Guernsey funds. "Generally, all Guernseydomiciled

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1 JERSEY GUERNSEY LONDON MAURITIUS BVI SINGAPORE GUERNSEY BRIEFING April 2015 Guernsey funds Guernsey is, for many, the jurisdiction of choice for the establishment /or administration of all types of collective investment vehicle, including private equity, hedge property funds, across a wide range of asset classes. "Generally, all Guernseydomiciled funds must be administered by a locally licensed administrator open-ended funds must also have a locally-licensed custodian." So why do so many promoters, investment managers investors choose Guernsey? proven track record as a leading fund financial services jurisdiction over many years; a critical mass of world quality experienced fund professionals; numerous options in terms of structuring authorisation / registration of vehicles; speed of formation of vehicles; fast-track regulatory registrations; pragmatic, independent regulator: the Guernsey Financial Services Commission ("GFSC"); robust corporate governance; high quality pool of non-executive directors; independent local exchange, the Channel Isls Securities Exchange Authority, for listing Guernsey other vehicles; ability to adapt innovate; proximity to the UK also to Europe, but positioned outside the European Union. Regulation Regulatory overview If a vehicle established in Guernsey satisfies the criteria for a "collective investment scheme" (see below) or "fund", it must either be registered or authorised by the GFSC no Guernsey-licensed entity can provide services to such a vehicle without it being so registered or authorised. Generally, all Guernsey-domiciled funds must be administered by a locally licensed administrator open-ended funds must also have a locally-licensed custodian. Fund promoters new to Guernsey will have to demonstrate a proven track record. What is a collective investment scheme or fund? The GFSC applies the following criteria in determining whether or not an entity is a collective investment scheme or fund: pooling of contributions of investors; third party management of the portfolio assets; spread of risk. If any of these features is lacking, the structure will not be regarded as a fund. For example, the GFSC is usually prepared to regard a structure as not requiring to be regulated as a fund where there is a limited number of investors, particularly where they are related parties, or where there is only one investment asset. Difference between open- closed- ended funds Guernsey makes a fundamental distinction between open-ended funds closed-ended funds. An open-ended fund is one in which the investors are entitled under the terms of the scheme to have their units redeemed or repurchased by the fund or to sell their units on an investment exchange at a price related to the value of the property to which they relate. In a closed-ended structure, there is no right to have one's shares redeemed although, usually, the fund will have a predetermined life.

2 GUERNSEY BRIEFING 2 "Both open-ended closed-ended funds may be either authorised or registered schemes under the POI Law funds may take the form of companies, limited partnerships, unit trusts or other entities." A Guernsey closed-ended fund is not required to appoint a local custodian or a local manager or adviser. Unlike a closed-ended fund, every open-ended fund generally must appoint a Guernsey licensed custodian to hold its assets on trust. Both open-ended closed-ended funds are required to appoint a locally licensed administrator (referred to as a "designated manager" both in the relevant legislation in this briefing). Previously, every open-ended fund also had to appoint a Guernsey licensed principal manager. This requirement was removed at the beginning of 2007 but, nonetheless, some promoters are continuing to use principal managers within their structures. Distinction between authorised registered funds The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended (the "POI Law") creates two categories of Guernsey fund: authorised collective investment schemes; registered collective investment schemes. Both open-ended closed-ended funds may be either authorised or registered schemes under the POI Law funds may take the form of companies, limited partnerships, unit trusts or other entities. Categories of open-ended fund Open-ended funds may be: authorised: class A: eligible for marketing to the general public in the UK certain other jurisdictions. There are comprehensive rules which regulate the documents by which a class A scheme is established, the content of the relevant scheme particulars, the general administration of the scheme the investment parameters; class B: not usually for sale to the general public typically established for marketing to institutions high net worth/sophisticated investors. The rules applying to class B scheme documents administration are less comprehensive than those applying to class A schemes; or class Q: restricted to qualifying professional investors. The rules governing such schemes are less prescriptive than those for class A class B schemes a fast track approval process should be available; or registered. Categories of closed-ended fund Closed-ended funds may be: authorised; or registered. The rules applying to Guernsey funds The following rules apply to Guernsey funds, depending on the type of fund: Registered Collective Investment Scheme Rules 2015: apply to open-ended closed-ended registered funds (the "2015 Rules"); Authorised Closed-Ended Investment Schemes Rules 2008: apply to authorised closed-ended funds; Authorised Collective Investment Schemes (Class A) Rules 2008: apply to authorised class A open-ended funds; Authorised Collective Investment Schemes (Class B) Rules 2013: apply to authorised class B open-ended funds; Collective Investment Schemes (Qualifying Professional Investor Funds) (Class Q) Rules 1998: apply to authorised class Q openended funds; The AIFMD (Marketing) Rules, 2013: apply to any Guernsey alternative investment fund managers ("AIFMs") who propose to market alternative investment funds ("AIFs") to professional or retail investors in one or more EEA member states; The AIFMD Rules, 2013: govern an opt in regime for the purpose of the Alternative Investment Fund Managers Directive ("AIFMD") for Guernsey fund managers depositories. Regulatory process Regulatory process for authorised funds For authorised funds (save in relation to qualifying investor funds ("QIFs") (see below)), a traditional three stage approval process must be followed: outline consent: this involves providing detailed information in connection with the promoter some general information in relation to the proposed fund; followed by interim consent: once the promoter has obtained outline consent, draft documentation relating to the fund structure itself is submitted to the GFSC for review. If successful, this application will result in notification that the GFSC will be minded to grant final approval upon receipt of final certified documentation; final consent: final signed/certified documentation is lodged the GFSC's consent is issued within two business days. The overall timing for this process is usually in

