Investment funds in Gibraltar: regulatory overview

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1 GLOBAL GUIDE 2015/16 INVESTMENT FUNDS Country Q&A Investment funds in Gibraltar: regulatory overview William Rawley, Peter Young and David Borge Ramparts global.practicallaw.com/ RETAIL FUNDS 1. What is the structure of the retail funds market? What have been the main trends over the last year? General market developments Gibraltar aims to be a major player in the global funds industry and the Gibraltar government is keen to maintain growth in the financial sector and funds industry. Success in other financial services sectors in Gibraltar has also extended to its growing financial services industry, which has access to over 500 million people within the EU. Gibraltar's advantages include: English law legal system. Favourable tax regime (including no income tax on foreign corporate income, low domestic corporate and personal income tax, no VAT, capital gains tax, no tax on the redemption of shares, no inheritance or wealth tax and no tax on interest earned by Gibraltar residents). No tax or withholding tax on dividends. Strong economy and financial stability. Gibraltar's position as a gateway to Europe. The re-domiciliation of existing funds in a large number of relevant funds in territories such as Europe, the US, Hong Kong, British Virgin Islands, the Cayman Islands, Switzerland and Commonwealth territories to Gibraltar is a simple process. Retail funds Although all fund activity currently consists of non-retail funds such as experienced investor funds (EIFs) and private funds (see Questions 16 to 25), Gibraltar is capable of providing for retail funds and it is hoped that this sector will expand in the future. The undertakings for collective investment in transferable securities (UCITS) retail fund regime introduced by EU law requires a wide range of management and investment criteria. It is possible to have an open-ended retail non-ucits fund, but many of the same provisions that apply to a UCITS fund also apply to such. The offer to the public of transferable securities in closed ended non-ucits funds is regulated by the Prospectuses Act 2005 which implements Directive 2003/71/EC (Prospectus Directive). Generally, other than in the Prospectuses Act, Gibraltar's fund regime does not distinguish between open-ended and closedended funds, and therefore the same regulatory framework applies. Many of the relevant structural differences therefore largely depend on any of the following: The target investor (retail or experienced investor). Choice of vehicle (common fund or company fund). Whether a fund falls within the existing framework of EU law. Regulatory framework and bodies 2. What are the key statutes, regulations and rules that govern retail funds? Which regulatory bodies regulate retail funds? Regulatory framework. The regulatory framework is set out in the Financial Services (Collective Investment Schemes) Act 2011 (CIS Act), which, among other things, transposes Directive 2009/65/EC on undertakings for collective investment in transferable securities (UCITS IV Directive) into national law. The CIS Act and the Financial Services (Collective Investment Schemes) Regulations 2011 (CIS Regulations) are the key statutes governing all retail collective investment schemes (CISs) and also provides the framework under which UCITS management companies can operate in Gibraltar. In relation to UCITS, the following regulations are applicable: Financial Services (Collective Investment Schemes) (Corporate Restructuring) Regulations Financial Services (Collective Investment Schemes) (Conduct of Business) Regulations Financial Services (Collective Investment Schemes) (Key Investor Information) Regulations Financial Services (Collective Investment Schemes) (Miscellaneous Provisions) Regulations Financial Services (Collective Investment Schemes) Regulations In relation to marketing, UCITS must also comply with: Financial Services (Advertisements) Regulations Financial Services (Unsolicited Calls) Regulations Regulatory bodies. The Financial Services Commission (FSC) authorises and supervises a wide range of organisations including regulated funds and financial entities. Regulatory framework. The key regulations are substantially the same as for open-ended retail funds (see above, Open-ended retail funds: Regulatory framework). In addition, the Prospectus Directive (transposed into Gibraltar law by the Prospectuses Act, 2005 (PA)) may apply to offers of transferable securities (excluding UCITS). The PA allows for the Thomson Reuters 2015 This article was first published in the Investment Funds Global Guide 2015/16 and is reproduced with the permission of the publisher, Thomson Reuters. The law is stated as at 1 July 2015.

