Originally published in Legal Week, March 2008.
It is a little over a year since Guernsey introduced its fast track approval process for closed ended funds - the registered fund. It has already been a remarkable success. At the end of February 2008, 89 registered closed-ended investment funds had received consent under the new regime.
The idea behind the new regime was simple - a guaranteed three day approval process for closed ended funds. Such a short timescale was achieved by relieving the Guernsey Financial Services Commission (the Commission) of responsibility for checking the credentials of new promoters and reviewing fund documentation generally. Instead, the fund administrator must conduct all the checks previously conducted by the Commission and then provide warranties to the Commission that they have done so. Where the warranties provided subsequently prove to be inadequate, the Commission will pursue the matter with the administrator and should not affect the approval granted to that fund. There is no restriction on the categories of investors in a fund utilising the registered fund approval process. However, the registered fund must appoint a local Guernsey licensed fund administrator and interests in a registered fund cannot be offered directly to members of the public in Guernsey.
At present the registered fund process is only available to closed ended funds but the process will be extended to open ended funds later this year.
An entity conducting regulated activities in Guernsey in connection with a fund (such as providing advice or administration or management services to a fund) must be licensed by the Commission under Guernsey's protection of investors (POI) law. The process of obtaining such a licence is not covered by the new registered fund approval process (which applies to the issuing of regulatory consents in connection with funds only). Obtaining a POI licence can take around 4 to 6 weeks for a first time applicant.
Many closed ended funds established as companies in Guernsey appoint UK authorised entities as their investment adviser. It is less common for such funds to appoint a local Guernsey investment adviser. Accordingly the establishment of a closed ended fund as a company often does not require any regulatory approvals other than the approval of the fund itself which can now be obtained through the registered fund approval process.
On the other hand, the private equity industry favours limited partnerships for its fund structures. By acting as such, a general partner of a limited partnership that is a fund is conducting regulated activities in connection with that fund. Accordingly, that general partner must be licensed under the POI law. For that reason the fast track approval process offered by registered funds has not generally reduced the time it takes to establish a new private equity fund.
There are no proposals to reduce the time required to obtain a POI licence at present. However, private equity fund advisers who have previously established a licensed general partner will find that their second or third GP is likely to obtain a licence in a shorter period than the 4 to 6 weeks referred to above. In addition, Guernsey's renowned regulatory competence is one of the factors that has made it the jurisdiction of choice for many private equity funds. Moreover, establishing a private equity fund of any significance within a period of less than 6 week would, in any event, be a tall order.
It is also worth noting that the Commission is flexible when considering new investment structures. For example, a structure with a limited number of investors will often not be regarded as a fund at all. Such a structure can be established within a matter of days and can be used as a private investment vehicle or simply to "warehouse" assets pending an offer of interests in the vehicle to a wider class of investors. Notably, where a limited partnership structure is not regarded as a fund, the general partner will not be deemed to be conducting regulated activities in connection with it and so will not require a POI licence.
As a result of the introduction of the regulated funds regime, the weight of regulatory responsibility now rests with the fund administrator and not on the Commission. Therefore the choice of fund administrator becomes crucial. To date the new regime and the response of the local administrators to this new responsibility has been a credit to Guernsey. How the fund administrators continue to respond to the opportunities and challenges this new responsibility presents will be important in determining Guernsey's position as a global funds centre over the coming years.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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