Knowledge

The Jersey funds industry is anticipating the launch of new codes of practice for certified funds (the "Codes") by the Jersey Financial Services Commission (the "JFSC") on 2 April 2012 (the "Effective Date").

The Codes will apply with immediate effect to all unclassified collective investment funds issued with a Certificate[1] and have been prepared for the purpose of "establishing sound principles and providing practical guidance" in respect of any Certified Fund[2] . The background to the Codes is the desire for Certified Funds to achieve, so far as possible, "fully implemented" ratings under the IOSCO Methodology[3], as well as for Jersey to be in a position to act quickly in response to those requirements of the AIFM Directive which impact Jersey funds.

Certain parts of the Codes will replace conditions formerly imposed on a fund through its Certificate so do not, in reality, introduce new requirements to those already operating in relation to Certified Funds. Elsewhere, new requirements have been introduced. The expectation is that compliance with the Codes will form part of the contractual arrangements with service providers to Certified Funds.

Funds to which the Codes will apply
All Certified Funds will be required to comply with the Codes. The Codes will not apply to:

• private placement funds, investment syndicates and 'club' arrangements, which are approved under the Control of Borrowing (Jersey) Law 1947, as amended;
• non-Jersey domiciled funds;
• unregulated funds within the meaning of Article 1 of the Collective Investment Funds (Unregulated Funds) (Jersey) Order 2008, as amended; and
• recognised funds within the meaning of Article 1 of the Law.

Responsibility for compliance with the Codes
It will be the responsibility of every Certified Fund, through its governing body[4], to comply with the Codes. Whilst the fund will be able to appoint another person (for example, the manager or administrator of the fund) to implement any necessary actions to comply with the Codes, ultimate responsibility will remain with the fund and its governing body. It should be noted that all Certified Funds must comply with the Codes in full.

Existing funds/grandfathering
The Codes will come into immediate effect from the Effective Date. Whilst there will be no formal "grandfathering" for existing funds allowance will be made for the implementation of the detail of the Codes, provided that the fundamental principles set out below are complied with and active steps are being taken by funds to secure compliance with the detailed underlying requirements. Departures from the principles will be permitted by the JFSC in exceptional circumstances (for example, where strict adherence would produce an "anomalous result"), although funds operating in accordance with pre-existing derogations will not be deemed to be in breach of the Codes.  

The principles
The following eight principles for the conduct of business by Certified Funds are set out in the Codes:

• A Certified Fund must conduct its business with integrity.
• A Certified Fund must act in the best interests of unitholders. 
• A Certified Fund must organise and control its affairs effectively for the proper performance of its business activities and be able to demonstrate the existence of adequate risk management systems.
• A Certified Fund must be transparent in its business arrangements with unitholders.
• A Certified Fund must maintain and be able to demonstrate the existence of both adequate financial resources and adequate insurance. 
• A Certified Fund must deal with the JFSC and other authorities in Jersey in an open and co-operative manner.
• A Certified Fund must not make statements that are misleading, false or deceptive.
• A Certified Fund must at all times comply with and be operated in accordance with any applicable guide.  

Consequences of breaching the Codes
Failure by a Certified Fund to comply with the Codes will represent grounds for the JFSC to take enforcement action and to use its regulatory powers which, in serious cases, could result in the winding up of the Certified Fund and revocation of its Certificate. Whilst failure to follow the Codes will not of itself render any person liable to proceedings, or invalidate any transaction, the Codes will be admissible in evidence if it appears to a court to be relevant to any question arising in court proceedings, and can be taken into account in determining any such question.

Conclusions
It is anticipated that the Codes will mean that compliant ratings for Certified Funds for the purposes of the IOSCO Methodology will be achieved, and will be a useful building block in constructing an AIFM-equivalent fund regime in Jersey. The Codes will 'fill the gap' that currently exists in that Jersey fund services providers are subject to detailed codes of practice requiring minimum standards as to the conduct of their business, but funds themselves are not.  In this way, Jersey's regulatory framework will be enhanced, offering further protection to investors in Jersey funds.

In practice, much of the work in ensuring compliance with the Codes will fall on the Jersey service providers to funds. The new Codes are based on, and thus have a high degree of consistency with, the existing regulatory requirements for fund service providers, which should facilitate implementation.  However, there are a number of areas of difference.  In addition, as mentioned above, the Codes must be implemented by all Certified Funds in full (whereas

Fund Service Providers to Expert Funds are only required to comply with the core principles of the codes applying to them).  

From the Effective Date, Jersey funds and their service providers will need to ensure that they meet, or are working towards compliance with, the requirements of the Codes. An analysis of existing fund documents should therefore be undertaken as soon as possible in order to identify any areas of non-compliance.

[1]  "Certificate" refers to a certificate issued by the JFSC under Article 8B of the Collective Investment Funds (Jersey) Law 1988, as amended (the "Law").

[2]  "Certified Funds" means all unclassified collective investment funds, within the meaning of Article 3 of the Law, issued with a Certificate.

[3]  "IOSCO Methodology" means the IOSCO Methodology for Assessing Implementation of the IOSCO Objectives and Principles of Security Regulation as at October 2008.

[4]  The "governing body" of the Certified Fund is, in the case of a company, its board of directors, in the case of a limited partnership, its general partner(s) and in the case of a unit trust, its trustee(s).