2 Country Q&A marketing of certain closed-ended collective investment undertakings in Gibraltar and potentially in Europe. Furthermore, the provisions of Directive 2011/61/EU on alternative investment fund managers (AIFM Directive) and the Financial Services (Alternative Investment Fund Managers) Regulations 2013 may apply to the manager of a non-ucits retail or a closed-ended retail fund. Regulatory bodies. The FSC is the regulatory authority. 3. Do retail funds themselves have to be authorised or licensed? Gibraltar open-ended retail funds must be licensed and authorised by the Financial Services Commission (FSC) either as: Undertakings for collective investment in transferable securities (UCITS) funds. A Gibraltar UCITS fund must: - operate with the sole object of collective investment in transferrable securities or in other liquid financial assets; - raise capital from the public and invest on the principle of spreading risk; and - issue units which are redeemable at the request of the holders. Non-UCITS retail funds. Applying for authorisation with the FSC involves: Meeting with the FSC prior to submitting an application. Submitting an application form with formation documentation. Submitting a prospectus. Submitting the names of the directors or trustees and fund managers. A CIS established outside Gibraltar can also apply to the FSC to market its units in Gibraltar. The FSC can grant an application authorising a foreign retail fund on a bilateral basis, if it is satisfied that: The scheme is subject to an authorisation and supervisory regime in its home jurisdiction with protection at least equivalent to the protection provided in Gibraltar. Adequate arrangements exist, or will exist, for co-operation between the competent authorities. The scheme is operated and managed in compliance with the applicable authorisation and supervisory regime. For UCITS funds established elsewhere within the EU, the supervisory authority from the member state where the UCITS is established should contact the FSC as set out in the EU passport regime. Gibraltar UCITS funds benefit from full passporting under EU financial services law. Closed-ended funds must be authorised by the FSC. The same application procedure is followed as for open-ended retail funds as the legislation in Gibraltar does not provide different regimes for open and closed-ended funds (see above, Open-ended retail funds). Closed-ended funds cannot take the form of UCITS funds. The PA permits closed-ended collective investment undertakings to offer their securities to the public under certain conditions. The fund must have its prospectus approved by the FSC as the competent authority. There is also an EU marketing passport regime for qualifying prospectus funds. Marketing 4. Who can market retail funds? Retail funds can be marketed in Gibraltar by: Any person or management company authorised by the Financial Services Commission (FSC). Any person or persons deemed to be authorised by the FSC such as EEA undertakings for collective investment in transferable securities (UCITS) management companies or other management companies which have been authorised to distribute funds in Gibraltar. Marketing conditions are the same for foreign retail funds as for locally established funds. The same provisions apply as for open-ended retail funds (see above, ). 5. To whom can retail funds be marketed? There are no restrictions regarding the persons to whom retail funds can be marketed. See above,. Managers and operators 6. What are the key requirements that apply to managers or operators of retail funds? Gibraltar law does not differentiate between open-ended and closed-ended retail funds, though the legislation makes reference to undertakings for collective investment in transferable securities (UCITS) funds, which must be open-ended. A UCITS fund can be structured as: A common fund (by contract or under trust), in which case, it must appoint an authorised UCITS management company (who will contract with the required service providers, including the administrator and investment manager). This can be either a Gibraltar UCITS management company or an EEA UCITS management company. A self-managed open-ended investment company (OEIC). Conditions for Financial Services Commission (FSC) authorisation of a Gibraltar UCITS management company include (sections 4 and 5, CIS Regulations): Capital requirements. The management company must have a minimum initial capital of EUR125,000 and, if the value of the portfolios of the management company exceeds EUR250million, the management company must provide an additional amount of its own funds. It must also take into account the further portfolio value requirements set out in the CIS Regulations 2011.

3 The business must be conducted by at least two people of sufficiently good repute, experienced in relation to the type of UCITS under management. The FSC must be notified of their names and their successors. The application must be accompanied by a programme of activity which should include the company's organisational structure. Both the head office and registered office must be located in Gibraltar. The FSC additionally requires every management company to have: Sound administrative and accounting procedures, control and safeguard arrangements for electronic data processing. Adequate internal control mechanisms including, in particular, rules for: - personal transactions by its employees; - the holding or management of investments in financial instruments to invest on its own account; - ensuring, at least, that each transaction involving the UCITS can be reconstructed according to its origin, the parties to it, its nature, and the time and place at which it was effected; - ensuring that the assets of the UCITS are invested according to the fund rules or the instruments of incorporation and the legal provisions in force. An organisational structure which minimises the risk of the UCITS or clients being prejudiced by conflicts of interest between: - the company and its clients; - two of its clients; - one of its clients and a UCITS; or - two UCITS. The authorisation requirements above do not apply to an EEA management company (section 13(2), CIS Rules). However, such companies must provide certain information to the FSC in Gibraltar in order to gain authorisation to provide management company services in Gibraltar and comply with local regulations. The management company for a common fund or the OEIC (as relevant) must issue a key investor information document (KIID) providing clear, fair and readily understandable information concerning the fund investment which must: Contain a risk indicator based on historical volatility for each fund or sub fund. Be provided to investors in good time before their proposed subscription of units in the UCIT. Be provided to product manufacturers and intermediaries selling or advising investors on request. Be made available on the website of the OEIC or management company. Be sent to the FSC (sections 93 to 97, CIS Rules). Key requirements for self-managed OEICs. An authorised UCITS scheme structured as a self-managed OEIC can be authorised without appointing a management company if: It has minimum initial capital of EUR300,000. There is a programme of activity. The business is conducted by at least two people of sufficiently good repute, experienced in relation to the type of UCITS under management. The FSC must be notified of their names and their successors. It manages only assets of its own portfolio. Non-UCITS