Alternative Investment Funds

The primary piece of legislation governing all types of investment funds in Guernsey is the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (POI Law) and the rules and regulations created thereunder by the Guernsey Financial Services Commission (GFSC).

Guernsey has specific rules and regulations governing separate types of collective investment schemes established in Guernsey. These are as follows (in order of highest level of regulatory oversight to lowest):

• ‘Class A’ retail schemes are governed by the Collective Investment Schemes (Class A) Rules 2008;
• ‘Class B’ professional investor/institutional schemes are governed by the Collective Investment Schemes (Class B) Rules 2013;
• ‘Class Q’ qualifying investor schemes are governed by the Collective Investment Schemes (Qualifying Professional Investor Funds) (Class Q) Rules 1998; and
• ‘registered’ funds are those funds registered under either the Registered Collective Closed Investment Scheme Rules 2018 or the Private Investment Fund Rules 2016.

The law and relevant rules and regulations governing Guernsey funds apply only in Guernsey. However, they apply to funds operating in or from within Guernsey, and thus capture both Guernsey entities undertaking fund activity elsewhere and non-Guernsey entities operating in Guernsey.

A separate regime governs the provision of restricted activities (eg, investment management) to ‘non-Guernsey’ schemes under the Licensees (Conduct of Business and notification) (Non-Guernsey Schemes) Rules, 1994.

The GFSC has signed bilateral cooperation agreements with 27 securities regulators from the European Union and the wider European Economic Area, including the United Kingdom, France and Germany, to allow Guernsey funds to be marketed in those jurisdictions by way of their respective national private placement regimes.

The GFSC also entered into a memorandum of understanding with the UK Financial Conduct Authority in March 2019 to give further certainty to Guernsey fund managers in light of Brexit.

The GFSC is the main supervisory body for collective investment schemes in Guernsey. The GFSC was created under the Financial Services Commission (Bailiwick of Guernsey) Law, 1987 and most of its powers as they relate to the regulation of funds and fund managers were created under the POI Law. Under the POI Law, the GFSC has the power to create rules and regulations governing fund structures, and to supervise and oversee their implementation. The GFSC has the power to obtain information, investigate, revoke prior authorisations and levy fines in respect of collective investment schemes.

The GFSC undertakes international cooperation though membership of, or association with, international organisations such as:

• the International Organisation of Securities Commissions;
• the International Association of Insurance Supervisors;
• the Organisation for Economic Co-operation and Development (through the United Kingdom’s membership); and
• the Council of Europe’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism.

The GFSC also works with the Basel Committee on Banking Supervision and the Financial Action Task Force on money laundering.

Private equity, venture capital, debt and real estate (as well as open-ended hedge funds) are the main asset classes popular in Guernsey funds; however, Guernsey is also home to a wide range of esoteric investment funds investing in many different asset classes. ‘Green’ investments of all kinds are a particular strategic focus of the jurisdiction at present, following the introduction of the globally unique ‘Guernsey Green Fund’ certification.

Investment funds in Guernsey are typically structured as either companies or limited partnerships. It is possible to structure funds as unit trusts, but this has become relatively rare in recent years. Limited partnerships tend to be favoured in the private equity space and companies for real estate, debt and hedge funds. Under the ‘company’ sub-heading, it is possible to create – in addition to a ‘standard’ company limited by shares – a protected cell company (PCC) or an incorporated cell company (ICC), discussed further in question 2.3.

Advantages: The advantages of these different structures are as follows:

• Limited partnership: Much like the structures of the same or similar name in other jurisdictions, a limited partnership can provide investors with the ability to provide undrawn commitments, delivering funds only when they are actually needed for deployment. They are also tax transparent.
• Company: Shareholder liability is limited to the paid-up share capital.
• PCC: PCCs can create and maintain segregated ‘cells’, in which assets and liabilities can be held separate from assets and liabilities of other cells. These are by far the most popular company structure, particularly due to their ability to easily create and launch new sub-funds through such cells.
• ICC: This is similar to a protected cell company, save that each cell is ‘incorporated’ and therefore has separate legal identity. This can be useful for setting up investment platforms where this clear distinction of legal personality may be important.

