitability challenges as a result of the global financial crisis. The fund servicing infrastructure has continued to consolidate and expand over the past year. The country is now home to over 400 funds including over 300 alternative investment funds and a significant number of UCITS funds. Hedge funds licensed in Malta range from single manager funds to funds of hedge funds and include large, mid-sized and small cap funds, as well as single and multi-strategy funds. New fund applications and investment services licences have accelerated significantly at the beginning of Maltese investment firms are also subject to strict prudential supervision which is based on the Capital Requirements Directive. Investor confidence has remained solid and none of Malta s investment firms have, so far, been severely impacted by the global financial crisis and the global recession. Regulatory framework for funds Malta s regulatory framework is geared to ensure the highest standards of probity and transparency while allowing operators the freedom to compete and innovate. The industry is overseen by a single regulator, the Malta FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

43 M A LTA Financial Services Authority (MFSA), which was set up in 2002 to consolidate the work previously carried out by several agencies. The MFSA aims at combining high standard regulation with an efficient response to industry needs. The Investment Services Act provides the statutory framework for the licensing and supervision of investment services and collective investment schemes (CISs). The legislative framework is flexible enough to adapt to different business models within parameters set by Maltese and EU legislation. The MFSA s Rulebook distinguishes between Retail Collective Investment Schemes and Professional Investor Funds. l Retail Collective Investment Schemes include both UCITS and non-ucits Schemes. These types of schemes are subject to strict regulatory requirements, based on the UCITS Directive (including the incorporation of the new eligible assets regime) which is fully transposed into the Maltese regulatory framework. l Professional Investor Funds (PIFs) are governed by a customised version of the Rules and, by comparison to retail funds, benefit from a lighter form of regulation through the disapplication of certain provisions. The PIF framework is used by hedge funds and for other forms of alternative investment. As legal structures go, PIFs may be set up as openended and closed-ended investment companies, investment partnerships or unit trusts. Alternatively they may be formed through other non-corporate investment instruments. They may be stand alone funds or incorporate a number of segregated sub-funds or managed accounts. There are three separate categories of PIF, each having its own particular licence parameters depending on the level of sophistication of the end investor. The most commonly used type is the Qualifying Investor Fund (minimum investment E75,000). This type of fund has no investment or borrowing restrictions and may make unlimited use of leverage. Such funds need not appoint a custodian or prime broker provided adequate safekeeping arrangements are in place. The Extraordinary Investor Fund, in its turn, is typically suited for private equity investment. In this case, the minimum investment threshold is E750,000. In addition to the advantages enjoyed by qualifying investor funds, this type of PIF also benefits from customised disclosure requirements and even faster licensing turnaround times, particularly where the directors, service providers and founder shareholders originate from recognised jurisdictions. At the other end of the scale, Experienced Investor Funds (minimum investment per investor E10,000) and an element of investment diversification. They also require the appointment of a custodian and can use leverage only up to 100% of NAV. PIFs that do not appoint a third party manager may be set up as self-managed funds. In such case, the management of the assets will be the responsibility of the Board of Directors. The Board may in turn delegate certain functions to an in-house Investment Committee whose role is to monitor and review the investment policy, establish and review guidelines for investments and issue rules for stock selections, set up the portfolio structure and asset allocation and make recommendations to the Board of Directors. The dayto-day investment management of the PIF s assets may be delegated to a portfolio manager appointed by the Investment Committee. Self-managed PIFs must have a minimum capital of E125,000. The turnaround time for a Qualifying Investor Fund could be as little as 7 days, while that for Extraordinary Investor Fund would be 3 days. Redomiciliation provisions incorporated in the legislation also allow funds to re-domicile to and from Malta at the least possible cost while listing of funds on the Malta Stock Exchange is also an option. A fund may set up Special Purpose Vehicles (SPVs) in any jurisdiction that is not blacklisted by the FATF, provided this is in line with the fund s objectives and policies as disclosed in the offering document. The fund s directors must also retain control on the Board of Directors of the SPV. Service providers The regulatory framework for