AIFM Directive
Certified Funds Prospectuses Order
FATCA
Managed accounts
Review of Financial Advice
The EU Alternative Investment Fund Managers (AIFM) Directive has now been in force for over two months and funds and their advisers are coming to terms with the new regime in Jersey. Some interesting themes that have been noted in this quarter are as follows:
- The new alternative investment fund codes contain provisions regarding the disclosure of side letters. This represents a departure from market practice in certain sectors (eg, hedge funds). The Jersey Financial Services Commission (JFSC) has confirmed that it intends to issue formal guidance on the disclosure of investor side letter terms in due course. This should bring some welcome clarity for advisers.
- The JFSC has issued a consultation paper recommending that the pro forma reporting template set out in the Level 2 regulations pursuant to the directive be used for the purposes of preparing reports to the JFSC required under the directive. The European Securities and Markets Authority has recently published the final guidelines on the reporting obligations for EU AIFMs, which may be of assistance for Jersey AIFMs when considering their reporting obligations to the JFSC.
- The Jersey orders and regulations incorporate transitional provisions for implementation of the directive. Essentially, if a fund manager can avail of the transitional arrangements in its target markets in the European Union, that manager and any Jersey funds that it manages are exempt from the need to make any filings to the JFSC or to comply with any of the alternative investment fund orders or regulations.
Regulatory applications
A number of fund managers continue to utilise the transitional arrangements in EU member states. These arrangements have the effect of delaying the requirement to make any filings in connection with marketing in the European Union. These arrangements will terminate in July 2014 and fund managers must give some consideration to any necessary filings in Jersey and in their funds' target markets in the European Union.
Any Jersey funds managed by an EU AIFM (which may be the case with a number of listed funds that have appointed UK managers) should be aware that the UK Financial Conduct Authority has issued a request for applications to be an AIFM to be made by January 2014. This date reflects a deadline under the directive of July 2014 (after transition) and builds in a three-month review period, plus an additional potential three-month extension. It is therefore regarded by some industry commentators as a conservative deadline.
The JFSC has not yet issued any statements or guidance in relation to processing applications for business relating to alternative investment fund services, but it is possible that there will be a rush of applications in the period up to July 2014. Therefore, it is advisable to consider now any necessary filings (and related prospectus updates) to ensure continued access to EU markets from July 2014.
Changes to fund agreements
Now that the initial work on the identification of AIFMs has been undertaken, fund managers may wish to consider amendments to fund documents to incorporate the following features:
- Management agreements and administration agreements appointing managers of managed entities should clearly identify the AIFM and should contain a detailed list of services, in particular relating to risk management and portfolio management.
- Administrators should consider amending their administration agreements to identify and, where appropriate, exclude responsibility for acting as depositary.
Certified Funds Prospectuses Order
The transitional period for the Certified Funds Prospectuses Order (which came into force on November 18 2012) is due to expire in November 2013. Any fund that is currently marketing such funds, but availing of the transitional period, must update its offer document to ensure compliance with the order before then.
The US Foreign Account Tax Compliance Act (FATCA) creates a new tax information reporting and withholding regime for payments made to certain foreign financial institutions and other 'foreign' persons. The definition of 'foreign financial institution' is very broad and includes funds. Failure to report could result in a 30% withholding tax being deducted from US source income and payments.
The implementation of FATCA is phased, with the first changes now due to take effect from July 1 2014, with certain withholding requirements also taking effect from July 1 2014.
Jersey is now in the process of negotiating an intergovernmental agreement with the United States, which will ensure that foreign financial institutions will:
- not be required to enter into a foreign financial institution agreement, but instead will be directed by local legislation to comply with FATCA;
- have reduced or no withholding tax and withholding obligations; and
- report on relevant accounts to their national tax authority, not direct to the US Internal Revenue Service.
Furthermore, the newly introduced Taxation (Implementation) (Disclosure Facility) (Jersey) Regulations 2013 provide that Jersey fund administrators and Jersey funds must make any clients that were resident in the United Kingdom for tax purposes between April 6 1999 and December 31 2013 aware of the availability of the disclosure facility with Her Majesty's Revenue and Customs by December 31 2013. To ensure that this deadline is met, fund managers and administrators may wish to consider incorporating a notice in investor mailings sent this quarter advising investors that the disclosure facility is now available.
The consultation process in relation to the regulatory treatment of managed accounts has continued, with the JFSC issuing feedback papers in August and October 2013.
The aim of the consultation was to simplify the regime by creating a new category of fund services business (that of managing a managed account) and exempting such managers from the requirement to be regulated for investment business.
The JFSC has responded to industry concerns regarding the minimum account size of $5 million for managed accounts and agreed to reduce this to $1 million, which is consistent with the minimum subscription amount for investors in eligible investor unregulated funds. In addition, the JFSC has agreed to extend the definition of the 'owner' of managed accounts to include individuals, family offices and institutional investors.
Although this progress is good news for potential managers, a number of areas of uncertainty remain, including:
- the extent to which a manager of a managed account would need to be a standalone entity, with reliance on arrangements with managers of managed entities being permitted for only 24 months (although this has been increased from the 12-month limit contemplated in the original consultation paper); and
- the requirement for a manager of a managed account to comply in full with the Codes of Practice for Fund Services Businesses (rather than just the principles thereof).
The JFSC has now published a paper setting out its final position on its Review of Financial Advice (the Jersey equivalent of the UK Retail Distribution Review). The paper confirms that only persons registered to undertake Class C and D investment business will be affected by the review.
The review will distinguish between professional clients and non-professional clients (or retail clients). The principal changes, which will apply from January 1 2014, are that:
- advisers will be required to hold an appropriate qualification at Qualifications and Credit Framework Level 4 or above in order to be able to give financial advice in or from within Jersey to retail clients. Advisers to professional clients must be "appropriately qualified"; and
- remuneration by way of commission will not be permitted in respect of advice given to retail clients resident in Jersey.
As fund service business providers are exempt from the requirement to register for investment business, the introduction of the review is not expected to have a significant impact on Jersey's funds industry.
However, the introduction of the review will result in certain changes to the Investment Business Codes of Practice. The proposed amendments are set out in a consultation paper issued by the JFSC. The principal changes of note include:
- differentiating between professional clients and retail clients and requiring registered persons to develop policies, procedures and controls to assist in client classification;
- establishing minimum professional qualification standards for investment employees; and
- restricting the circumstances under which a registered person may be remunerated by way of commission.
For further information on this topic please contact Niamh Lalor at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email ([email protected]). The Ogier website can be accessed at www.ogier.com.
