The Private Investment Fund
The Guernsey Financial Services Commission is today launching its regime for Private Investment Funds.
This concludes its evaluation of the responses to the consultation process. The Commission is very grateful to all who responded and will be writing in due course to all who did so.
The Applications Process
The duration of the applications process would be one business day. The application Form PIF requests both a licence, under section 4 of the Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended (“the Law”) and for fund registration under section 8 of the Law. Strong corporate governance is ensured through the requirement for a manager licensed under the Law. Thus the licence and fund application is made in tandem and is turned around in one business day by the Commission.
An application should be accompanied by the relevant licensing and registration fees.
Key features of the proposed Private Investment Fund Regime
The Private Investment Fund is a regulated product with a focus on strong corporate governance, including managing conflicts of interest. No-one should be in any doubt that only the highest principles of corporate governance must be exercised in the use of this product.
1. Private Investment Funds may be either open-ended or closed-ended.
2. Private Investment Funds will be subject to the Private Investment Fund Rules. The Rules contain requirements for
- Managing conflicts of interest;
Submitting annual returns notifying of any changes to the warranties made (please see 8 below);
Submitting annual audited accounts within six months of period end;
Mandatory characteristics of a private investment fund (please see 3, 4 and 5 below)
but do not contain any requirements for an information particulars to be prepared.
3. The Private Investment Fund should contain no more than 50 legal or natural persons holding an ultimate economic interest in the private investment fund, save in the instance where the investment is made by an investment manager acting as agent for a wider group of stakeholders. This may be, for example (but not exhaustively): an investment manager acting as agent for investors in a collective investment scheme or equivalent, pension holders in an occupational pension scheme, or government funds – whether local or sovereign.
4. Excepting a period of one year commencing from the date of first subscription, there is a “rolling test” applied on a continuous basis. In the previous twelve months, the Private Investment Fund can add no more than 30 new ultimate investors. This test must be applied and evidenced by the licensed manager of the Private investment fund. The manager shall keep a record of such tests.
5. No attempt has been made to limit the number of investors to whom the private investment fund may be marketed.
6. The Private Investment Fund requires a licensed manager in the structure. No rules would be applied against the licensed manager.
7. The Private Investment Fund cannot entertain a structure whereby there are separate investment advisers acting in respect of individual cells. There must be one adviser to the entire structure.
8. As part of the applications process the proposed licensed manager provides warranties on the ability of the investors to assume loss. The philosophy of a private fund is a close relationship between investors and management; therefore, this is not an unreasonable representation. The Commission will treat any failures in the process leading to the signing of such warranties extremely seriously.
The Commission’s Addressing of Major Themes Arising from Consultation
Respondents will notice that the Commission has not required the Private Investment Fund to be a sub-threshold product for AIFMD and that the product may be incorporated as either a protected cell company or incorporated cell company.
Further, respondents will notice that the “30 investor rolling test” does not apply for the first year of the Private Investment Fund – the commencement of the first year being defined as the moment when the first investor has subscribed, however termed.
In addition, the Commission acknowledges that the burden on the manager to warrant an investor’s ability to sustain loss can only fall at the time the subscription is made. The Commission received representations suggesting that the burden of such warranties would ultimately fall on to the designated administrator. It is not the intention of the Commission to place this burden on the designated administrator. The Commission, whilst not imposing rules on the manager of the Private Investment Fund, sees its role as one of substance in the discharging of corporate governance. The philosophy is that the manager exists for the promoter, who will have a relationship with the investors. As stated in the consultation paper, the Commission recognises that certain funds are characterised by a relationship between management and investors that is closer than that of a typical agent. It is difficult to see how a designated administrator can have this relationship at the outset, and therefore the regime does not anticipate it being able to fulfil this role. Hence the requirement for a licensed manager.
The Commission, in introducing this regime, is placing reliance on the designated administrators that they will take on good quality business in this space.
The Commission intends to undertake a review of the use of the Private Investment Fund around its first anniversary in order to ensure it is being used as is anticipated.
The Commission recognises that there may be ongoing questions over whether a particular structure fulfils the mandatory characteristics of a Private Investment Fund. Accordingly the Commission is very happy to discuss any case.