Disadvantages: The disadvantages are as follows:

• Limited partnership: The liability of limited partners is to ‘uncalled commitments’ – that is, what has been committed to be invested. It is also possible for a limited partner to ‘lose’ its limited liability by committing certain acts. Additionally, the limited partnership is not a separate legal entity in its own right – all acts are undertaken by the general partner.
• Company –
• PCC: While this is a popular and well-regarded structure, some jurisdictions have not yet formally recognised the legal segregation of assets and liabilities provided by a PCC. Most jurisdictions which do recognise the PCC have not had the concept tested in their courts, so there is little jurisprudence on the matter. While legal risk is considered minimal, this can make investors unfamiliar with the concept wary.
• ICC: As each incorporated cell is a separate legal entity, they can be quite expensive to maintain – each incorporated cell must have a board (though it must match the ICC’s board), will likely be administered separately and must make annual returns to the Guernsey Registry separate from the ICC and its fellow incorporated cells.

The PCC and limited partnership are probably the most popular structures for Guernsey funds – the limited partnership for its structure, which is so familiar to private equity managers; and the PCC for its flexibility and ability to launch new sub-funds quickly and with relatively little cost.

Limited partnerships are favoured by private equity and venture capital funds and PCCs by some real estate and hedge fund sectors.

All Guernsey alternative investment funds must have a Guernsey-based administrator. However, Guernsey administrators are permitted to delegate certain functions to providers outside of Guernsey, provided that this is appropriately disclosed.

Open-ended funds governed by the Protection of Investors (Bailiwick of Guernsey) Law (POI Law) and the relevant rules (save for private investment funds (PIFs)) must generally have a Guernsey-based custodian, unless the fund receives a specific derogation from this requirement from the Guernsey Financial Services Commission (GFSC). These derogations are provided only in exceptional circumstances and where the GFSC can be satisfied that the Guernsey fund’s assets are appropriately custodised notwithstanding no Guernsey custodian being appointed.

Closed-ended funds and PIFs are not required to appoint a custodian, though for PIFs the fund must appoint a ‘designated custodian’ for the purposes of compliance with the POI Law. Such a designated custodian may be the administrator.

Limited partnerships cannot currently migrate into or out of Guernsey.

All types of company may, if permitted by the laws of the jurisdiction they are migrating from, permitted to migrate to Guernsey. Where the company is regulated (eg, an investment fund), it will need to involve the GFSC as part of the redomiciliation process. The investment application to the GFSC will be treated as if the company migrating to the jurisdiction is a newly incorporated entity, though evidence of its existing regulatory authorisation in the jurisdiction it is exiting will assist with the authorisation process.

There are two main types of regulatory regime in Guernsey for funds: the authorised fund regime and the registered fund regime.

The authorised fund regime requires a more fulsome application process, with significant involvement of the Guernsey Financial Services Commission (GFSC), which will review and approve all aspects of the structure.

The registered fund regime requires an application to the GFSC, but it is accompanied by a confirmation from the appointed administrator as to certain matters concerning the applicant fund, which reduces the scope of the GFSC’s review and also speeds up the application process.

Depending on the type of fund authorisation or registration being applied for, the relevant criteria are set out within the relevant rules.

A Guernsey fund will need to apply for ‘authorised’ status unless it falls within one of the criteria of a ‘registered’ fund. Of the two main classes of authorised fund, it will be ‘Class A’ if it is intended to be marketed to ‘retail’ investors and ‘Class B’ if it is more geared towards institutional and professional investors.