retail funds. A non-ucits retail scheme is "authorised" under section 11 of the CIS Act. Any "authorised" scheme (with the exception of an EIF) including a non-ucits retail scheme has to have a Gibraltar UCITS management company or an EEA UCITS management company under section 18 of the CIS Act. See above,. Assets portfolio 7. Who holds the portfolio of assets? What regulations are in place for its protection? The scheme property belonging to an authorised open-ended investment company (OEIC) must be entrusted to a depositary for safekeeping. When the authorised scheme is a trust, it must also appoint a trustee. Procedures to protect assets of both undertakings for collective investment in transferable securities (UCITS) and non-ucits funds are contained in the Financial Services (Collective Investment Schemes) Regulations Trustees are liable to the management company and the unitholders for any loss suffered as a result of a failure to perform or improper performance. See above,. Legal fund vehicles 8. What are the main legal vehicles used to set up a retail fund and what are the key advantages and disadvantages of using these structures? Legal vehicles. Currently, there are no retail funds in Gibraltar (see Question 1, Retail funds). However, Gibraltar retail funds could be established as one of the following: Open-ended investment company (OEIC) (including under a protected cell company (PCC) structure (see below)). Where an OEIC is used, participants' interests can be represented by shares. A UCITS fund set up in this way can be self-managed by its directors rather than having to appoint an undertakings for collective investment in transferable securities (UCITS) management company. A company is subject to usual Companies Act legislation and filing requirements, with minor modifications applicable to funds to make matters easier. A PCC segregates the assets and liabilities of different classes of shares into independent cells which are managed under one umbrella company. As well as saving costs, using a PCC structure is advantageous to investors in that they are not reliant on a purely contractual arrangement between them in respect of risk and liability. The PCC regime provides a statutory basis for the segregation of assets and liabilities which also binds third parties. Country Q&A

4 Country Q&A Unit trusts. A unit trust does not have a separate legal personality. It is a trust arrangement under which the trustee holds the scheme's assets on trust for the benefit of unitholders. As there are no Companies House filing requirements, it is easier to preserve confidentiality with a unit trust than an OEIC. Contractual funds. A contractual fund does not have separate legal personality and enjoys the same benefits as a unit trust. Since the fund is not incorporated, the investors are treated as owning a proportionate amount of the assets, rather than a company owning the assets. A management company is responsible for establishing the fund and the share in the fund is determined by contract rather than by a trust deed. Non-UCITS retail schemes in Gibraltar must be authorised by the FSC. They can be established (whether open-ended or closedended) as either a common fund (with a trust deed or binding agreement between the manager and trustee) or an OEIC. Advantages/disadvantages. See above, Legal vehicles. See above,. Investment and borrowing restrictions 9. What are the investment and borrowing restrictions on retail funds? Undertakings for collective investment in transferable securities (UCITS) funds. The following investments are authorised (section 47, CIS Regulations 2011): Transferable securities and money market instruments. Units of UCITS. Deposits with credit institutions. Financial derivatives instrument. Money market instruments, other than those dealt with in a regulated market in certain circumstances. However, in relation to investments, a UCITS fund must not: Invest more than 10% of its assets in other transferable securities or money market instruments (other than those admitted by the regulation). Acquire precious metals or certificates representing them. Risk global exposure relating to derivative instruments that exceeds the total net value of its portfolio. Invest more than 5% of its assets in transferable securities or money market instruments issued by the same body. Invest more than 20% of its assets in deposits made with the same body. Risk exposure to a counterparty of the UCITS in an over-thecounter derivative transaction that exceeds either: - 10% of its assets when the counterparty is a credit institution; or - 5% of its assets in other cases. (The FSC may raise the 5% and 20% limits noted above on assets and assets in deposits respectively in certain situations, subject to conditions being satisfied.) Restrictions also apply to investment in other collective investment schemes (for example, investments made in units of collective investment undertakings other than UCITS must not exceed in aggregate, 30% of the assets of the investing UCITS (section 52(2), CIS Regulations 2011)). In respect of borrowing restrictions, generally an OEIC or management company acting on behalf of a common fund cannot borrow. However, a UCITS can acquire foreign currency by means of a back-to-back loan and the FSC may authorise a UCITS to borrow if it is: On a temporary basis and represents no more than 10% of the assets or value of the fund. To enable an OEIC to acquire immovable property essential for the direct pursuit of its business, provided it represents no more than 10% of its assets. Non-UCITS. The provisions on the restrictions on investments by non-ucits funds are contained in the Financial Services (Collective Investment Schemes) Regulations 2011 and are general rather than specific. The Regulations, in relation to non-ucits, require the investment objectives set out in the prospectus to be complied with and the scheme property aim to provide a prudent spread of risk. In effect, the scheme will be subject to the FSC's approval who will determine whether the investment strategy is acceptable for retail investors. See above, Open-ended funds. 10. Can the manager or operator place any restrictions on the issue and redemption of interests in retail funds? There isn't anything in the applicable legislation that prevents restrictions on the issue of interests in retail funds. A scheme, for example, could be limited issue (that is, only a limited number of units are issued or units are only issued for a limited time). Undertakings for collective investment in transferable securities (UCITS) funds can only restrict redemption in very limited circumstances (generally when it is in the interests of the investors). Non-UCITS retail funds must allow for redemption within a "reasonable time" as perceived by a "reasonable investor". Closed ended retail funds only issue a limited number of units. Regarding redemption, if the constituting instrument of a fund provides for limited redemption, the restrictions must be appropriate to the fund's aims and objectives. Redemption arrangements must be clearly specified. 11. Are there any restrictions on the rights of participants in retail funds to transfer or assign their interests to third parties? Unitholders are entitled to transfer or assign units to third parties provided they follow the specified protocol and use the form approved by the manager. The manager can only accept a transfer if this procedure (which is specified in the prospectus) is followed. See above,.

