JFA Legal Update 26 March 2015

1. JFA Legal Update26 March 2015 Ben Robins – Chairman of JFA and Partner, Mourant Ozannes, Jersey

2. What we'll cover • Recent and on-going local “product” law amendments: • recent Companies Law amendments • proposed updates of the Limited Liability Partnerships and Limited Partnerships Laws • Managed Accounts Exemption • Recent and on-going “regulatory” changes and consultations (AML, outsourcing policy, civil penalties and fund licensing fees) • External factors: • Where are we with AIFMD? • BEPS impact? • MiFID 2 impact? • Where are we with post-McKinsey funds regime review process? Slide 2

3. Companies Law amendments Companies (Amendment No.11)(Jersey) Law 2014 • reductions of share capital possible without court approval • distribution which does not reduce company’s net assets (eg upstream guarantee) not subject to provisions regulating distributions • changes to shareholder ratification of breaches of directors’ duties (OR rather than SR) • more flexible written resolutions (non-unanimous; new process for circulation) • variable special resolution voting thresholds • share redemptions/buy-backs: “in kind” transactions permitted; depositary receipts catered for • meetings: corp rep, consent to short notice and proxy requirements now reflect UK Companies Act • statutory merger/migration process improvements • transfers between capital accounts made easier • (court) process to ratify unlawful distributions Changes to prospectus and demerger provisions under subordinate legislation to follow….

4. LLP Law Amendments Backdrop: • 1997 “prototype” Law: aimed at professional services organisations; required £5m bond to be posted by each LLP • Not widely taken up - £5m bond requirement since removed 2014: new JFSC policy to allow LLPs to be licensed as fund services businesses (NB subject to local span of control requirements) 2015: update of 1997 Law expected (Q3?); near final draft consulted on; • no drastic changes – just a slicker version • replaces “designated partner” concept (for JFSC filings) with Jersey (TCB licensed) secretary requirement • can’t be used as fund vehicles

5. LP Law Amendments Proposal to update Limited Partnerships (Jersey) Law 1994 - Mainstay legislation of local PE industry; other jurisdictions have been/will be updating their LP laws (eg Cayman, Lux, Guernsey) - Possible amendments: • specify statutory general partner duties (as per Delaware/Cayman) • amendment of the "safe habour" limited liability provisions to protect advisory committee members and to reflect the use of "GP/LPs" as a general partner of a Jersey limited partnership • more flexibility on liquidation: on dissolution LP affairs can be wound up by the general partners or by such other person appointed in accordance with the partnership agreement • statutory basis for investor default/commitment forfeit provisions • statutory basis to irrevocable commitment provisions • adding flexibility around limited partner inspection rights (LPA restrictions possible) • adding LP merger/continuance provisions • adding cellular LP provisions?

6. Managed Accounts Exemption Financial Services (Investment Business (Qualifying Segregated Managed Accounts – Exemption) (Jersey) Order 2014 - Created the Qualifying Segregated Managed Accounts (QSMA) concept - QSMA = a >$1m managed account with a single manager, employing a strategy replicating a hedge fund strategy the manager already employs for its funds business, set up for a single investor or connected group of joint investors - Where an fund services business licenced manager operates a QSMA, it is exempt from the need to also hold an investment business licence to operate that managed account - Need to notify JFSC when appointed to operate a QSMA - 3 or 4 notifications already made

7. AML Amendments / MONEYVAL (1) Against backdrop of MONEYVAL inspection in January 2015: • In 2014/15, numerous expedited industry consultations re amendments to the AML/CFT Handbooks, including the AML/CFT Handbook for Financial Services Businesses • Some changes (eg enhanced identification measures) implemented as of January 2015 before MONEYVAL visit • New funds sector-specific guidance in FSB handbook currently being worked on • A series of themed JFSC meetings in 2014 with funds industry compliance officers to inform JFSC revisions • Hope to introduce more certainty and market consistency in grey areas

