Unregulated Funds: Exemption Orders for Special Purpose Vehicles (SPV) General Partners and Trustees.

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A decision made (18/08/2008) regarding: Unregulated Funds: Exemption Orders for Special Purpose Vehicles (SPV) General Partners and Trustees.

Decision Reference: MD-E-2008-0160
Decision Summary Title :	Unregulated Funds: Exemption Orders for Special Purpose Vehicles (SPV) General Partners and Trustees		Date of Decision Summary:	15 August 2008
Decision Summary Author:	Robert Jones Finance Industry Development Assistant		Decision Summary: Public or Exempt? (State clauses from Code of Practice booklet)	Public
Type of Report: Oral or Written?	Written		Person Giving Oral Report:
Written Report Title :	Unregulated Funds: Exemption Orders for Special Purpose Vehicles (SPV) General Partners and Trustees		Date of Written Report:	15 August 2008
Written Report Author:	Robert Jones Finance Industry Development Assistant		Written Report : Public or Exempt? (State clauses from Code of Practice booklet)	Public
Subject: The passing of the Collective Investment Funds (Unregulated Funds) (Amendment) (Jersey) Order 200- and the Financial Services (Amendment of Schedule 2 to Law) (No. 2) (Jersey) Order 200- (together “the Orders”).
Decision(s): The Minister made the Collective Investment Funds (Unregulated Funds) (Amendment) (Jersey) Order 200- and the Financial Services (Amendment of Schedule 2 to Law) (No. 2) (Jersey) Order 200- (together “the Orders”).
Reason(s) for Decision: The Orders will allow the unregulated funds regime to operate more effectively, and consequently assist Jersey’s funds industry. The Jersey Financial Services Commission has recommended that the Minister makes the Orders. Industry have been consulted, through Jersey Finance Limited, and are in favour of the Orders being made.
Resource Implications: No measurable cost or manpower implications arise for the Commission, the States or industry.
Action required: The Minister to approve, sign and seal the Orders and the sealed Orders to be delivered au Greffe.
Signature: Senator P.F.C.Ozouf		Position: Minister
Date Signed:		Date of Decision (If different from Date Signed):

Unregulated Funds: Exemption Orders for Special Purpose Vehicles (SPV) General Partners and Trustees.

MINISTER FOR ECONOMIC DEVELOPMENT

UNREGULATED FUNDS: EXEMPTION ORDERS FOR SPV GENERAL PARTNERS AND TRUSTEES

COLLECTIVE INVESTMENT FUNDS (UNREGULATED FUNDS) (“AMENDMENT”) (JERSEY) ORDER 200- (“THE UF AMENDMENT”)

FINANCIAL SERVICES (AMENDMENT OF SCHEDULE 2 TO LAW) (NO. 2) (JERSEY) ORDER (“THE SCHEDULE 2 AMENDMENT”)

TOGETHER “THE ORDERS”

THE ISSUE AND RECOMMENDATION

The Minister will recall that on 18 February 2008, he made the Collective Investment Funds (Unregulated Funds) (Jersey) Order 2008 (“the UF Order”), creating a new model of Jersey fund, the unregulated fund, for sophisticated or institutional investors.
Industry, acting through Jersey Finance Limited (“JFL”) have asked that the general partner to a fund which is a limited partnership or the trustee to a fund which is a unit trust, where the general partner or trustee is a special purpose vehicle (“SPV”), should be exempt from registration as a fund functionary, provided that the SPV itself is being provided with a registered office by a person registered as a manager of a managed entity (“MOME”). The Jersey Financial Services Commission (“the Commission”) have agreed that such an exemption is appropriate.
It is recommended that the Minister makes the Orders.

BACKGROUND

JFL, the Jersey Fund Association and the Commission have been fully engaged in the drafting of the Orders and there has been widespread consultation by JFL with industry. Agreement has been reached for the terms of the Orders.

