Published in Legal Week - 31 March 2008

The Funds industry in Jersey has undergone some important changes in recent months. The introduction of Unregulated Funds, changes to the way functionaries of funds are regulated and changes to the island's companies law all serve to improve what Jersey can offer from an offshore funds perspective.

Unregulated Funds

The Collective Investment Funds (Unregulated Funds) (Jersey) Order (the "UFO") came into force on the 19th of February and creates a new classification of fund which falls outside of the traditional collective investment funds regime and requires no pre-approval from the island's regulator: the Jersey Financial Services Commission (JFSC). Instead, a written notice confirming that the conditions set out by the UFO for Unregulated Funds are satisfied is submitted to the Jersey Registrar of Companies after the fund has been established.

Unregulated funds are divided into two categories: Unregulated Eligible Investor Funds and Unregulated Exchange-Traded Funds.

The defining feature of an Unregulated Eligible Investor Fund is that all investors in the fund must qualify as 'eligible investors' and sign a declaration that they have received an investment warning in the prescribed form. There are a number of other ways in which a person may qualify as an eligible investor, but a person who invests not less than USD 1,000,000 or the currency equivalent in an Unregulated Eligible Investor Fund will automatically qualify.

Unregulated Eligible Investor Funds may be open-ended or closed-ended and may be established as a Jersey company, a Jersey limited partnership or a unit trust.

Save for limited partnerships and unit trusts (which must have a Jersey corporate general partner/Jersey corporate trustee or manager) there is no requirement for an Unregulated Eligible Investor Fund to appoint Jersey functionaries, directors or other officers. If a Jersey functionary is appointed to provide services, it must be licensed by the JFSC for the conduct of fund services business.

The defining feature of an Unregulated Exchange-Traded Fund is that its units must be listed on one or more of 54 approved exchanges and that the prospectus contains a prominent investment warning as prescribed by the UFO.

Unlike Unregulated Eligible Investor Funds there are no eligibility criteria for investors of an Unregulated Exchange-Traded Fund, but Unregulated Exchange-Traded Funds may only be established as closed-ended vehicles. Otherwise, the two categories of Unregulated Fund share many of the same features.

Amendment to the Companies Law - the introduction of treasury shares

The most recent amendments to the Companies (Jersey) Law 1991 enable a Jersey company to hold as treasury shares any of the limited shares that it has redeemed or purchased subject to its articles of association. A company that holds shares as treasury shares may cancel the shares, sell the shares, transfer the shares for the purposes of or under an employee’s share scheme or hold the shares without cancelling, selling or transferring them. Treasury shares do not carry the right to vote and there is no entitlement to dividends in respect of treasury shares.

Treasury shares are likely to be attractive to investment funds, as their use will avoid any need to create a capital redemption reserve fund. As no dividends are payable on treasury shares, all the distributable profits will be available for distribution amongst non-treasury shareholders.

Changes to the Regulation of Fund Functionaries

With effect from 14 November, 2007, a change of regulation resulted in all fund functionaries being licensed under the Financial Services (Jersey) Law (the "FSL"), rather than under the Collective Investment Funds (Jersey) Law 1998 (the "CIF Law"). This new method of regulating 'fund services business' is important and should simplify the procedure required when setting up a new fund in Jersey. In particular, once licensed under the Financial Services Law as a fund services business, administrators will be allowed to take on new fund administration business without the need for additional licences/permits (as was previously the case) under the CIF Law.

Although the fund itself is still regulated under the CIF Law, the majority of the requirements imposed by the JFSC will be placed on the Jersey monitoring functionary, rather than on the fund itself. Those who were carrying on fund services businesses in Jersey at the time of implementation have been “grandfathered” into the new regime and are now subject to newly issued codes of practice for fund services business.

In respect of non-Jersey domiciled funds, a Jersey-based entity acting for the fund will, in most cases, be able to do so by virtue of its registration under the Financial Services Law with a simple notification being furnished to the JFSC for each new fund for which a functionary is to act.