Investment funds in gibraltar regulatory overview

MULTI-JURISDICTIONAL GUIDE 2013/14

INVESTMENT FUNDS

© This article was first published in the Investment Funds Multi-jurisdictional Guide 2013/14 and is reproduced with the permission of the publisher, Practical Law Company. The law is stated as at 1 April 2013.

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Investment funds in Gibraltar: regulatory overviewPeter Howitt, Jessica Calvert and David BorgeRamparts Law

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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 is a relatively recent arrival to the global funds industry. The Financial Services (Experienced Investor Funds) Regulations 2005 established Gibraltar as a competitive funds jurisdiction, by introducing high regulatory standards and fast-tracked procedures, to ensure it compares favourably with top-tier jurisdictions. Success in other finan-cial services sectors has led to Gibraltar’s growing financial services reputation with access to over 500 million people within the wider EU (of which it forms part) and European Economic Area (EEA). The government is keen to maintain growth in the financial sector and funds industry.

Gibraltar’s advantages include:

• Gibraltar’s English law legal system.

• A favourable tax regime, including no income tax on foreign corporate income, low domestic corporate and personal income tax, no VAT, capital gains tax (therefore no tax on the redemp-tion of shares), inheritance, wealth or tax on interest earned by Gibraltar residents. There is no tax on dividends and interest paid by a Gibraltar company to non-residents including investors in a fund. There is no withholding tax on dividends.

• The strength of the economy and its financial stability.

• Gibraltar’s position as gateway to Europe and established arrangements. The re-domiciliation of existing funds in a large number of relevant funds territories including Europe, the US, Hong Kong, British Virgin Islands, the Cayman Islands, Switzerland and Commonwealth territories is relatively easy.

Gibraltar is due to transpose Directive 2011/61/EU on alternative invest-ment fund managers (AIFM Directive) in July 2013 (see Question 27). The new regime aims to capitalise on demand for European funds by providing:

• Regulation for non-UCITS fund managers.

• A licensing and regulatory regime for alternative investment funds managers (AIFM).

• An alternative funds passport.

Retail funds

Gibraltar is capable of providing for retail funds and aims to expand this sector, although all fund activity currently consists of non-retail funds such as experienced investor funds (EIFs) and private funds (see Questions 15 to 26).

In most cases, Gibraltar’s fund regime does not distinguish between open-ended and closed-ended funds. Many of the relevant structural differences therefore largely depend on:

• 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. The undertakings for collective investment in transferable secu-rities (UCITS) retail fund regime introduced by EU law requires a wide range of management and investment criteria. The non-UCITS closed-ended transferable securities funds regime is regulated by Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading (Prospectus Directive) in respect of marketing rights and obligations.

There are currently no retail funds (open or closed-ended) in Gibraltar. However, it would be possible to set up a fund under the current regu-latory rules (see above).

Generally, the same regulatory framework applies to open-ended and closed-ended retail funds (see Questions 2 to 14).

Regulatory framework and bodies

2. What are the key statutes, regulations and rules that govern retail funds? Which regulatory bodies regulate retail funds?

Open-ended retail funds

Regulatory framework. The regulatory framework is set out in the Financial Services (Collective Investment Schemes) Act 2011 (CIS Act) (transposing Directive 2009/65/EC on undertakings for collec-tive investment in transferable securities (UCITS) (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 collective investment schemes (CISs) and also provides the framework under which UCITS management companies can operate in Gibraltar.

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In addition, the following regulations are applicable:

• Financial Services (Collective Investment Schemes) (Corporate Restructuring) Regulations 2011.

• Financial Services (Collective Investment Schemes) (Conduct of Business) Regulations 2011.

• Financial Services (Collective Investment Schemes) (Key Investor Information) Regulations 2011.

• Financial Services (Collective Investment Schemes) (Miscellaneous Provisions) Regulations 2011.

• Financial Services (Collective Investment Schemes) Regulations 1991.

In relation to marketing, UCITS must also comply with:

• Financial Services (Advertisements) Regulations 1991.

• Financial Services (Unsolicited Calls) Regulations 1991.

Regulatory bodies. The Financial Services Commission (FSC) author-ises and supervises a wide range of organisations including regulated funds and financial entities (see the code of practice on collective investment schemes at www.fsc.gi/download/adobe/codecis.pdf).