3 GUERNSEY BRIEFING 3 "Often, the investment adviser to a fund will be a UK regulated entity. Provided that no activities are being conducted by that adviser in Guernsey, then there should be no Guernsey regulatory obstacles to this." the region of six weeks. Regulatory process for registered funds Under the registered fund regime, responsibility for ensuring that the promoter of the fund is fit proper that the fund documentation complies with the relevant regulatory requirements lies with the designated manager of the fund. The designated manager must provide warranties to the GFSC verifying those matters in reliance upon those warranties, the GFSC will issue the necessary registration within three working days. This process has moved responsibility for compliance on to the designated managers leaves the GFSC free to inspect, investigate audit those designated managers to ensure that the warranties being provided to it upon which it will rely in granting registration are accurate backed up by the necessary documentation. Previously, the one restriction on registered funds was that they could not be marketed directly to the public in Guernsey. However, the GFSC has monitored the stard of due diligence collected by designated managers as part of the registered fund application process determined that certification process by designated managers has been a success. Accordingly, the GFSC has now lifted the prohibition on direct offerings in Guernsey pursuant to the 2015 Rules. The most significant advantage that registered schemes have over authorised schemes is the fast-track three day approval process for the fund a fast-track ten day approval process for service providers (see below). Authorised funds, on the other h, are generally subject to a lengthier approval process (save in the case of QIFs). Qualifying investor funds A faster approval route is available to certain authorised funds, known as the qualifying investor fund or "QIF" process. This enables approval to be obtained within three working days. The QIF approval process is only available to funds limited to qualified investors, who are professional investors, experienced investors /or knowledgeable employees. An individual investor investing US$100,000 or more is a qualified investor. QIFs can only be marketed to qualified investors warranties must be given by the fund's Guernsey administrator that the requirements have been complied with. Authorised or registered? The policy of the GFSC is to subject authorised schemes to closer supervision than registered schemes. In the case of closed-ended schemes, there is little of substance to distinguish between the two categories, other than the fast-track approval process for registered funds. However, in relation to open-ended funds, the registered regime provides a lighter touch than the authorised category which, until the end of 2001, was the only form of regulation available to an openended fund in Guernsey. Consequences A person who provides services in Guernsey to a closed-ended or open-ended fund must hold a licence under the POI Law (a "POI Licence"). This applies to fund administrators, who must be licensed under the POI Law to provide administration services to fund entities. It also means that, for example, an investment adviser providing services in Guernsey to a Guernsey fund or the general partner of a Guernsey limited partnership which is a fund must also be licensed under the POI Law. Notably, real property is not a controlled investment under the POI Law. Accordingly, the provision of services in connection with real property is not caught by the POI Law does not require a POI Licence. Often, the investment adviser to a fund will be a UK regulated entity. Provided that no activities are being conducted by that adviser in Guernsey, then there should be no Guernsey regulatory obstacles to this. POI licensing It is important to note that the fund approval processes described above do not encompass the obtaining of a POI Licence for any adviser, manager, administrator or general partner. Traditionally, the obtaining of a POI Licence could take around four to six weeks. However, a fast-track process exists under which the GFSC will consider an application for a POI Licence within ten business days of the receipt by it of a fully completed application, together with warranties from the designated manager that it has conducted due diligence on the beneficial owners of the applicant that the application is complete in all respects.