To qualify as a registered fund under the Registered Collective Investment Scheme Rules 2018, the proposed administrator of the fund must provide certain warranties about the fund and its principals to the GFSC, so the fund must have a good relationship with its administrator and will likely have had to go through a lengthy and fairly involved know-your-customer process with it, to get the administrator comfortable with such warranties.

Under the Private Investment Fund Rules 2016, to qualify for registration as this type of fund:

• the fund must have 50 or fewer investors;
• the fund must have 30 or fewer changes in investors in a calendar year; and
• the manager of the fund must be prepared to affirm to the GFSC that it is sufficiently knowledgeable of each investor so as to confirm that it is able to sustain a loss of its investment.

Authorised funds, whether open or closed ended, generally take four to six weeks to be authorised from submission to the GFSC. The authorised fund application process is generally a three-stage process: outline, interim and final. The outline stage requires disclosure of the key elements of the fund – strategy, board, manager, leverage and service providers. The interim stage requires submission of the information particulars and investor documents of the fund for review. The final stage requires submission of executed agreements, constitutional documents and service provider agreements (having addressed any questions or comments raised by the GFSC during the application process).

Registered funds, from submission to the GFSC to registration, have a guideline timescale of three working days. The application is made in one pack, with the information documents and administrator undertaking going in at the same time. Private investor funds register in the same way, but with a guideline timescale of one working day for registration.

Generally, managers and advisers are structured as limited companies.

The advantage of a corporate manager/adviser is the limited liability afforded to the shareholders of the relevant manager/adviser.

To conduct ‘controlled investment business’ in or from within Guernsey, alternative investment fund (AIF) managers must be licensed by the Guernsey Financial Services Commission (GFSC) under the Protection of Investors (Bailiwick of Guernsey) Law (POI Law). ‘Controlled investment business’ encompasses the relevant activities of managing, advising and promoting investments.

Any company carrying out a ‘restricted activity’ in respect of a ‘controlled investment’ requires a licence from the GFSC. For any controlled investment business – whether a fund or other – the vehicle must apply for a licence, submitting a detailed application form, three-year business plan, accounts and proof of track record, either of a sister company within its group or of the principals looking to set up the manager.

Where the fund is a private investment fund (PIF), a licence is issued to a manager vehicle upon the fund’s authorisation. However, such licence permits the manager to manage only the PIF; it may not conduct any restricted activities in connection with any controlled investment business other than that particular fund.

The process to obtain a licence generally takes six to eight weeks.

Under the Licensees (Capital Adequacy) Rules 2010, all licensees of this type (other than PIF managers) must maintain capital of at least £10,000, as well as appropriate insurance.

The manager of a Guernsey AIF can generally involve itself in the running of a fund to a significant degree. However, its activities are always subject to the overall oversight and control of the fund’s board.

There are no specific requirements regarding who may or may not own an AIF manager in Guernsey. However, the owners of an AIF manager must be disclosed as part of the licence application process, including the percentage holding they have. Where any shareholder of the AIF manager is classed under the POI Law as a ‘shareholder controller’ (ie, it holds 15% or more), any change in this ownership must be notified to the GFSC.

AIF managers are permitted to appoint investment advisers, which may be separate legal entities from the AIF manager. This appointment must be on the basis that the AIF manager remains responsible to the fund for the actions of the delegate.

Any fully licensed manager may conduct the restricted activities in respect of controlled investments for which it has sought authorisation. So an AIF manager that has applied for a licence to provide investment management services to a fund may provide such services to another fund.

The promotion, or marketing, of ‘controlled investments’ (as defined in the Protection of Investors (Bailiwick of Guernsey) Law (POI Law)) is a restricted activity.

Collective investment schemes fall within the definition of ‘controlled investments’ under the POI Law.

The definition of ‘promotion’ in the POI Law includes:

• advertising;
• issuing a prospectus, application form or proposal form; and
• circulating or making available promotional material.

Carrying out a restricted activity (promotion) in respect of a controlled investment (collective investment scheme) ordinarily requires a licence if carried on in or from within Guernsey, unless one of the statutory exemptions applies.