5 Reporting requirements 12. What are the general periodic reporting requirements for retail funds? Authorised funds must publish and provide to investors: A prospectus (including the key investor information document (KIID) for undertakings for collective investment in transferable securities (UCITS) funds). An annual report for each financial year (within four months of the end of the financial year). A half-yearly report covering the first six months of the financial year (within two months of the end of that period). With regard to UCITS, when Gibraltar is the UCITS home state, the prospectus, any amendments, and the annual and half-yearly reports must be sent to the Financial Services Commission (FSC) and (if requested) the EEA authority of the management company's home state. See above, Open-ended funds. Tax treatment Other investors such as limited partners or unitholders will also not be liable to any taxes on income from funds which do not accrue or derive from Gibraltar. See above, Open-ended funds. Quasi-retail funds 14. Is there a market for quasi-retail funds in your jurisdiction? There is currently no quasi-retail fund activity in Gibraltar. Reform 15. What proposals (if any) are there for the reform of retail fund regulation? The legislation relating to non-undertakings for collective investment in transferable securities (non-ucits) retail funds is rumoured to be the subject of a possible review (see Question 1). HEDGE FUNDS 16. What is the structure of the hedge funds market? What have been the main trends over the last year? Country Q&A 13. What is the tax treatment for retail funds? Funds. In most cases Gibraltar does not levy tax on investment fund income, since only income accrued in or derived from Gibraltar is taxable. Retail fund income is likely to be generated outside of Gibraltar, or of a type that is not within the scope of Gibraltar tax. In addition, there is no capital gains tax or VAT levied in Gibraltar. It is possible for retail funds to request a ruling from the Gibraltar Commissioner for Income Tax to confirm the fund will not be subject to income tax. Certain types of funds (such as the contractual fund) are tax transparent and would likely be recognised as tax transparent in other jurisdictions. A Gibraltar based licensed investment fund manager providing licensed investment services would be subject to pay corporate income tax at a general rate of 10% on income derived in or from Gibraltar. However, qualifying employees and investment fund owners may be able to benefit from certain additional tax treatment benefits that provide for a maximum annual taxable income for qualifying individuals. Managers of investment funds would be likely to qualify. No income tax is levied on non-resident directors who are present in Gibraltar for less than 30 days a year. Resident investors. Gibraltar resident shareholders or unitholders do not pay tax on: Fund income which does not accrue or derive from Gibraltar. Income from funds marketed to the general public (retail funds). Non-resident investors. As there are no withholding taxes on dividends, capital gains tax or interest in Gibraltar, non-resident investors will not usually have to pay any taxes in Gibraltar. Hedge funds make up the majority of the funds market in Gibraltar. The Financial Services (Alternative Investment Fund Managers) Regulations 2013 (AIFM Regulations) implemented Directive 2011/61/EU on alternative investment fund managers (AIFM Directive) in July All non-retail collective investment schemes (including EIFs and private funds) are affected to some degree. Both private funds and EIFs fall within the scope of the AIFM Regulations since July As at December 2013 there were 218 funds administered in Gibraltar with assets under management of GB 3.7billion Private funds Private funds are collective investment schemes not listed on the stock exchange and not authorised to have more than 50 investors. Until recently, these funds have been substantially unregulated. However, from July 2014 these funds must be registered as a minimum requirement. Funds set up after 22 July 2013 must be registered immediately. Experienced investor funds (EIFs) An EIF is similar to types of fund found in the Caribbean, Luxembourg, the Channel Islands, Malta and Ireland. It is regarded as the driving force behind Gibraltar's growing fund industry. Further obligations may also apply to EIFs under the AIFM Regulations, depending on their size and type. Since private funds are currently not all registered, it is unclear exactly how many there are. As at December 2013, there were 89 registered EIFs with 183 funds and sub-funds managing over GB 2.6 billion worth of assets. It is thought the EIFs are structured into: Hedge funds (43%) trading in: - commodities; - securities; and - currencies.

6 Country Q&A Mixed strategy (13%). Real estate (12%). Distressed real estate (2%). Fund of fund strategies (12%). Private equity (9%). Unusual investment strategies (about 9%). About one in seven EIFs take a mixed approach. On 11 December 2014 the Financial Services (Alternative Investment Fund Managers)(Amendment) Regulations 2014 were published which created a national private placement regime (NPPR) for fund managers wishing to promote, in Gibraltar, the funds they manage. The NPPR caters for the promotion of funds managed by fund managers that are currently not able to take advantage of the marketing passport under the AIFM Directive (EU and non-eu fund managers) and creates a notification or authorisation regime for such fund managers. Regulatory framework and bodies 17. What are the key statutes and regulations that govern hedge funds in your jurisdiction? Which regulatory bodies regulate hedge funds? Regulatory framework The regulatory framework differs for experienced investor funds (EIFs) and private funds: EIFs are regulated by the Financial Services (Experienced Investor Funds) Regulations 2012 (EIF Regulations) and potentially the AIFM Regulations. Private funds are established under section 6(3) of the CIS Act (see Question 2) and CIS Regulations but do not require authorisation by the FSC and are therefore unregulated. However, following the introduction of the AIFM Regulations, registration is now required (see Question 15). Under the AIFM Regulations, alternative investment funds (AIFs) are generally everything that is a collective investment scheme but not an undertaking for collective investment in transferable securities (UCITS) or a retail fund offered by way of prospectus. The AIFM Regulations came into force in July Under the AIFM Regulations, managers will now be either: In-scope AIFMs. These are AIF managers who manage AIFs with assets of at least: - EUR100 million (open-ended including any leverage); or - EUR500 million (if close-ended, unleveraged). In-scope AIFMs must be authorised and therefore comply with obligations such as capital requirements, operational requirements, depository requirements, remuneration, conflicts of interest, risk and liquidity management, transparency, disclosure and regulatory reporting. Further obligations target private equity firms and funds that are substantially leveraged. Out-of-scope AIFMs. These are AIF managers that manage AIFs with assets that fall outside of the thresholds required for in-scope AIFMs (see above). However, out-of-scope AIFMs can choose to opt in to the regulations so as to obtain a passport for their services throughout the EU. Regulatory bodies AIF managers (AIFMs) are regulated by the FSC. Provided there are no objections, an EIF which is an out-of-scope AIFM can be established within ten days of application. There are several in-scope AIFM applications currently with the FSC. The process for in-scope AIFMs is more time consuming. 