4 GUERNSEY BRIEFING 4 "Guernsey has long been recognised as a premier jurisdiction for private equity funds, but is also a domicile of choice for many hedge funds." Notably, the fast-track process only applies to applicants who are seeking to provide services to QIFs or registered closed-ended investment funds. Other considerations Prospectus Rules 2008 The Prospectus Rules 2008 prescribe the information that must be contained in: a prospectus issued by a Guernsey registered fund (open-ended or closedended); a prospectus issued by any other Guernsey entity; a prospectus in respect of any offer of securities made to the public in Guernsey by a Guernsey or non-guernsey entity. The public is defined as 50 or more people in Guernsey. For registered closed-ended funds, the Prospectus Rules 2008 replaced the old minimum disclosure guidelines issued by the GFSC. There is an exemption in respect of a prospectus offering shares which are to be listed on a stock exchange in an International Organisation of Securities Commissions ("IOSCO") member country. The GFSC considers AIM listings to fall within this exemption, provided that the UK's prospectus rules have been complied with. Outsourcing It is possible for the holder of a POI Licence, such as a fund administrator, to outsource certain of its functions to an entity outside Guernsey. However, such delegation of activities must be done in compliance with outsourcing guidelines issued by the GFSC. In particular, it is worth noting that the licensee must retain sufficient expertise to oversee any such delegated functions. Corporate governance With effect from 1 January 2012, the GFSC's Code of Corporate Governance for the Finance Sector (the "Code") came into effect. The Code applies to all companies which hold a licence from the GFSC under Guernsey's regulatory laws or which are registered or authorised as collective investment schemes under the POI Law. It does not apply to Guernsey branches of foreign domiciled companies or to partnerships. The Code sets out eight principles guidance on how to meet the principles. Each company's approach to the Code should reflect its legal operating structure, as well as the nature scale complexity of the business. Noncompliance with the principles set out in the Code does not automatically make a company subject to the Code liable to any sanction or proceedings, but the GFSC will require an assurance statement from companies confirming that the directors have considered the effectiveness of their corporate governance practices are satisfied with their degree of compliance in the context of the nature, scale complexity of their business. Companies should prepare a self assessment in order to assist the board in its consideration of the Code. The Code should be considered periodically at a board meeting the discussion minuted. Hedge funds Guernsey has long been recognised as a premier jurisdiction for private equity funds, but is also a domicile of choice for many hedge funds. To address the fact that in some respects hedge funds require a different regulatory approach, the GFSC has adopted a flexible approach to hedge fund authorisation in certain key areas: custodians prime brokers: for institutional expert investor hedge funds, the GFSC will be prepared to waive the requirement for a locally licensed custodian will be prepared to designate as a custodian a prime broker regulated in an acceptable jurisdiction having substantial net worth. In addition, the GFSC would not require a prime broker to offer physical segregation of fund assets from its own assets; for hedge funds targeted at retail less sophisticated investors, the GFSC would normally require a traditional custodian, although it will be prepared to waive the requirement that the custodian takes control of the fund's property provided that the property is held by a prime broker regulated in an acceptable jurisdiction having substantial net worth. The GFSC would normally expect a custodian to be a licensed Guernsey institution but will be prepared to consider requests to designate custodians from another jurisdiction, provided it can be satisfied that the custodian's role in overseeing the fund manager will be subject to monitoring by the custodian's regulatory authority. For funds of this type the prime broker would be expected to provide clear segregation from its own assets of all fund assets exceeding the amount required for collateral against credit extended by the prime broker;