8. AML Amendments / MONEYVAL (2) Legislative Changes: • Proceeds of Crime and Terrorism (Miscellaneous Provisions) (Jersey) Law 2014: updating/tidy-up exercise; brought all ML offences into Proceeds of Crime Law • Money Laundering (Jersey) Order 2008 - Amendment No. 7 in 2014: requires enhanced CDD measures in some areas (eg private banking investment; companies with nominee holders) and prevents simplified identification measures where customers resident in FATF non-compliant countries • One “live” Consultation Paper No.4 2015: re identification measures: policies and procedures to determine whether customer is acting for a third party or is subject to international sanctions • Proceeds of Crime (Amendment - Financial Intelligence) (Jersey) Law and Regulations – to establish the JFCU as Jersey’s Financial Intelligence Unit (FIU) and specify its powers/functions

9. Outsourcing and Delegation Policy Review • Existing JFSC policy difficult to apply in practice • Different requirements depending on whether service is “outsourced” or “delegated” and definitions aren’t very clear • Revised policy subject to industry consultation; nearing completion • “Hoped for” amendments: • confirm the purchase of advisory services by fund managers is outside the scope of the policy • update to cover AIF services business; • clarify that Jersey certified funds, funds services businesses or AIF services businesses can delegate or outsource for the purposes of the revised policy (ie banking/investment service providers can only outsource)

10. New Civil Penalties for Breaches of Codes • Financial Services Commission (Amendment No. 6) (Jersey) Law – in force 20 March 2015 • Enables civil financial penalties to be levied for contraventions of JFSC Codes of Practice (bringing Jersey into line with other jurisdictions) • Recent Tariff Order consultation – re the tariff of such penalties; suggested ranges of 4%, 6%, 8% of gross turnover; some in industry suggest a monetary cap is needed • Recent Processes Order consultation - re the principles and processes to be applied by JFSC when seeking to impose a financial penalty • JFL has responded – new Orders expected soon

11. Increased JFSC Licencing Fees for Funds? • JFSC Consultation Paper No. 3 of 2015 re proposed increases in fund-related regulatory fees from this summer • Proposals include: • £1k fee on all COBO consent applications sent to Funds Authorisation team • FSB application fees up from £1.6k to £2.1k • CIF cert holder fees up from £1.6k to £1.7k • JFA industry response stressed need for competitiveness and sought a more nuanced approach to COBO fees (ie fee justified for JPPF applications but less so for very private structures and consents for circulation of non-Jersey fund offers)

12. AIFMD: application to Jersey AIFMs Applies to and regulates Jersey AIFMs: • marketing any “AIF” to professional investors in the EEA after July 2014; or • managing EEA AIFs

13. AIFMD: Marketing into the EEA under NPPRs Private Placement Marketing in the EEA since July 2014 • for all those Jersey AIFMs marketing to professional investors in the EEA; • use differing national private placement regimes (NPPRs) of individual EEA states; • Jersey AIF needs AIF Certificate (or CIF certificate and file AIF/Exempt notification for AIF exemption) • Jersey AIFM needs AIFSB licence (or FSB licence and file AIFSB/Exempt notification for AIFBS exemption) or sub-threshold AIFM approval • then need to comply with AIFMD's disclosure, reporting and transparency provisions as set out in AIFMD and new AIF Codes Note: some use of NPPRs alongside “reverse solicitation“ - CAUTION NEEDED!

14. AIFMD: two local legislative “tweaks” to come • Self-managed Jersey corporate AIFs • issue with shareholder Form PQs required to obtain AIF Services Business licence • to be resolved shortly: exemption for publicly-offered funds (CIFs) from the requirement to be authorised to carry on AIF Services Business • EEA AIFs (eg UK LPs) with Jersey AIFM (eg GP) • problem: from the point in time at which non-EEA AIFMs can be authorised in EEA (eg for passporting) when non-EEA AIFMs manage EEA AIFs (eg Jersey GP of UK LP), must be fully-compliant with AIFMD • can be avoided if UK LP is treated as “established in Jersey” for AIFMD purposes by having its registered office in Jersey or being authorised in Jersey • AIF Regulations to be amended to permit JFSC to authorise UK LPs with Jersey AIFM/GP so they are treated as Jersey AIFs under AIFMD