18. How are hedge funds regulated (if at all) to ensure compliance with general international standards of good practice? Out-of-scope experienced investor funds (EIFs) and private funds EIFs that fall outside qualification for in-scope alternative investment fund managers (AIFMs) (out-of-scope EIFs) and the restrictions regarding marketing (see Question 19) are the most common non-retail funds in Gibraltar. These funds are regulated in a number of ways to ensure compliance with international standards of good practice. Private funds (with less than 50 investors) are currently unregulated save for the new registration requirement under the AIFM Regulations. Risk In respect of EIFs, the fund controllers, usually the directors (or trustee or directors of the general partner or manager in a noncorporate structure), are responsible for risk management, the safeguarding of assets, prevention of fraud and other irregularities. In addition a Gibraltar-licensed administrator or approved non- Gibraltar administrator must be appointed. Where the fund is the open-ended type, a depositary must appointed. Sufficient details on anticipated potential risks should be included in all EIF offering documents. Valuation and pricing In respect of EIFs there are no particular rules on valuation except the method of valuation must be included in the prospectus. The Financial Services Commission (FSC) provides guidance on EIF valuation: In calculating net asset valuations, the value of the underlying assets of a fund should be independently verified. Details of the pricing process should also be provided in the offer document. The EIF's board should exercise due diligence over pricing at all times. Funds should ensure compliance with the International Organization of Securities Commissions' (IOSCO) principles of valuation. Firms should consider introducing a procedure for dealing with errors in the valuation process and whether its details, particularly actions to be taken in the case of major errors, should be stated in the offer document. Systems and controls When an EIF is established as a company, at least two directors must be resident in Gibraltar and licensed by the FSC. If it is established as a trust, at least two of its trustees must be ordinarily resident in Gibraltar and licensed by the FSC. An EIF must also have: A depository (unless the EIF is a closed fund or the FSC makes a determination to that effect).

7 An annual audit of its financial statements performed by an auditor locally approved. An authorised fund administrator and confirmation from a Gibraltar lawyer to the FSC that the fund complies with relevant legislation. In-scope AIFMs In-scope AIFMs (which for the avoidance of doubt could be either an EIF or a private fund where it is self-managed) must apply to be licenced as set out in the AIFMD Regulations and are required to demonstrate all of the following: Suitable qualification of fund management and directors. Adequate risk management procedures. Adequate liquidity management controls. Procedures for the management of conflicts. Prescriptive disclosure requirements to potential investors. The licensing requirements for in-scope AIFMs are set out in detail in the AIFM Regulations and are substantially similar to other EU jurisdictions. The licensing process for in-scope AIFMs is more involved and lengthy than for out-of-scope EIFs. There are currently several full in-scope AIFMs authorised by the FSC and it is anticipated that this is a trend that will accelerate. Insider dealing and market abuse Insider dealing and market abuse are governed by the Market Abuse Regulations 2012 transposing: Directive 2003/6/EC on insider dealing and market manipulation (market abuse). Directive 2004/72/EC on accepted market practices, definition of inside information, lists of insiders, managers' transactions and notification of suspicious transactions (market practices). Directive 2010/78/EC on the powers of the European Supervisory Authority (European Banking Authority), the European Supervisory Authority (European Insurance and Occupational Pensions Authority) and the European Supervisory Authority (European Securities and Markets Authority). The regulations apply to all professionals arranging transactions and are not specific to the fund industry or to alternative funds. Transparency See above, Systems and controls and below, Question 19. Money laundering Gibraltar has a strong anti-money laundering policy. EU antimoney laundering regulations are implemented in Gibraltar through the Crime (Money Laundering and Proceeds) Act 2007 and the FSC has issued Anti-Money Laundering Guidance Notes. Short selling Regulation (EU) No 236/2012 on short selling and certain aspects of credit default swaps became directly applicable on 1 November This regulation creates a harmonised framework for the disclosure of short positions throughout the EU and creates broad powers for the European Securities and Markets Authority to impose emergency restrictions on short selling. Guidelines on the Regulation have yet to be provided by the FSC. Marketing 19. Who can market hedge funds? An authorised alternative investment fund manager (AIFM) can market EU alternative investment funds (AIFs) that it manages to professional investors, provided it notifies the Financial Services Commission (FSC) and receives consent to market such AIFs. There are no Gibraltar restrictions on who can market an experienced investor fund (EIF) or private fund, but there may, depending on the facts, be restrictions on how funds can be marketed. Restrictions apply to the persons to whom the fund is being marketed (see Question 18). The EIF Regulations state that a person who promotes an EIF to persons other than experienced investors or where the fund is not yet established and authorised is liable to a fine of up to GB 10,000. The EIF Regulations do provide for limited information to be communicated to potential investors to negotiate the terms of the investment. As private funds are unregulated in Gibraltar, there are no requirements related to the marketing of foreign hedge funds locally other than the requirement to be offered to no more than 50 potential investors, and these have to be an "identifiable category" of persons (see Question 20, Out-of-scope private funds). 