Closed-ended retail funds

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)) applies to offers of transferable securities (excluding UCITS). The PA allows for the marketing of certain closed-ended collective investment undertakings in Gibraltar and in Europe.

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 FSC either as:

• 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.

• Receipt of a FSC decision (within six months of application).

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:

• 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 passporting regime. Gibraltar UCITS funds benefit from full passporting under European financial services law.

Non-UCITS retail funds are not currently authorised within the framework of EU law and are not therefore easily passportable between European jurisdictions.


Closed-ended funds must be authorised by the FSC (see above, Open-ended retail funds). 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. 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 passporting regime for qualifying prospectus funds. There is currently considerable cross-border uncertainty on the extent to which closed-end funds fall within the scope of the Prospectus Directive.

Marketing

4. Who can market retail funds?


Retail funds can be marketed by:

• Any person or management company authorised by the FSC.

• Persons deemed to be authorised by the FSC such as:

– EEA UCITS management companies;

– 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, Open-ended retail funds).

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There are no restrictions regarding the persons to whom open-ended retail funds can be marketed.


See above, Open-ended retail funds.

Managers and operators

6. What are the key requirements that apply to managers or operators of retail funds?


UCITS funds structured as common funds. A UCITS fund can be struc-tured as a common fund (by contract or under trust) (see Question 8, Open-ended retail funds). In that case, it must appoint an authorised UCITS management company (who will contract with the required service provid-ers, including the administrator and investment manager). This can be either a Gibraltar UCITS management company or an EEA UCITS man-agement company. UCITS may also be a self-managed OEIC (see below).

Conditions for 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 exceed 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.

• The business must be conducted by at least two people of suf-ficiently 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.

• Adequate internal control mechanisms 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.

• Adequate internal control mechanisms ensuring that the assets of the UCITS are invested according to the fund rules or the instru-ments 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 man-agement 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 rel-evant) 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 sub-scription 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 a self-managed OEIC. An authorised UCITS scheme structured as a self-managed OEIC can be authorised without appointing a management company if (sections 24 to 26, Part IV, CIS Regulations):

• 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.

The FSC also requires the OEIC to ensure:

• 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 and the holding or management of investments in financial instruments to invest initial capital;

– ensuring transactions may be reconstructed according to its origin, the parties to it, its nature, and the time and place at which it was effected;

– that its assets are invested according to law and the instruments of incorporation.

Non-UCITS retail funds. There is currently no complete or comprehensive legislation concerning non-UCITS fund managers.


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See above, Open-ended retail funds. Gibraltar law does not differenti-ate between open-ended and closed-ended retail funds, though the legislation makes reference to UCITS funds, which must be open-ended.

Assets portfolio

7. Who holds the portfolio of assets? What regulations are in place for its protection?


The scheme property belonging to an authorised OEIC must be entrusted to a depository for safekeeping. When the authorised scheme is a trust, it must appoint a trustee.

Procedures to protect assets of both UCITS and non-UCITS funds are contained in the Financial Services (Collective Investment Schemes) Regulations 2011.

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, Open-ended retail funds.

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 open-ended retail funds in Gibraltar (see Question 1, Retail funds). However, Gibraltar UCITS could be established as one of the following:

• OEIC (including under a protected cell company (PCC) struc-ture (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 a UCITS management company. A company is subject to usual Companies Act legislation and filing requirements.

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 has an advantage to investors. 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.

• Unit trusts. A unit trust does not have a separate legal person-ality. 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.

Because 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 respon-sible for establishing the fund and the share in the fund will be determined by contract rather than by a trust deed.

Participants are referred to as unitholders in the FSC Code of Practice on Collective Investment Schemes.

Non-UCITS retail schemes in Gibraltar must be authorised by the FSC. They can be established (whether open-ended or closed-ended) as either:

• Common funds (with a trust deed or binding agreement between the manager and trustee).

• An OEIC.

Advantages. The advantages and disadvantages of using each would be as stated above (a common fund can be set up as a unit trust or contractual fund) (see above, Legal vehicles).

Disadvantages. See above, Advantages.


There are no retail funds in Gibraltar at present.

Investment and borrowing restrictions

9. What are the investment and borrowing restrictions on retail funds?


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.

An OEIC may acquire movable or immovable property which is essential for the direct pursuit of its business.