service providers is based primarily on the EU Markets in Financial Instruments Directive and the Capital Requirements Directive. Managers, Investment Advisers, Custodians and Prime Brokers establishing operations in Malta would need to apply for the appropriate licence under the Investment Services Act. On the other hand Fund Administrators intending to provide purely administrative services may apply to the MFSA for recognition certificate. Funds domiciled in Malta may also be serviced by administrators, managers or custodians authorised in other EEA or recognised jurisdictions. Credit institutions, constituted and licensed in Malta, or exercising the freedom of establishment rights under EU legislation, as well as branches or subsidiaries of overseas credit institutions that are subject to prudential requirements equivalent to those applicable to Maltese credit institutions, are among the institutions that are eligible for a custody licence under the Investment Services Act. FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

44 M a lta Redomiciliation of offshore funds to Malta In January this year, the Malta Financial Services Authority (MFSA) published a set of guidelines regarding the redomiciliation of offshore funds to Malta under the Companies Act, Continuation of Companies Regulations, The Guidelines provide a simple, one-stop procedure to be followed by funds intending to redomicile to Malta. The Guidelines specify the documentation required from fund promoters and outline the way the process is handled by the Authorisation Unit and the Registry of Companies at the MFSA. They are available for downloading from the MFSA s website ( mt) under the heading Securities/Guide to Regulation. Companies including insurance and fund services firms have been using Malta s redomiciliation legislation since it came into force in 2002 largely because the process is seamless and allows the companies to retain the same legal personality. The need for the publication of guidelines for funds arose due to an increase in the number of managers enquiring about the redomiciliation procedures in recent months as the Malta funds regime allows funds to have external administrators and custodians in contrast to other jurisdictions which require the service providers to be present in the domicile. This flexibility makes Malta the most effective and efficient EU jurisdiction when redomiciliation is being considered. Business environment Malta is well positioned to continue making headway in financial services. As a domicile it is widely respected and provides a highly attractive business environment. Legal and accounting expertise is fully developed, underpinned by the presence of the major accountancy firms and traditionally strong links with City law firms. Advantages include a quality human resource; an internationally accepted tax regime with an extensive network of bilateral treaties; a unique legal system that combines the continental civil law system with Anglo Saxon commercial law principles; an excellent IT and communications infrastructure, and good air links with other financial centres and surrounding markets. In a country whose professional resources are already well-supported by a deep pool of multilingual administrative staff, the funds industry is investing heavily in training at the specialised end. As a result Malta is fast becoming a serious alternative for fund promoters. It is moreover an established onshore jurisdiction forming an integral part of the EU single market in financial services. Strongly biased in favour of quality rather than quantity, Malta is approaching critical mass as a fund domicile and this is drawing more managers and administrators to establish operations. The advent of the single management passport in the EU, the structural shift that is taking place in the financial services landscape and increased specialisation on the local scene are all factors that will influence Malta s development going forward. As a result, fund services in particular custody and management services are set to become stronger in the not too distant future. International benchmarking l The World Economic Forum s Competitiveness Index has ranked Malta 13th (out of 134 countries) for financial market sophistication. The Report also ranks the soundness of the Maltese banking system in 13th place and the regulation of securities exchanges 15th. l The Internal Market Scoreboard, published by the European Commission in January 2009, placed Malta (along with Denmark) in joint first position in the implementation of internal market directives - further evidence of the sound internal structures that are in place and confirmation of Malta s status as one of them most integrated economies in the EU. l A European Commission Report on Trade and Foreign Investment Indicators published on 19 January 2009, places Malta among the top five EU performers with respect to foreign direct investment inflows as a percentage of GDP. l Malta was among the countries placed on the original OECD White List published following the G20 meeting in April 2009, recognition of its track record as a tax efficient but serious jurisdiction and its long term commitment to international tax standards. FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul