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Gib and the BVI: the anatomy of another MOU

Chris Hamblin, Editor, London, 7 September 2015

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The Gibraltar Financial Services Commission has signed a Memorandum of Understanding with the British Virgin Islands Financial Services Commission on the subject of the European Union's Alternative Investment Fund Managers' Directive.

This MoU promotes mutual assistance in the supervision of managers of alternative investment funds, their delegates and despositaries that operate "on a cross-border basis" in the two jurisdictions. Like all MoUs, it is not a legally binding document, although it does contain its own ideas about what ought to be on the statute book: "No domestic banking secrecy, blocking laws or regulations should prevent an authority from providing assistance to another authority." Despite such blandishments, it does not attempt to force either jurisdiction to change any laws that might conflict with it and the signatories promise to give each other "the fullest co-operation under the law" with that caveat in mind. Either side, moreover, can deny co-operation "on the grounds of the national public interest" - this is ostensibly a huge, gaping hole in the arrangement, especially as the document does not assign the task of deciding what is in the national interest to any judicial or other body, thereby leaving that job up to the lowliest of regulatory functionaries on either side.

"Operating on a cross-border basis" happens when: (a) EU managers manage non-EU alternative funds; (b) or market non-EU funds of this type in an EU country; or (c) non-EU managers market EU/non-EU funds in an EU country; or when (d) EU managers market non-EU funds in the EU with a passport;  or when (e) non-EU managers manage EU funds in the EU; or when (f) non-EU managers market EU funds in the EU with a passport; when (g) non-EU managers market non-EU funds in the EU with a passport and when (h) EU managers market such funds in Gibraltar or the BVI.

Terms and obligations

Article 3(3) states that each regulator will inform the other as soon as possible about any event that "could adversely impact a covered entity" - guaranteeing both of them a busy day the next time the world's stock markets crash - and any enforcement or regulatory action that might have a "material effect" on any such entity. Either side can pull out of the agreement within 30 days after giving notice.

Article 3(4) deals with the regulators giving each other information on written request. In fact, the exact wording allows them some leeway, only obliging them to give each other "assistance in obtaining information" and then only if the information is "not otherwise available to the requesting authority." Each party does, however, have to interpret the information if the other party cannot understand the format. The information could be anything and everything.

The language of this MoU is unaccountably American, containing such fragments of jargon as "covered entity," a novelty in British regulatory parlance but an old staple of US financial regulators since the 1930s. By tripping over themselves with phrases such as "covered entities which are covered," the draftsmen exhibit signs of unfamiliarity with the term. Their reason for using it at all remains a mystery. The MoU says that it can be "terminated," bringing to mind that memorable American film. "Examinations" - the American term for regulatory visits - are mentioned also, for example in the phrase "examination reports." Results and requests are "executed" - it is unknown whether this turn of phrase is American in origin, but it sounds suitably violent and melodramatic.

Article 4 deals with cross-border on-site visits. In the most tentative of language, it enjoins the parties to agree on a timetable and "the scope" (presumably the limits of what the visitors can ask the practitioners) of such a visit. When the foreign regulators go on their visits, the MoU states magnanimously that the local regulators can go along with them if they like.

Each regulator must nominate somebody to act as a 'go-to' person for activity in line with the MoU. Article 5 states that each request for written information should be made in writing by and to such people, unless it is an "emergency situation," in which case anything goes.

When will the MoU be useful?

Co-operation is especially important, according to the MoU, in situations where the "requesting regulator," i.e. the regulator that asks for supporting information, has required a fund manager in its jurisdiction to stop doing anything contrary to the AIFMD; when the requesting regulator is trying to freeze the assets of a fund established in the other jurisdiction; when the requesting regulator wants such a fund to cease "professional activity;" and when it has asked for the suspension of the issue, repurchase or redemption of units or shares of funds established in the other, "requested," jurisdiciton. Information, according to Article 7, is not to be gathered under the MoU for enforcement purposes. This has rarely stopped information obtained in such circumstances from finding its way into British courtrooms in the past, so this provision is unlikely to be effective here.

Keeping information confidential

Except for disclosures in accordance with the MoU, each regulator promises to keep confidential, "to the extent permitted by law," information shared under the MoU, requests made under the MoU, the contents of such requests and any other matters arising under the MoU. Article 8(2) dictates that each regulator will tell the other about anyone who has a legal right to see information gained under the MoU, as long as it is legally able to do so. This aside, it must obtain the consent of the other regulator before disclosing "non-public information" received under the MoU to any non-signatory to the MoU. This last safeguard, however, has a gigantic hole in its side: it does not apply in all cases where EU regulators are required to share information with other EU regulators.

By Article 25(2) of the AIFMD, an EU regulator might need to share information received from the BVI or Gibraltar regulator with other EU regulators if a manager for which it is responsible or a fund that that manager manages might constitute a source of so-called counterparty risk to a credit institution or some other "systemically relevant" firm.

Distinguishing features

This MoU is not without its peculiarities. For a start, it has has been drawn up to facilitate compliance with a set of foreign rules. Both its signatories, indeed, lie outside the EU to whose directive it pertains. This opens the door to a situation in which any confidential information that the Gibraltar and BVI regulators share might end up on the desks of a wide variety of people who operate nowhere near either Gibraltar or the BVI. In the meantime, the MoU's draftsman appears to be married to, or in a relationship with, an American and his employers appear not to have noticed the toll that this has taken on his work. The entire MoU, moreover, is overshadowed by a much older and more important agreement whose terms do not appear in its pages. It draws inspiration from a document that the International Organization of Securities Commissions issued in 2002. This is a "multilateral MoU concerning consultation and co-operation and the exchange of information," the IOSCO MMoU that both jurisdictions signed long ago. Article 2(4) of the present MoU states that it does not affect the previous and more important agreement but merely complements it. In other words, anyone who wants to appreciate the contents of this document fully must first read another.

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