However, in relation to investments, a UCITS fund must not:

• Invest more than 10% of its assets in other transferable securi-ties 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.


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• Risk exposure to a counterparty of the UCITS in an over-the-counter 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 condi-tions being satisfied.

Restrictions also apply to investment in other collective investment schemes, for example investments made in units of collective invest-ment undertakings other than UCITS shall not exceed in aggregate, 30% of the assets of the investing UCIT (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 2006 and the FSC Code of Practice on Collective Investment Schemes. Though the 2006 Regulations were repealed by the 2011 Regulations, the FSC Code still applies.

A non-UCITS fund is authorised to invest in the following:

• Transferable securities.

• Units in collective investment schemes.

• Approved money-market instruments.

• Derivatives and forward transactions.

• Deposits.

• Property.

• Gold, up to a limit of 10% of the value of the scheme property.

A non-UCITS fund must not:

• Invest more than 20% of the value of the scheme property in deposits with a single body.

• Invest more than 10% of the value of the scheme property in transferable securities or money-market instruments issued by a single body, and more than 20% issued by the same group.

• Risk exposure to any one counterparty in an over-the-counter derivative transaction exceeding 10% of the value of the scheme property.

• Hold more than 35% of units in any one CIS.

Different rules apply where the scheme is invested in government and public securities.

Particular restrictions apply to non-UCITS retail schemes that invest in:

• Collective investment schemes (for example, the maximum percentage in value of the scheme property that may consist of transferable securities or money market instruments issued by a single body is 10%. Similarly, maximum exposure to any one counterparty in an over-the-counter derivative transaction is 10%).

• Property, such as ensuring the property has:

– good title;

– been valued by a qualified valuer; and

– been purchased within six months of valuation.

In addition, no more than 25% of the value of a scheme property is to consist of any one immovable property. There are also restrictions on what percentage of scheme property can be mortgaged.

In respect of borrowing restrictions, non-UCITS authorised retail funds that borrow cash cannot use these monies for a transaction in deriva-tives (trade in commodities) or forwards transaction (the purchase or sale of a good or service for a certain price on a fixed future date), except where the manager:

• Borrows an amount of currency from an eligible institution or an approved bank.

• Keeps an amount in another currency, at least equal to the bor-rowing on deposit with the lender, his agent or nominee.

The manager of an authorised scheme must ensure that borrowing does not, on any day, exceed 10% of the value of the scheme property. This restriction does not apply to back-to-back borrowing.


The same rules that apply to non-UCITS open-ended funds also apply to closed-ended funds (see above, Open-ended funds).

10. Can the manager or operator place any restrictions on the issue and redemption of interests in retail funds?


The manager can place restrictions on the issue and redemption of interests in retail funds. A scheme, for example, can be limited issue (that is, only a limited number of units are issued or units are only issued for a limited time). If the scheme provides for limited issue, the manager cannot issue further units unless, at the time of the issue, he is satisfied on reasonable grounds that the proceeds of the subsequent issue can be invested without either:

• Compromising the fund’s investment objectives.

• Materially prejudicing existing unitholders.

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 provide for redemptions at least once every six months.


Closed ended retail funds only issue a limited number of units (this is what defines a closed-ended fund). Regarding redemption, see above, Open-ended funds.


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11. Are there any restrictions on the rights of participants in retail funds to transfer or assign their interests to third parties?


Managers can impose restrictions. Every unitholder is entitled to transfer units in any form approved by the manager. The manager is only required to accept a transfer if it is permitted by the constituting instrument or prospectus.


By their nature, closed-ended retail funds impose restrictions on partici-pants to redeem, transfer or assign their units. Restrictions on transfer or assignment will depend on the fund’s rules rather than legislation.

Reporting requirements

12. What are the general periodic reporting requirements for retail funds?


UCITS funds must publish and provide to investors:

• A prospectus (including the KIID).

• 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).

When Gibraltar is the UCITS home state, the prospectus, any amend-ments, and the annual and half-yearly reports must be sent to the FSC and, if requested, the EEA authority of the management company’s home state.


See above, Open-ended funds.

Tax treatment

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 tax-able. Retail fund income is likely to be generated outside of Gibraltar. 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 corporate income tax.

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.

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.

Reform

14. What proposals (if any) are there for the reform of retail fund regulation?

The legislation relating to non-UCITS retail funds and the new AIFM Directive is currently under review (see Question 1).