Obtaining a licence for controlled investment business is covered in question 4.

Obtaining a licence for controlled investment business is covered in question 4.

As Guernsey is a designated third country under the EU Alternative Investment Fund Manager Directive, it is unable to avail itself of the passporting regime. Therefore, Guernsey funds looking to market into countries outside of the United Kingdom (where they may freely market themselves) must look at the relevant national private placement regime (NPPR) in the country or territory into which they are looking to market, as to whom such funds can be marketed is generally determined by the rules and restrictions of the relevant NPPR of the country concerned.

Content criteria are set out in the rules of the various authorised funds. Registered funds may be subject to the Prospectus Rules 2018.

Circulation of marketing materials is ‘promotion’ and hence is subject to obtaining a licence for controlled investment business as covered in question 4.

Where restricted activities are conducted by a firm without a base in the Bailiwick of Guernsey at the initiation of the client (ie, on a reverse solicitation basis), a licence is not required.

Additionally, a firm with its main place of business in a country or territory that has been designated for the purposes of Section 29(1)(c) of the POI Law (the United Kingdom is so designated) which promotes collective investment schemes to the public in the Bailiwick of Guernsey does not require a licence, provided that the following requirements are met:

• The firm does not have a permanent place of business within the Bailiwick of Guernsey;
• The firm is an entity established in a country or territory designated for the purposes of Section 29(1)(c) of the POI Law and has provided evidence that it is recognised as a national of that designated country or territory;
• The collective investment scheme falls within the categories specified in the Designated Countries & Territories Regulations that make designations in respect of Section 29(1)(c);
• The promotion is carried out in accordance with the laws of that designated country or territory;
• Prior notice is given to the Guernsey Financial Services Commission (GFSC) by completion of a ‘Form EX’ and submission of the requisite documentation (and payment of a notification fee); and
• The GFSC has issued confirmation of the exemption.

The promotion of collective investment schemes to regulated entities in the Bailiwick of Guernsey will be exempt from licence requirements if:

• the firm does not have a permanent place of business within the Bailiwick of Guernsey;
• the firm is an entity established in a country or territory listed in the first column of the Schedule to the Investor Protection (Designated Countries and Territories) (Bailiwick of Guernsey) Regulations 2017 (the United Kingdom is so designated);
• the promotion is carried out in accordance with the laws of that designated country or territory;
• the promotion is carried out to regulated entities which are persons licensed to carry on business under any of the following laws:
• • the POI Law;
  • the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law 2000;
  • the Banking Supervision (Bailiwick of Guernsey) Law 1994;
  • the Insurance Business (Bailiwick of Guernsey) Law 2002; or
  • the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law2002; and
• written notice of the date from which the firm intends to carry out the promotional activity is given to the GFSC by completion of a short notification form on the GFSC’s website, which must include:
• • the name of the entity;
  • its principal place of business;
  • a contact email;
  • the name of the supervisory authority; and
  • the date of intention to start promotion.

This is not required (if the promoter has another means of permitted marketing as set out in this section); however, an overseas promoter does not require a POI licence if it engages the services of a person or entity that is licensed to carry on promotion in Guernsey (a ‘POI licensee’) and the POI licensee carries out the promotion in Guernsey on the overseas promoter’s behalf, provided that the overseas promoter enters into the service contract with the POI licensee outside of Guernsey.

With the appropriate licence, yes, it is possible to market to retail investors in Guernsey.

Guernsey funds authorised or registered under any regime other than the ‘Class A’ Rules may institute their own investment and borrowing strategies and restrictions.

Class A funds are governed by a regime similar to undertakings for collective investment in transferable securities (UCITs) and the borrowing and investment restrictions must comply with the UCITs Directive.

There are no specific requirements beyond those set out in Guernsey’s anti-money laundering/countering financing of terrorism regime which reflect international standards. For funds in the ‘green’ space, the Green Fund certification requires that assets meet the Green Fund criteria set out in the rules to get certification.

