Gibraltar – Regulatory changes

After nearly seven years, Gibraltar’s Experienced Investor Fund regime is being updated and modernised in a continuation of the partnership between the industry, the Financial Services Commission (the FSC or Regulator) and the Government of Gibraltar.  Prior to 2005, Gibraltar’s fund industry comprised a handful of funds regulated under the, then, Financial Services Ordinance 1989 and a few dozen private funds.

Whilst the regime of the former worked in practice, it relied heavily on obtaining derogations from the Regulator.  This made the process of authorising a fund somewhat cumbersome.  On the other hand, the private funds industry grew fairly rapidly.  Private funds in Gibraltar are not regulated and can only be marketed to an identifiable category of persons whose number is less than fifty.  Although there are no actual statutory requirements for the production of audited accounts, a prospectus nor the engagement of a fund administrator, the industry practitioners very much insisted on these.

It was then to meet the demand of certain funds that had grown and wished to market themselves to external investors that the industry proposed to Government the enactment of the Financial Services (Experienced Investor Funds) Regulations 2005.  These regulations ultimately codified what had become the practice with private funds and added a few elements to allow the funds to be marketed more extensively.  Firstly, the marketing of Experienced Investor Funds (EIFs) was limited to experienced investors which were defined as investment professionals, investors who had €1million besides the value of their residential home, or investors who invested €100,000 or equivalent.  The Regulations also required the engagement of two Gibraltar based directors who are authorised by the local Regulator to act as fund directors.  They also required the appointment of a local fund administrator.  The authorisation process was particularly attractive as a fund was allowed to begin trading on the basis of a legal opinion issued by local counsel stating that the fund was properly established in accordance with the Regulations.  A fund would have to notify the Regulator within fourteen days of its commencement of trading.  The notification would be accompanied by the company’s constitutional documents and Private Placement Memorandum and the regulatory fee of £2,500.  The regime worked very well and is probably one of the most flexible Experienced Investor Fund regimes within a European jurisdiction.

After almost seven years of practice, industry requested certain amendments to the regime to increase its competitiveness and ease of use.  The main areas of change are the permission to use certain foreign fund administrators, the expansion of the definition of experienced investors and the addition of an optional pre-launch authorisation scheme.

The principle amendment of the proposed new regulations is that under certain circumstances, foreign fund administrators are eligible to act for Gibraltar EIFs.  In an attempt to achieve a balance between the requirements of some of the larger and more institutional funds to be able to use brand-name administrators and the need to protect the local administration industry, the formula is one whereby the categories of foreign administrators allowed to administer EIFs are administrators that are connected to a credit institution wheresoever established or any administrator that the Regulator and the Minister may approve with the understanding that there would be an initial approval of a list of up to thirty brand-name administrators that would be proposed by industry for such approval.

It was also proposed to expand the definition of experienced investors such that in addition to the existing classes of experienced investors, funds would be able to admit investors who are;

• A participant who has invested an aggregate of €100,000 in one or more Experienced Investor Funds;
• Professional clients and defined under the Financial Services (Markets in Financial Instruments) Act 2006;
• Investors who invest €50,000 and who has been advised by a professional adviser to invest in the fund and the fund’s administrator has received confirmation of such advice; and
• Investors who are investors in funds which were established outside of Gibraltar and were aimed at professional or sophisticated investors and which funds are subsequently re-domiciled to Gibraltar.  This is seen as an important addition because, in light of the Alternative Investment Fund Managers directive which is scheduled to come into force in 2013, there is the expectation that a significant number of Cayman Islands funds will consider re-domiciling into an EU jurisdiction such as Gibraltar, in order to avail themselves of the marketing advantages of European domiciled funds.

The amendments to the Experienced Investor Fund Regime in Gibraltar is expected to come into force some time in early 2012 and it is anticipated that it will improve the competitiveness of the Gibraltar Fund regime while keeping the interests and objectives of investors and the Regulator intact.  It is also anticipated that the new regime will be more user friendly for the more institutional funds.

James Lasry is a partner and the head of the funds team at Hassans International Law Firm in Gibraltar. He served as Chairman of the Gibraltar Funds & Investments Association for 2 years.  James advises the Government of Gibraltar on its funds legislation and was involved in the drafting of the Financial Services (Experienced Investor Funds) Regulations 2005 and their subsequent amendments in 2012. 

He is fluent in English, French, Spanish and Hebrew and he read literature, music and law at John Hopkins and Bar-Ilan Universities. James is a member of the Israel Bar Association, the Law Society of England & Wales and the Gibraltar Bar.   James can be contacted on +350 200 79571 or by email at james.lasry@hassans.gi