HEDGE FUNDS

15. What is the structure of the hedge funds market? What have been the main trends over the last year?

Hedge funds make up the majority of the funds market in Gibraltar through:

• Private funds. Private funds are collective investment schemes not listed on the stock exchange and not authorised to have more than 50 investors.

• 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.

See Question 24.

Since private funds are not registered, it is unclear exactly how many there are. As of December 2012, there were 96 registered EIFs man-aging over GB£2.7 billion worth of assets. It is thought the EIFs are structured into:

• Hedge funds (43%) trading in:

– commodities;

– securities; and

– currencies.

• Mixed strategy (13%).

• Real estate (12%).


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• Fund of fund strategies (12%).

• Private equity (9%).

• Unusual investment strategies (about 9%).

About one in seven EIFs take a mixed approach.

Both private funds and EIFs may fall within the scope of the AIFM Directive when it is transposed into national law in what is anticipated to be mid-2013 (see Question 27).

Regulatory framework and bodies

16. 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 EIFs and private funds:

• EIFs are regulated by the Financial Services (Experienced Investor Funds) Regulations 2012 (EIF Regulations).

• Private funds are established under section 6(3) of the CIS Act (see Question 2) and CIS Regulations but do not require authori-sation by or registration with the FSC and are therefore unregu-lated. This situation is set to change with the implementation of the new AIFM Directive (see Question 27).

Regulatory bodies

EIFs are governed by the FSC. Provided there are no objections, an EIF can be established within ten days of application (see Question 22).

17. How are hedge funds regulated (if at all) to ensure compliance with general international standards of good practice?

EIFs are the most common non-retail funds in Gibraltar and regulated in a number of ways to ensure compliance with international standards of good practice. Private funds are currently unregulated (see Question 16, Regulatory framework).

Risk

The fund controllers, usually the directors, are responsible for risk management, the safeguarding of assets, prevention of fraud and other irregularities. Sufficient details on anticipated potential risks should be included in all EIF offering documents.

Valuation and pricing

There are no particular rules on valuation except the method of valu-ation must be included in the prospectus. The 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, particu-larly 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 authorised by the FSC. If it is established as a trust, at least two of its trustees must be ordinarily resident in Gibraltar and authorised 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).

• 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.

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 manipula-tion (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 22.

Money laundering

Gibraltar has a strong anti-money laundering policy. All EU anti-money laundering regulations are implemented in Gibraltar through the Crime (Money Laundering and Proceeds) Act 2007 and the Anti-Money Laundering Guidance Notes issued by the FSC.

Short selling

Regulation (EU) No 236/2012 on short selling and certain aspects of credit default swaps became directly applicable on 1 November 2012. 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.


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Marketing

18. Who can market hedge funds?

There are no restrictions on who can market an EIF or private fund. The restrictions apply to the persons to whom the EIF or private fund is being marketed (see Question 19).

The EIF Regulations state that a person who promotes an EIF to per-sons 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.

As private funds are unregulated in Gibraltar, there are no requirements related to marketing of foreign hedge funds locally.

19. To whom can hedge funds be marketed?

EIFs

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.

• An individual whose net worth, or joint net worth with that person’s spouse, is greater than EUR1 million, excluding that person’s princi-pal 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, that is an entity author-ised or regulated to operate in the financial markets such as credit institutions, investment firms and insurance companies (Financial Services (Markets in Financial Instruments) Act 2006).

• 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 he is a qualified investor and that he has received and accepted the investment warning stipulated in the offer document.

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

20. Are there any restrictions on local investors investing in a hedge fund?

There are no specific restrictions for local investors to participate in an EIF or a private fund if the eligibility criteria have been complied with (see Question 19).

Assets portfolio

21. Who holds the portfolio of assets? What regulations are in place for its protection?

EIF

Open-ended EIF’s must have a depository 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 depository.

Private funds

As private funds are not regulated, there are no statutory requirements for a depository to be appointed.

Requirements

22. What are the key disclosure or filing requirements (if any) that must be completed by the hedge fund?

A major advantage in setting up as an EIF is that no prior approval is required from the FSC so funds can be marketed very quickly, in theory 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 prospec-tus 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;

– 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).


Country Q&

ACountry Q

&AThe 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.

23. What are the key requirements that apply to managers or operators of hedge funds?

To undertake investment management activities in Gibraltar a financial service licence is required from the FSC.

