Monday, 21 March 2016

The critical role of the Compliance Officer in the governance framework for funds



In the offshore investment funds arena, the importance which is now attached to the exercise of proper oversight and control by the governance bodies of investment funds is stimulating debate as to how these governance responsibilities can be effectively supported.

The governance body of an offshore investment fund is typically non-executive in nature, in that it meets only periodically to review performance and conduct of service providers to whom the governance body has delegated responsibility for the discharge of day-to-day functions for the fund – investment management, risk management and fund administration, for example.  The governance body itself has no permanent secretariat or employees working for it.  As a consequence it is critically dependent upon the flow-back to it of good quality information and reports from the agencies and service providers who have been engaged on a full time basis to service particular aspects of the fund’s operations.

In this context the role of the Compliance Officer (CO) to the fund assumes considerable significance.  While the regulatory regime in Jersey does not specify any minimum time commitment that a CO must devote to their duties and leaves it open to each fund and their CO to craft a compliance monitoring programme which is appropriate to the needs of the fund, the CO is expected to be on permanent alert, even if not engaged on a continuous basis in the affairs of each fund that the CO provides services to.

The CO is in many ways the “eyes and ears” of the governance body of the fund.  The duty of the CO, on behalf of the governance body, is to keep the fund’s activities under surveillance between board meetings of the governance body and to report on the same at those periodic board meetings.

It is interesting to note that the description of the CO role in the Certified Funds Codes of Practice in Jersey is not limited solely to ensuring that the fund remains in compliance with applicable legal and regulatory rules but extends to ensuring appropriate monitoring of the operational performance of the fund and promptly instigating action to remedy any deficiencies in these arrangements.  While this latter provision should, arguably, not be interpreted as obligating COs to act beyond a monitoring role and to undertake supervisory duties akin to those attached to the role of fund directors, it does emphasise the critical link role that the CO plays in the governance arrangements.  The CO is a key dependency of the governance body.  This dependency necessitates a close working relationship between the governance body and the CO:  COs and fund governance bodies need to work closely together to formulate an agreed-upon approach to the CO role and the content of the compliance monitoring programme.

Historically, however, the CO appointed to an offshore fund has not necessarily been viewed as having this level of prominence in the governance framework.  This is due to the fact that CO services have typically been provided as an ancillary element within the fund administration “package” which the fund administrator offers to each fund.  The fund administrator agrees to provide personnel to act as the “key persons” to the fund including the CO and to arrange the provision of compliance resources to enable the fund to meet its compliance responsibilities under the Certified Funds Codes of Practice.  As a consequence there has been a tendency to view the CO role as something that is subsumed within the fund administration mandate and which is discharged at the level of the delegated functions conferred on the fund administrator.  The CO inhabits and largely operates within the confines of the fund administrator’s business operations; and the relationship between CO and governance body is reflected in the periodic “upstream” compliance reporting out of the administration silo.

What tends to be lacking in these arrangements is a clear recognition that to operate effectively the CO must sit, figuratively, not at the underlying level of the fund administrator but between the governance body of the fund and all of the principal service providers and agencies engaged for the fund.  This could be characterised as a “top down” rather than a “bottom up” approach and reflects the role of the CO office as one which operates in tandem with the governance body of the fund, exercising a monitoring oversight which extends outwards and downwards across all of the key service dependencies of the fund.

Inevitably there are time and resource constraints and fee strictures which in the past have militated against achieving the ideal compliance monitoring set-up.  But with the growing scrutiny to which fund directors and governance bodies are now being subject by both regulators and increasingly pro-active investors, there is now a need for fund governance bodies to engage more with their appointed COs to develop and evolve the CO role so that it can operate more effectively to support fund governance bodies and directors in the discharge of their fiduciary and regulatory responsibilities.

Friday, 19 February 2016

Jersey Guarantee Companies – The Forgotten Option



Little use is currently made of Jersey companies limited by guarantee.  Traditionally guarantee companies are often associated with philanthropy business. But that could be set to change with the increasing use that is made of Jersey-based entities as asset holding or governance vehicles.

Guarantee companies can be incorporated in Jersey by following the same procedure as applies to companies limited by shares.  The guarantee company memorandum of association has to provide for guarantor members and state that each guarantor member undertakes to contribute to the assets of the company (if it is wound up while they are a member or within twelve months after they cease to be a member) such amount as is necessary to pay off the debts of the company and the winding up expenses but in any event not exceeding the maximum limit per member stated for this purpose in the memorandum.  Usually the limit of liability is set at £1.00 per member.

The articles of association of the guarantee company are of course adapted to reflect the absence of share issues and shareholders and replaced with provisions dealing with the admission and retirement of members.

As a not-for-profit entity with the benefits of separate legal personality, limited liability for members, perpetual succession and a zero tax regime in Jersey, the guarantee company option should not be forgotten when considering the type of entity to use, not just for philanthropy proposals, but also for private trustee roles.