The amount of information made public on Jersey funds is limited. Companies incorporated in Guernsey will appear on the Guernsey Register, which is searchable online. The company’s constitutional documents are made available for public inspection, including the memorandum and articles on payment of a fee. Special resolutions passed by the company must also be filed and will be made available for inspection, as will the company’s annual return, which shows a company’s legal (but not beneficial) owners. As well as corporate funds, a general partner of a limited partnership and a trustee of a unit trust will also generally be formed as a limited company.

A search of the Guernsey Register will also show any limited partnerships established in Guernsey. There is no need for the Limited Partnership Agreement to be filed and no requirement to file a return detailing who the partners in the limited partnership are.

The name and address of Guernsey funds and Guernsey regulated service providers are also shown on the website of the Guernsey Financial Services Commission (GFSC) (whether formed as a company, limited partnership or otherwise).

Reporting requirements are set out for each fund category in the relevant funds rules.

Governance requirements are set out in the GFSC’s Code of Corporate Governance. To the extent that a fund meets the Association of Investment Companies’ Code of Corporate Governance, it does not need to separately follow the code.

Fund managers, administrators and custodians each play a role (as applicable) in ensuring that risks are managed. Many of these roles or functions are set out under the relevant rules. For example, a custodian of a Class B fund must monitor the compliance of the fund and the manager in relation to the requirements of the rules and compliance with the fund’s prospectus.

Guernsey companies are taxed at 0%. Guernsey limited partnerships and unit trusts are tax transparent.

Guernsey companies are taxed at 0%. Guernsey limited partnerships and unit trusts are tax transparent.

Guernsey resident investors have the standard income tax rate of 20% applied to dividends received from Guernsey funds. Investors who are not Guernsey resident fall outside of Guernsey’s tax regime.

The US Foreign Account Tax Compliance Act and the Common Reporting Standard are two international standards of reporting which have been adopted by all of the Crown Dependencies, including Guernsey.

Given the simplicity of the Guernsey tax regime (companies taxed at 0% and limited partnerships/unit trusts being tax transparent), there is no need for complex tax strategies to be adopted with regard to Guernsey tax.

The funds landscape is slowly but surely shifting. The focus of the last 20 years on UK and European managers and investments has been successful, but the weight of international capital flows has led to marketing efforts further afield – including Asia, the Americas, the Middle East and Africa. Each of these markets presents its own opportunities and challenges, and the fund offering will evolve to match these needs. For example, for the Asian market, a further streamlining of the applications process may be required; whereas for the African market, a focus on daily traded long-only and hedge funds would seem a useful focus.

In the shorter term, the focus on substance will require some funds to strengthen their on-island offering – a challenge that the island is well placed to service.

Guernsey has recently introduced the Green Fund. Any investment fund established and regulated in Guernsey can seek designation as a Guernsey Green Fund. To do so, a fund must ensure that its principal documents comply with the Guernsey Green Fund Rules and that its portfolio meets the ‘green criteria’ set out in the Guernsey Green Fund Rules. Having done so and obtained certification, the fund will then be entitled to use the Guernsey Green Fund brand and logo.

There is an emerging interest in expanding the Guernsey Green Fund concept set out above into a broader ‘impact’ fund structure, not just focusing on green assets, but investing with broader economic, social and governance objectives in mind.

• Have certainty on the structure that works for you before committing time and resources to setting it up. Tax advice in this regard is crucial.
• Know the key geographical markets for your fund. Knowing where you wish to market (and knowing the potential pitfalls of marketing in those jurisdictions under the relevant national private placement regimes) beforehand is critical.
• Engage with a local administrator (and, where appropriate, custodian) as early in the process as possible. They will be undertaking many of the day-to-day tasks of the fund following its launch. Getting their early input helps to smooth the authorisation process.