EIF management

An EIF established as a Gibraltar company (or Gibraltar re-domiciled 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 EIF’s 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 manag-ers managing local EIFs but they must be lawfully able to provide their services from their home jurisdiction. European managers will normally need a licence under the Markets in Financial Instruments Directive (MIFID) to confirm this requirement.

Private funds

There is no restriction on private funds being managed or operated by a foreign fund manager.

Legal fund vehicles and structures

24. 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?

EIF

A company formed or re-domiciled under the Companies Act. The participants are shareholders and their interests are shares. The advan-tages and disadvantages are:

• Advantages. The EIF has limited liability.

• Disadvantages. The need to comply with Companies Act requirements is an administrative burden. The filing of docu-ments also means that certain information is not confidential.

A unit trust. Where the vehicle is a unit trust, its participants’ interests are held as units. The advantages and disadvantages are:

• Advantages. The unit trust does not impose a significant admin-istrative burden when compared to a company but will only be tax efficient for non-residents.

• Disadvantages. The unit trust does not come within the compli-ance regime of the Companies Act, meaning that usual govern-ance relating to companies will not apply.

A protected cell company. The participants are shareholders and their interests are shares. The advantages and disadvantages are:

• Advantages. Protected cell companies allow assets and liabili-ties to be split and segregated between different cells of the same company for the protection of third parties and sharehold-ers. 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.

A limited partnership. A limited partnership can comprise up to a maximum of 20 persons. The advantages and disadvantages are:

• Advantages. Limited partnerships can be commercially flexible as they are subject to less compliance and disclosure obligations than companies.

• Disadvantages. Partners are personally liable for the debts and obligations under a limited partnership.

Private funds

The common practice in Gibraltar is to establish a private fund as a limited company, with directors controlling the fund as set out in the fund’s offering document.

Tax treatment

25. What is the tax treatment for hedge funds?

The same rules apply as for retail funds (see Question 13).

Restrictions

26. 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 restrictions mentioned in Questions 10 and 11 do not apply to EIFs. Interests in EIFs can only be transferred to third parties who fit the profile of an experienced investor.

As private funds are unregulated it will depend on the constitution of the particular fund.

Transfer to third parties

See above, Redemption of interest.


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Reform

27. What (if any) proposals are there for the reform of hedge fund regulation?

The AIFM Directive is currently under review for transposition into Gibraltar law. It should enter into force by July 2013. This Directive provides for:

• The regulation of non-UCITS fund managers.

• A licensing and regulatory regime for alternative investment fund managers and a European alternative funds passport.

ONLINE RESOURCESFinance Centre Department

W www.gibraltar.gov.gi/finance-centre

Description. The Finance Centre Department is responsible for:

• 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 www.fsc.gi

Description. Financial Services Commission. Statutory body responsible for financial services in Gibraltar.

Gibraltar Funds and Investment Association

W www.gfia.gi

Description. The Gibraltar Funds and Investment Association’s objective is to develop and maintain Gibraltar as a specialised investments jurisdiction of choice within Europe.

Laws of Gibraltar

W www.gibraltarlaws.gov.gi

Description. This official website contains all Gibraltar primary and secondary legislation consolidated to date.


Country Q&

ACountry Q

&A

Professional qualifications. LPC, 1999; England and Wales Solicitor, 2002; Gibraltar Solicitor, 2012

Areas of practice. Commercial; Corporate; E-commerce; Payments; Gaming; Tax.

Non-professional qualifications. BA Law & Criminology, University of Sheffield

Languages. English

Professional qualifications. LPC, 2002; England and Wales Solicitor, 2005; Gibraltar Solicitor 2011

Areas of practice. Commercial contracts; Gaming; Real Estate.

Non-professional qualifications. LLB (Hons), Leeds University

Languages. English

Professional qualifications. LPC, 2010; England and Wales, Solicitor, 2012

Areas of practice. Gaming; Tax; Intellectual Property.

Non-professional qualifications. Pharmacy MPharm (Hons), Cardiff University

Languages. English; Spanish

David Borge, Associate

Ramparts LawT +350 200 61061F +350 200 64756E [email protected] www.ramparts.eu

Peter Howitt, Founder


Jessica Calvert, Senior Associate


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Investment funds in gibraltar regulatory overview