20. To whom can hedge funds be marketed? In-scope alternative investment funds (AIFs) In-scope AIFs can be marketed to "professional clients" as defined in Schedule 2 of the Financial Services (Market in Financial Instruments) Act A professional client is a client who possesses the experience knowledge and expertise to make its own investment decision and properly assess the risk that it incurs. There are clients who are considered professional and may be treated as such because of the type of entity or the kind of experience they have (for example, credit institutions and investment firms). Clients may also request to be considered professional but a fitness test must then be undertaken to assess whether the client can be considered professional. This requires that the client must, as a minimum, fulfil two of the following three criteria: The client has carried out transactions, in significant size, on the relevant market at an average frequency of ten per quarter over the previous four quarters. The size of the client's portfolio exceeds EUR500,000. The client has worked in the financial sector in a relevant area for at least a year. All experienced investor funds (EIFs) (including out of the AIFM Directive scope) EIFs can only be offered to an experienced investor, defined as a person or entity that falls into one of the following categories: A person or partnership whose ordinary business or professional activity includes, or it is reasonable to expect that it includes: - acquiring, underwriting, managing, holding or disposing of investments, whether as principal or agent; or - the giving of advice concerning investments. A company which has net assets in excess of EUR1 million or which is part of a group which has net assets in excess of EUR1 million. An unincorporated association which has net assets in excess of EUR1 million. The trustee of a trust, where the aggregate value of the cash and investments which form part of the trust's assets is in excess of EUR1 million. Country Q&A

8 Country Q&A An individual whose net worth, or joint net worth with that person's spouse, is greater than EUR1 million, excluding that person's principal place of residence. A participant who has a current aggregate of EUR100,000 invested in one or more EIFs. A participant who invests a minimum of EUR50,000 and has been advised by a professional adviser to invest in the fund and confirmed the same to the fund's administrator. A participant who is a professional client under the Financial Services (Market in Financial Instruments) Act A participant in a fund that has re-domiciled to Gibraltar where the FSC has permitted their re-domicile either in respect of a specific fund, a category of funds from a certain jurisdiction or generally. To be accepted as a participant of an EIF, the investor must provide written confirmation that he: - is a qualified investor; and - has received and accepted the investment warning stipulated in the offer document. Out-of-scope private funds A private fund can be marketed to no more than 50 potential investors from an exclusively restricted identifiable category of persons such as friends, family or close business associates. The offer must be in respect of units that are or will be established as a private scheme that will remain as such for at least one year after the offer is made. Investment restrictions A prudentially regulated and supervised institution of a type that (at the date the AIFM Directive came into force on 21 July 2011) is eligible to be an undertaking for collective investment in transferable securities (UCITS) depositary under Article 23(3) of the UCITS IV Directive (2009/65/EC). For private equity AIFs, the depositary may be an entity which carries out depositary functions as part of its professional or business activities of which it is subject to mandatory professional registration recognised by the law or to legal or regulatory provisions, such as law firms or administrators. However, the above is only a brief summary. Section 27 of the AIFM Regulations set out the requirements of the depository and its duties and responsibilities in detail. All experienced investor funds (EIF) (including out of AIFM Directive scope) Open-ended EIFs must have a depositary whose principle duty is to keep the assets under its control, safe and accounted for, as well as undertake whatever duties are required in the EIF's offer document. A closed-ended EIF does not require a depositary. Private funds As private funds are not regulated, there are no statutory requirements for a depositary to be appointed. Requirements 23. What are the key disclosure or filing requirements (if any) that must be completed by the hedge fund? 21. Are there any restrictions on local investors investing in a hedge fund? There are no specific restrictions for local investors to participate in an in-scope AIF, an out-of-scope EIF or a private fund, if the eligibility criteria has been complied with (see Question 19). Assets portfolio 22. Who holds the portfolio of assets? What regulations are in place for its protection? In-scope alternative investment funds (AIFMs) AIFMs must ensure that a single depositary is appointed for each AIF it manages. Under the AIFM Regulations the depositary is the key independent party and is responsible for protecting the investors in each AIF. The depositary has three major roles: The safekeeping of assets. The monitoring of cash. To oversee net asset value (NAV) calculation and fund administration. The depositary must be one of the following: An EU credit institution (such as an EU bank). An investment firm authorised under Directive 2004/39/EC on markets in financial instruments (MiFID) subject to the same capital requirements as credit institutions in accordance with the Capital Requirements Directive (CRD) (Directive 2006/48/EC on the taking up and pursuit of the business of credit institutions (Banking Consolidation Directive) and Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions). In-scope alternative investment fund managers (AIFMs) Disclosure to potential investors. Prior to investment by an investor, AIFMs must make certain information available to AIF investors for each of the AIFs that they manage and for each of the AIFs that they market in the EU. The information to be provided is set out below: A description of the investment strategy and objectives of the AIF. Information on where any master AIF is established and where the underlying funds are established if the AIF is a fund of funds. A description of the types of assets in which the AIF may invest. The techniques it may employ and all associated risks. Any applicable investment restrictions. The circumstances in which the AIF may use leverage. A description of the procedures by which the AIF may change its investment strategy or investment policy, or both. The legal implications of the contractual relationships entered into for the purpose of investment. The identity of the AIFM, the AIF's depositary, auditor and any other service providers and a description of their duties and the investors' rights. A description of how the AIFM is complying with the requirements of Article 9(7) of the AIFM Directive (on capital requirements). A description of any delegated management function and of any safe-keeping function delegated by the depositary, the identification of the delegate and any conflicts of interest that may arise from such delegations. A description of the AIF's valuation procedure and of the pricing methodology for valuing assets, including the methods used in