15. AIFMD: Likelihood of Third Country Passport - thoughts…(1) - Jersey is in the first group of (20) third countries being assessed by ESMA for suitability (ESMA to opine in July 2015) - Jersey has already implemented fully-compliant AIFMD option (ie Level 1 and Level 2 text) through its AIF Codes where Jersey AIFMs opt to comply in full for pass-porting - If third country AIFM pass-porting commences, subject to ESMA review (ie the “AIFMD II” debate) in 2017, NPPRs may endin 2018 and only fully AIFMD-compliant non-EEA AIFMs may be able to market into the EEA, by way of passport. BR view: NPPRs will be sustained for access to important but non-equivalent third countries (eg U.S.)

16. AIFMD: Likelihood of Third Country Passport – thoughts…(2) • ESMA opinion in July 2015 – passport unlikely before Feb 2016 at earliest; possibly as part of AIFMD II in 2017? • ESMA Call for Evidence – responded to by 8 Jan 2015 (e.g. JFSC, JFA, EVCA, BVCA, AIMA, AREF, ALFI etc.) information gathering on functioning of passport and private placement in practice. • JFSC are now intensively engaged with ESMA • ESMA will differentiate between 3rd countries – those with equivalent regimes more likely to get passport than those without? ESMA Chairman’s speech of 5th November 2014: “…our advice will not treat all non-EU countries as a single block. In other words, we will not simply say “yes, there should be a passport for everyone”. Rather, we will distinguish between the various non-EU jurisdictions taking into account the criteria set out in the AIFMD itself. One of the aspects that we will look at is whether EU entities experience difficulties in getting access to non-EU markets. This is just one of the criteria to be assessed, but it is an important one.”

17. BEPS Impact on Jersey Funds? Base Erosion and Profit Shifting - Political measure in response to global fiscal deficits - G20 directive to OECD to create an action plan: “ensure profits are taxed where economic activities generating profits are performed” - Focus on corporate multi-nationals (eg Amazon, Starbucks); tax structuring, profit shifting, exploitation of loop-holes and double tax treaties Impact on fund structures - as yet unclear but need to be watchful: - Hopefully fund entities can remain tax transparent - BUT query: • impact on management/advisory fees: permanent establishment issues; tax to be paid on services where earned, so a need for Jersey substance if local rates to apply • impact on tax efficient investment holding structures (eg Lux DTA companies)

18. MiFID 2 Impact on Jersey Funds? • MiFID 2 = Markets in Financial Instruments Directive and the related Regulation • Due to take effect in January 2017 • Sets out which investment services and activities should be licensed across the EU and the organisational and conduct standards that those providing such services should comply with • Harmonised regime expected for non-EU firms providing services in the EU cross-border to professional clients/eligible counterparties; no harmonised rules where services are provided via EU branches or to retail clients • JFSC team are considering impact on Jersey entities; most impact likely on investment businesses rather than funds businesses BUT possible impact on EU investment trading and fund distribution activity by Jersey funds and their managers

19. Post-McKinsey Funds Review Process • Process to explore and implement stream-lining changes to Jersey’s fund regulatory regimes, as recommended by McKinsey review of the finance industry • Government and JFSC teams working on proposals • Industry JRIG groups being consulted on outputs • Promising early signs: • a single funds law (replacing CIF, COBO and AIF regs) • fewer, but still varied, regimes • regulatory focus on a single “responsible entity” in Jersey (reduce “layering” of regulation on multiple entities) • a single “professional investor” definition for non-retail products • AIFMD “over-lay” approach retained so rest of world business not impacted

20. Contact details: Ben Robins, ben.robins@mourantozannes.com T +44 1534 676 475 Mourant Ozannes is one of the world's leading offshore law firms. We advise on the laws of the BVI, Cayman Islands, Guernsey and Jersey.