Caroline Chan and Val Rouse of Ogier discuss the changes to the Class B rules in Guernsey and what this means in practice for Guernsey funds.
The vast majority of open-ended funds in Guernsey tend to be established as Class B schemes because of the flexibility of the regime, which has operated successfully since 1990. It has only recently been updated for the first time. The Authorised Collective Investment Schemes (Class B) Rules, 2013 (Class B Rules) came into operation on 2 January 2014 and this article discusses certain of the changes that have been made and the main points to note.
If they have not already done so, Class B scheme service providers will need to take certain action. Scheme particulars must be updated by no later than 2 January 2015 and any derogation granted under the previous rules which continues to be required must be reapplied for within the same timeframe, otherwise it will lapse. If principal documents require updating, this must be carried out by no later than 2 January 2016. The changes include the following:
Each new class or cell of a Class B authorised scheme will now be declared approved by the Commission. A declaration will be valid for one year and may be revoked if the new cell or class is inactive.
NOTIFICATIONS AND APPROVALS
A change of designated administrator or trustee continues to require prior notification and the Guernsey Financial Services Commission's approval in practice because of the need for the scheme's Class B declaration of authorisation to be varied. There are also new requirements relating to reconstructions which may result in the need to obtain the Commission's prior approval for any such a proposal. However, otherwise, the new regime is one of notification only.
In particular, there is no longer any need to obtain prior written approval from the Commission for a change to a scheme's investment, borrowing and hedging powers, although it is still necessary to notify the Commission in advance and give sufficient notice to holders to allow them to redeem their shares before the change takes place.
The requirement to obtain prior approval from the Commission for payment out of scheme property of previously unauthorised or undisclosed fees, expenses or charges has also been replaced with a requirement to notify the trustee and to give notice to holders.
Other notification requirements include a proposed change of principal manager, investment adviser, director, registrar or auditor and any proposal to terminate a class or cell. Suspension of dealings must also be notified, together with reasons, "forthwith".
SERVICE PROVIDER ROLES AND DUTIES
The designated manager for the purposes of the Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended is now redefined in the Class B Rules as the "designated administrator" to better reflect its role. It is also now made clear that the term "principal manager" means the Guernsey-based principal manager (if any), who would normally delegate some or all of its administration functions to the designated administrator.
New guidance clarifies that the Commission expects the duties of a designated administrator normally to be limited to administering the scheme and monitoring the constituents of the scheme property. Responsibility for investment decisions is expected to be that of the principal manager (or in the case of a company scheme, the company).
As regards the trustee, its principal duties remain that of safe custody of scheme property and oversight over the designated administrator and the principal manager (if any). It has responsibility "for the safe custody of all the scheme property" and will be liable to the relevant authorised scheme "in the event that the loss of any scheme property occurs as a result of the trustee's unjustifiable failure to perform its obligations or its improper performance of them".
The Class B Rules now recognise that the function of registrar will often be carried out by a service provider other than the trustee, normally the designated administrator. Accordingly, that appointment may now be made direct by the scheme, subject to provision being made for the trustee's oversight role.
Respective roles and responsibilities of service providers under the Class B Rules are not necessarily the same as previously. For example, certain responsibilities which would previously have fallen to the "manager" (meaning either the designated manager or the principal manager or both) may now be stated as being those of a principal manager only (or in the case of a company scheme, the company). Further, the Commission notes by way of guidance that whoever is ultimately responsible will be a matter of contractual arrangement and that, in assessing compliance with the Class B Rules, it will take into account those contractual arrangements.
As a result of these changes, Class B scheme service providers should consider carrying out a full review of their roles under the Class B Rules in conjunction with the contractual arrangements under which they are appointed and take advice as appropriate.
FEES AND EXPENSES
One point to note, in particular, is that the prohibition on double charging is now stricter than previously. The Class B Rules provide that where a Class B scheme invests in other schemes managed by the same manager or investment adviser or persons in the same group, double charging of any charge payable by a target scheme is prohibited. The Commission has now confirmed by means of its Class B FAQs that "any charge" in fact means management or investment advisory charges. However, this is still stricter than the position under the previous rules where the prohibition was limited to preliminary or redemption charges. However, double charging in feeder fund structures is not prohibited, provided that the relevant fee structure is fully disclosed. It is no longer necessary for 90 days' notice to be given to holders of any increase in the manager's periodic charge. Instead, the Class B Rules provide that sufficient notice must be given such that an investor may redeem his shares prior to the increase coming into effect. Note, however, that there is now a requirement to disclose in the scheme particulars the amount of notice to be given to holders to increase the principal manager's and investment adviser's charges.
MEETINGS OF HOLDERS
The minimum period of notice fixed by the Class B Rules for a meeting of holders is reduced from 14 to 10 days, subject to any longer period specified in the principal documents or by applicable law.
The provisions of the Companies (Guernsey) Law, 2008 relating to the deemed service of notices and documents will apply regardless of the constitution of the scheme in question. For some Class B schemes, this may extend the period that is normally allowed for deemed service and the position may need to be checked and advice taken, as appropriate. In relation to the powers of a meeting of holders, a resolution for this purpose now requires only a simple majority of the holders or class of holders in order to be passed. An extraordinary resolution is no longer required.
- The Commission may object to undesirable or misleading names in relation to a scheme or class
- The conflicts of interest section has been updated
- Principal documents and scheme particulars may now be made available on a relevant website
- There is no longer a specific requirement to issue certificates within 21 days or to file interim report and accounts with the Commission
- Whilst minimum disclosure requirements for scheme particulars have been reduced, there are several new requirements, including disclosure of accounting standards, director's interests, material conflicts of interest, arrangements for the removal of service providers and the notice required to be given to increase principal manager or investment adviser charges
- In respect of directors, details of any other directorships that are held and have been held in the past five years must be made available to any potential holder at the registered office of the authorised scheme
- There are new provisions to enable a sub-fund of an umbrella fund to be wound up.
This article is a summary only. Specific legal advice should be sought in relation to any particular set of facts.
An original version of this article appeared in the HFMWeek Guernsey Report 2014, May 2014.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.