9 valuing hard-to-value assets in accordance with Article 19 of the AIFM Directive (on valuation). A description of the AIF's liquidity risk management, including the redemption rights both in normal and in exceptional circumstances, and the existing redemption arrangements with investors. This should include disclosure of notice periods in relation to redemptions, details of lock-up periods, an indication of circumstances in which normal redemption mechanisms might not apply or may be suspended, and details of any measures that may be considered by the governing body, such as gates and side pocketing, as they have an impact on the specific redemption rights of investors in the particular AIF. A description of all fees, charges and expenses and of the maximum amounts of any fees, charges or expenses which are directly or indirectly borne by investors. A description of how the AIFM ensures a fair treatment of investors and, whenever an investor obtains preferential treatment or the right to obtain preferential treatment, a description of that preferential treatment, the type of investors who obtain such preferential treatment and, where relevant, their legal or economic links with the AIF or AIFM. The latest annual report referred to in Article 22 of the AIFM Directive (annual report). The procedure and conditions for the issue and sale of units or shares. The latest net asset value of the AIF or the latest market price of the unit or share of the AIF, in accordance with Article 19 of the AIFM Directive (on valuation). Where available, the historical performance of the AIF. The identity of the prime broker. A description of any material arrangements of the AIF with its prime brokers. There are also on-going disclosure requirements. Disclosures to the Financial Services Commission (FSC). There are requirements under the AIFM Regulations to provide a wide range of information to the FSC on an on-going basis. A summary of this requirement can be found on the FSC website. In addition, AIFMs are required to provide their annual accounts (which must include all information specified in the AIFM Regulations) within six months of the year end. All experienced investment funds (EIFs) (including out of AIFM Directive scope) A major advantage in setting up an EIF is that no prior approval is required from the FSC. As a result, funds can be marketed very quickly, and in theory, be up and running within ten days of finalising the offer documentation. To establish an EIF in Gibraltar, certain documents must be filed with the FSC by the EIF's administrator (no later than ten days before or within ten days after the establishment of the fund): Written notification registering the fund as an EIF in the approved form with the prescribed application fee. A copy of the offering documents (also known as the prospectus or private placement memorandum). A legal opinion that the EIF is compliant with applicable Gibraltar legislation. This opinion must be produced by a lawyer: - of at least five years' professional standing; - who is also a barrister or solicitor of the Supreme Court of Gibraltar; and - who is independent of the administrator. Any other documents requested by the FSC. The EIF must file annual audited financial statements with the FSC within six months of its financial statement period end (which should be no longer than 18 months). The EIF's controller (being separate to the EIF administrator) must ensure the FSC is notified of any material change to the EIF within 20 days of such change taking place. Annual returns must also be filed in the form specified by the FSC. Private funds There are no disclosure or filing requirements that must be completed by a private fund except for the registration requirement mentioned above. 24. What are the key requirements that apply to managers or operators of hedge funds? Requirements for Financial Services Commission (FSC) authorisation An FSC licence is required to undertake investment management activities in Gibraltar. Prior to the introduction of the Alternative Investment Funds Manager (AIFM) Regulations, an experienced investment fund (EIF) that was self-managed did not need to obtain a licence (although see below regarding the requirement for licensed directors). External managers of EIFs needed to obtain a Markets in Financial Instruments Directive (MiFID) licence for their activities where they were undertaking licensable activities. With the advent of the AIFM Regulations, out-of-scope EIFs which are self-managed are in the same position as before (that is, they do not need separate licensing). From an AIFM Directive perspective and under EU law, a MiFID firm cannot be jointly authorised as an AIFM under the Directive. As such, managers of "out-of-scope" AIFs are in somewhat of a no-man's land if they do not opt in, which is something that they may not want to do given the time and expense involved. Discussions are now on-going in Gibraltar to create a special framework for such activities. The AIFM Regulations apply to those managers who either opt in or who must be licensed due to their size. The requirements are set out in detail in the AIFM Regulations but in summary, an AIFM applying for an authorisation is required to provide the following information relating to the AIFM to the FSC: Information on the persons effectively conducting the business of the AIFM. Information on the identities of the AIFM's shareholders or members, whether direct or indirect, natural or legal persons, that have qualifying holdings and on the amounts of those holdings. A programme of activity setting out the organisational structure of the AIFM, including information on how the AIFM intends to comply with its obligations under the Act. Information on the remuneration policies and practices pursuant to Article 13 of the AIFMD. Information on arrangements made for the delegation and subdelegation to third parties of functions, required by Article 20 of the AIFM Directive (see FSC information page on AIFMD: Delegation). The FSC must not grant authorisation to an AIFM unless: The FSC is satisfied that the AIFM is able to meet the conditions of the AIFM Regulations and the AIFM Directive. Country Q&A