It is this latter context in particular that opens up new possibilities for the use of Jersey guarantee companies as private trust companies (PTCs) for private client, off-balance sheet holding and asset management arrangements.  Using a Jersey company limited by shares as a PTC involves the complication of who will own the shares in the PTC.  Often this is resolved at present by superimposing a Jersey law purpose trust over the top of the Jersey company.  But this brings its own complications in terms of an extra layer of fiduciary responsibility, extra administration costs and the need to identify a suitable enforcer for the purpose trust.

A Jersey company limited by guarantee may in appropriate cases be a simple solution to the structuring arrangements for a self-contained holding or governance structure with ownership and control divorced in whole or in part from the client or organisation that is the instigator of the scheme in question.  With appropriate drafting of the articles of the guarantee company the ownership and control of the company can be contained within the envelope of the corporate structure with the directors of the company also acting as the members of the company thus providing a simple sidestep to the complications arising from the use of share capital companies as PTCs.

Monday, 24 November 2014

Damages Award for Misuse of Confidential Information



A decision of the English High Court in the autumn of 2014 (CF Partners (UK) LLP v Barclays Bank PLC) has resulted in the Bank being ordered to pay €10million of damages to CF Partners for breach of equitable duty of confidence.  The court decision held that the Bank had misused confidential information which had been supplied to it by CF Partners in the context of an application by CF Partners for a bank loan to finance a takeover bid of a Swedish business, Tricorna AB.  In the course of negotiating the bank loan CF Partners supplied Barclays with documentation relating to the Swedish target company including technical information about the target company, its business operation and proposed means of enhancing the value of the target acquisition.  The takeover deal ultimately foundered; but subsequently Barclays itself proceeded to buy Tricorna.  Two years after acquiring the business Barclays sold Tricorna at a large profit.  CF Partners began legal proceedings against the Bank for breach of confidence in relation to the information on Tricorna which CF Partners had disclosed to the Bank for the purpose of its application for bank finance.

The court held that the Bank had indeed breached an equitable duty of confidence to CF Partners and awarded damages against the Bank.

This was not a case of a breach of a contractual duty of confidentiality as the Bank and CF Partners never reached the point of entering into contractual relations for a bank loan.


The case highlights that even in the absence of a contractual relationship, the law imposes a duty of confidence wherever a person receives information which they know or ought to know is fairly and reasonably to be regarded as confidential in nature; and that information cannot be used other than for the purpose for which it was supplied without the consent of the party who is the owner of that confidential information.

Tuesday, 28 October 2014

Mudarabah and Jersey Limited Partnerships




Islamic financing emphasises the importance of a genuine assumption of risk on the part of the financier to justify reward.  Mudarabah are one of the legal forms used in Islamic financing to establish a risk sharing venture; and it is possible to establish limited partnerships in Jersey (a “JLP”) which qualify simultaneously as mudarabah in accordance with the standards defined by Shariah Standard No 13 of the Accounting and Auditing Organisation for Islamic Institutions (AAOIFI).

Islamic origins of the limited partnership concept

Structuring a JLP so as to qualify simultaneously with the requirements for a mudarabah reflects the closeness of these two concepts; indeed it points towards the almost certain fact that the commandite or limited partnership concept which developed across Europe since medieval times has its origins in the mudarabah which was copied and developed as part of European commerce in the Middle Ages by Italian merchant venturers conducting business with Moslem traders in the Adriatic and Eastern Mediterranean.
So by setting up JLPs which also qualify as mudarabah we are returning to the origins of the silent partnership concept as it was introduced into Western Europe along the ancient Islamic trade routes. 

Key Considerations

Under these arrangements the General Partner of the JLP acts as the mudarib and the Limited Partner as the rab al-maal.  The General Partner will provide its labour and skill to the JLP and be responsible for managing the affairs of the partnership while the Limited Partner will provide the working or investment capital for the partnership.

Care needs to be exercised to adapt the partnership agreement so as to meet the express requirements for a mudarabah.  The limited partnership agreement will also need to comply with the general tenets and principles of Sharia including certainty of contract and fairness in dealings.  The partnership activities will need to exhibit the positive application of capital through transactions which are not associated with speculation or gambling.  Investments in haram or prohibited activities such as in pork, weaponry, alcohol or casinos will not be permitted on account of their detrimental social effects.

Use of JLP as a mudarabah

Jersey limited partnerships structured to comply with the requirements of mudarabah can be used for permitted activities including passive investment or active trading purposes on a profit sharing basis. These are flexible contract based schemes which have the added advantage of tax transparency and a high degree of privacy for the partners’ risk/reward participation rights which lie at the heart of the partnership agreement. 

They are a good example of the flexible structuring solutions that Jersey is able to offer, allowing the Occidental and Islamic traditions to combine in a fully compliant manner to achieve an investment or business objective.


Simon Howard