It should be noted that as the Orders are to be made under Article 3(7) of the Collective Investment Funds (Jersey) Law 1988 and Article 4(1)(b) of the Financial Services (Jersey) Law 1998 (“the FS Law”) respectively and that the power granted to the Minister is in each case to be exercised on the recommendation of the Commission. A letter of recommendation from the Commission is attached to this report.

Jersey has had since the late 1990s a successful and growing alternative fund industry but an unregulated fund offering has only been available since February. Since then, it has been established that it is desirable for unlimited funds in the form of limited partnerships or unit trusts to exclude SPV general partners and trustees from the scope of the FS Law, by including them in Schedule 2 of that law.

Proposals

The UF Amendment

The Minister will recall that paragraph 2 of each of Schedules 1 and 2 of the UF Order requires that Jersey based functionaries to an unregulated fund be registered under the FS Law to carry on fund services business of a similar nature. This was a transitional arrangement, pending the coming into force of the Financial Service (Amendment of Law) (No. 3) (Jersey) Regulations 2008, which came into force on 6 May 2008. These regulations included the provision of fund services to an unregulated fund within the definition of “fund services business” under the FS Law.
The bulk of paragraph 2 of each Schedule is therefore no longer required, and would be inconsistent with the exemption from registration of SPV general partners and trustees. However, paragraph 2(3) (in each case), provides a requirement that unregulated funds in the form of companies issuing units must have their registered office provided by a person who is registered under the FS Law in respect of fund services business of certain classes. It is desired by the Commission to retain this requirement.
Therefore the UF Amendment replaces the existing paragraph 2 of each of Schedules 1 and 2 with a new paragraph 2 preserving only the requirement currently contained in paragraph 2(3).
There are also some consequential changes to the definitions in Article 1 of the UF Order.

The FS Amendment

The FS Amendment adds four paragraphs to Schedule 2 of the FS Law. Three of these paragraphs (3C, 18A and 21) are in essentially the same terms and exempt SPV general partners and trustees of unregulated funds from registration in respect of trust company business, investment business and fund services business respectively. The fourth paragraph (18B) is consequential, and the reasons for it are set out in paragraph 3.10 below.
The scheme of the exemption is as follows. The general partner or trustee of an unregulated fund (with the meaning of the UF Order) is exempt from registration provided that it is (i) a company, (ii) whose only business is acting as general partner or trustee to the fund (i.e. it is an SPV), (iii) which is provided with a registered office by a person registered as a MOME and (iv) notice is given to the Commission.
The reason for the requirement that the company must be provided with a registered office by a person registered as a MOME is to ensure that the Commission has sufficient oversight for AML/CFT purposes. Under the terms of the UF Order, the general partner or trustee must be a Jersey company, and will therefore have a registered office in Jersey. The additional requirement is that this registered office should be provided by a MOME. In the opinion of the Commission, MOMEs have sufficient expertise and experience to ensure AML/CFT compliance. It is the intention of the Commission to modify the Codes of Practice for Fund Services Business in respect of MOMEs to make clear the nature and extent of MOMEs’ obligations in respect of exempt entities.
The provisions in sub-paragraph (1)(a)(iii) of each of paragraphs 3C, 18A and 21 are intended to cover the case where the unregulated fund in question is part of a set of linked funds, collectively forming a single scheme or arrangement. In this case the same SPV general partner or trustee may act in respect of all or some of the linked funds, but will not for that reason cease to be an SPV, because the funds together form a single scheme or arrangement.
There is also a provision to ensure that the SPV general partner or trustee may itself invest in the scheme or arrangement concerned without ceasing to be considered as an SPV. It is considered desirable in the interests of investors that the promoter of a scheme should also invest in it, and one way of doing this would be through the general partner or trustee. We do not wish to do anything to discourage this.
Finally, paragraph 18B is added to exempt a MOME from requiring separate registration as a trust company business in respect of services provided to an SPV general partner or trustee. The MOME must already have been registered as a MOME and it would be pointless to require duplicate registration.

RECOMMENDATION

It is recommended that the Minister for Economic Development makes the Orders.

ROBERT JONES

Finance Industry Development Assistant

15 August 2008

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