10 Country Q&A The AIFM has sufficient initial capital and own funds in accordance with Article 9 of the AIFM Directive (see FSC information page on AIFMD: Capital Requirements). The persons who effectively conduct the business of the AIFM are of sufficiently good repute and are sufficiently experienced. The shareholders or members of the AIFM that have qualifying holdings are suitable, taking into account the need to ensure the sound and prudent management of the AIFM. The head office and the registered office of the AIFM are located in Gibraltar. EIF management An EIF established as a Gibraltar company (or Gibraltar redomiciled company) must have at least two directors who are approved by the FSC and ordinarily resident in Gibraltar. Where an EIF is established as a limited partnership, the general partner must be ultimately controlled by a corporate entity with two directors who are qualified and authorised by the FSC. For EIFs which are established as unit trusts: Where there is more than one trustee, at least two of the trustees must be persons ordinarily resident in Gibraltar and authorised by the FSC. If a trustee is a company, at least two of its directors must be persons ordinarily resident in Gibraltar and authorised by the FSC. For any other type of EIF, the controller of the person or entity with ultimate responsibility for the management and control of the EIF must include at least two persons authorised by the FSC. If these conditions are met, there is no restriction on foreign managers managing local EIFs but they must be lawfully able to provide their services from their home jurisdiction. European managers would normally have needed a licence under MIFID to confirm this requirement. However, the situation since the implementation of the AIFM Directive is less clear (see above). Private funds There is no restriction on out-of-scope private funds being managed or operated by a foreign fund manager. Legal fund vehicles and structures 25. What are the main legal vehicles used to set up a hedge fund and what are the key advantages and disadvantages of using these structures? The main legal vehicles are set out below. Company formed or re-domiciled under the Companies Act The participants are shareholders and their interests are shares. Advantages. The fund company has limited liability. Disadvantages. The need to comply with Companies Act requirements is an administrative burden. The filing of documents also means that certain information is not confidential. Unit trust Where the vehicle is a unit trust, its participants' interests are held as units. Advantages. The unit trust does not impose a significant administrative burden when compared to a company. Disadvantages. The unit trust does not come within the compliance regime of the Companies Act, meaning that usual governance relating to companies will not apply. Protected cell company The participants are shareholders and their interests are shares. Advantages. Protected cell companies allow assets and liabilities to be split and segregated between different cells of the same company for the protection of third parties and shareholders. A single vehicle can be used to pool assets or to pursue different investment strategies. Disadvantages. They are potentially more complicated and less well known as a legal vehicle. Limited partnership A limited partnership must have one or more general partner whose liability is unlimited and one or more limited partners whose liability is limited to their capital contribution. Advantages. Limited partnerships can be commercially flexible as they are subject to less compliance and disclosure obligations than companies. Partners can leave or be replaced without dissolving the partnership. The tax transparency is readily accepted in many jurisdictions which can provide tax efficiency. Disadvantages. General Partners have unlimited liability. Limited partnership agreements tend to be more heavily negotiated and therefore costly. Tax treatment 26. What is the tax treatment for hedge funds? The same rules apply as for retail funds (see Question 13). Restrictions 27. Can participants redeem their interest? Are there any restrictions on the right of participants to transfer their interests to third parties? Redemption of interest The Alternative Investment Fund Managers (AIFM) Regulations require that investors have the ability to redeem their investments in a manner consistent with the fair treatment of all AIF investors and in accordance with the AIF's redemption policy and its obligations. Terms specifying how investors can redeem their interests must be set out in the fund documentation available to investors. In assessing the alignment of the investment strategy, liquidity profile and redemption policy the AIFM must also consider the impact that redemptions may have on the underlying prices or spreads of the individual assets of the AIF. Transfer to third parties Unless there is a specific limitation or a limitation arising by law (for example, the requirement that an experienced investment fund (EIF) investor must be an experienced investor), interests can generally be transferred or sold to third parties. Reform 28. What (if any) proposals are there for the reform of hedge fund regulation? A licensing and regulatory regime for alternative investment fund managers (AIFMs) that have or would have had a Markets in Financial Instruments Directive (MiFID) licence previously in order to provide services is being contemplated.

11 Finance Centre Department W Description. The Finance Centre Department is responsible for: ONLINE RESOURCES Advising the Finance Minister on all financial services policy matters. Liaising with the private sector and regulator in Gibraltar. Financial services legislation. Co-ordination of communication relating to strategic initiatives involving the IMF, OECD, EU. Other financial services-related matters. Financial Services Commission W Description. Financial Services Commission. Statutory body responsible for financial services in Gibraltar. Gibraltar Funds and Investment Association W Description. The Gibraltar Funds and Investment Association's objective is to develop and maintain Gibraltar as a specialised investments jurisdiction of choice within Europe. Gibraltar Laws W Description. This official website contains all Gibraltar primary and secondary legislation consolidated to date. Country Q&A

12 Country Q&A Practical Law Contributor profiles William Rawley, Solutions Manager Ramparts T E williamrawley@ramparts.eu W Peter Young, Director Ramparts T E peteryoung@ramparts.eu W Professional qualifications. Legal Practice Course, 1994; England and Wales Solicitor, 1996; Hong Kong Solicitor, 1997 Areas of practice. Finance and Corporate. Non-professional qualifications. BA MA (Cantab); FSA Regulations Level 1 Languages. English; Spanish; French Professional qualifications. Legal Practice Course, 1998; England and Wales, Solicitor, 2001; Gibraltar Solicitor, 2003 Areas of practice. Investment funds; tax; ICANN and domain names; commercial; corporate; e-commerce. Non-professional qualifications. LLB Law, University of Newcastle upon Tyne Languages. English, conversational Spanish David Borge, Associate Ramparts T E davidborge@ramparts.eu W Professional qualifications. Legal Practice Course, 2010; England and Wales Solicitor, 2012; Gibraltar Solicitor, 2013 Areas of practice. Gaming; tax; electronic money; intellectual property. Non-professional qualifications. Pharmacy MPharm (Hons), Cardiff University; PgDip (Law), Glamorgan University Languages. English and Spanish