5 GUERNSEY BRIEFING 5 "Guernsey has embraced AIFMD by introducing a dual regime so that Guernsey AIFMs can distribute into both EEA states non- EEA states." net asset value share price estimation: for the broad spectrum of funds, the GFSC will be prepared to permit arrangements which allow preliminary estimation of net asset value, provided such arrangements are fully disclosed in fund documentation the risks to investors are fully set out; for those funds aimed at retail less sophisticated investors, the GFSC would not accept arrangements under which the fund itself bore any risk of loss through overpayment on redemption; client money rules: the GFSC is prepared to consider waivers from the operation of client money rules, provided it is satisfied as to the robustness of estimation procedures to be used. AIFMD The Directive on Alternative Investment Fund Managers (the "AIFMD") entered into force on 21 July 2011 had to be implemented by EU member states by 22 July A transitional period ended on 22 July Although not strictly required to do so certain EEA member states have also implemented the directive its application is therefore wider than just EU member states. AIFMD affects AIFMs also AIFs themselves. It has introduced a harmonised regulatory framework for EEA established AIFs including requirements relating to authorisation, administration, remuneration, marketing depositaries. AIFMD also applies to non-eea AIFMs that manage or market AIFs in the EEA, subject to a number of conditions. Guernsey has embraced AIFMD by introducing a dual regime so that Guernsey AIFMs can distribute into both EEA states non-eea states. The two regimes are: the existing regime which will remain for those investors managers not requiring an AIFMD fund including: those using EEA national private placement regimes; those marketing to non-eea investors. an opt-in regime under the Guernsey AIFMD Rules, 2013 which is fully AIFMD compliant can be used where there is a particular commercial reason to do so, e.g. for investor relations. With regard to marketing in EEA states, AIFMs can continue to use existing national private placement regimes for as long as they exist Guernsey will look to transition to full passporting as when that regime is implemented for third countries. The AIFMD (Marketing Rules), 2013 ensure that any Guernsey AIFM Guernsey AIF to whom they apply shall take all reasonable steps with a view to ensuring that any form of marketing in a country or territory within the EEA is effected in accordance with the laws regulations in force in the relevant state that the GFSC is notified of that marketing within 14 calendar days of commencement. The AIFMD (Marketing) Rules, 2013 do not apply to AIFMs managing AIFs with assets under management which in total do not exceed one of the following limits: EUR500 million, provided the AIFs are not leveraged investors have no redemption rights for the first five years; EUR100 million (including assets acquired through leverage). Taxation From 1 January 2008, Guernsey moved to its "Zero 10" taxation regime. Under this regime, all Guernsey registered companies (other than exempt companies) are taxed at zero percent on their profits except for: income from banking business lending activities (taxed at 10%); income from activities regulated by the Office of Utility Regulation (taxed at 20%); income from ownership of l buildings in Guernsey (taxed at 20%). In addition, from 1 January 2013, an income tax rate of 10% was extended to the activities of licensed fiduciaries (in respect of regulated activities); licensed insurers (in respect of domestic business); licensed insurance intermediaries; licensed insurance managers. The ability for Guernsey companies to be exempt from Guernsey income tax on their non-guernsey sourced income to be nonresident in Guernsey for taxation purposes was abolished except in relation to funds. Accordingly, it is still possible for an openended or closed-ended fund to be exempt from Guernsey taxation in respect of its non- Guernsey sourced income. This exemption is also available to fund established as unit trusts. Guernsey limited partnerships do not constitute separate taxable entities under current law practice in Guernsey therefore are not liable to tax in Guernsey. Income gains arising in respect of the

6 GUERNSEY BRIEFING 6 limited partnership fund would only be taxed (if at all), in accordance with the particular circumstances of each partner of the fund. Guernsey does not levy any taxes in respect of capital gains, nor does it levy VAT or any goods services tax. In most circumstances, a Guernsey fund will make dividend payments to non-guernsey residents free of any withholding tax. No Guernsey stamp duty will be payable upon the issue of shares. In the event of the death of a sole holder of shares, a Guernsey grant of probate or administration may be required in respect of which certain fees will be payable to the Ecclesiastical Registrar in Guernsey. Continued on following page

GUERNSEY BRIEFING 7 For further information, please contact: Guernsey Kate Ovenden (Author) Partner T +44

helyar@ Richard Sharp Senior Associate T +44 (0)1481 812803 E richard.

chana@ 2009 Bedell Cristin The information contained in this briefing is intended to provide a brief update in

The information opinions expressed in this briefing do not purport to be definitive or comprehensive are not

7 GUERNSEY BRIEFING 7 For further information, please contact: Guernsey Kate Ovenden (Author) Partner T +44 (0) E kate.ovenden@ Mark Helyar Partner T +44 (0) E mark.helyar@ Richard Sharp Senior Associate T +44 (0) E richard.sharp@ London Sukhvinder Chana Senior Associate T +44 (0) E sukhvinder.chana@ 2009 Bedell Cristin The information contained in this briefing is intended to provide a brief update in relation to the topics covered. The information opinions expressed in this briefing do not purport to be definitive or comprehensive are not intended to provide legal advice should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained. No responsibility or liability is accepted in connection with the content of any websites to which you may gain access from this briefing.

An insight into Jersey Funds

www.hatstone.com An insight into Jersey Funds This note provides an overview of Jersey Funds Introduction Jersey has established itself as a well regulated international finance centre for investment funds