Isle of Man Investment and Fund Management:

The first mutual funds were established in the Island in the mid-1960s and were mainly used by British expatriates. New legislative initiatives in the early 1980s created opportunities for growth and gave rise to a rapid expansion of the Island's fund management industry. The Isle of Man became the first offshore jurisdiction to be granted 'designated territory status' by the UK in 1986, thus enabling Isle of Man funds to apply for SIB recognition in the UK.

Confirmation of the Island's OECD membership in 1990 subsequently led to Isle of Man funds being approved by the Japanese Securities Dealers' Association, although the fall of the Asian economies somewhat dampened this achievement. The introduction in 1991 of a 5% rate of tax on fund managers' profits provided a further incentive for managers to look towards the Isle of Man.

Mutual funds can take the form of companies (open or close-ended), trusts, limited partnerships or pure contractual arrangements.

As in other offshore jurisdictions, managers in the Isle of Man are more focused on administration than asset allocation. Where a manager chooses not to establish a real presence in the Island, it is a requirement that its business must be administered by a licensed third party fund administrator.

The leading association in the Island is the Fund Management Association. In late 2003, in its ninth annual report on the Isle of Man, independent investment fund research company, Fitzrovia International revealed that the jurisdiction's funds industry has stood up remarkably well to the sustained pressure inflicted by difficulties in global equity markets.

According to Fitzrovia, a key factor in the industry's impressive performance has been growth in the number of Experienced Investor Schemes. These schemes, launched in October 1999, now make up around 63% of all funds notified to the Financial Supervision Commission, and in mid-2003 there were 122 in operation on the Island, up from just 48 in 2001.

By mid-2006, out of 184 investment funds domiciled in the Isle of Man, with total capitalisation of US$30bn, 135 were Experienced Investor Funds.

In July, 2005, after consulting with the Isle of Man Fund Management Association, the Commission revised its policy in relation to who, locally, may act as a Custodian to an Experienced Investor Fund (EIF) or Professional Investor Fund (PIF).

In addition to licensed banking institutions in the Isle of Man, the Commission will now consider certain licensed investment businesses, namely those with a Category 4 or 5 licence.

Such licenceholders wishing to act as Custodian will be assessed on a case by case basis taking into account the type or nature of the underlying scheme assets. It will also be required to demonstrate to the Commission that it is an entity with adequate financial resources and has the relevant track record, competence, experience and systems to undertake this function.

The Commission’s existing policy (i.e. under which only a licensed banking institution can act as a Custodian in the Isle of Man) is being retained for those persons wishing to act as Trustee/Custodian of an Authorised or 'pure' International Scheme.

John Aspden, Chief Executive of the FSC commented: “This development should further enhance the attractiveness of the EIF fund structure which was established in 1999 as a flexible fund structure to promote the establishment of hedge and alternative investment funds”.

The Experienced Investor Fund (“EIF”) structure was launched in October 1999 and was designed to provide a simple, inexpensive and flexible solution to the ever more complex needs of sophisticated individuals, market professionals and global asset managers, while seeking to provide an adequate level of comfort to investors by ensuring proper disclosure and administration.

The Experienced Investor Fund is subject to a form of regulation that is aimed at the 'Experienced Investor'. Such schemes are exempted from certain of the legal and regulatory requirements that are generally applicable to International Schemes through the Financial Supervision (Experienced Investor Fund) (Exemption) Order 1999.

In April, 2006, following consultation with the Fund Management Association, the Manx Financial Supervision Commission revised its policy on the activities that a fund administrator or fund manager can undertake for a foreign Collective Investment Scheme.

Under the revised policy, Isle of Man licenceholders will be able to provide broader administration services to operators of foreign schemes provided these are carried out under an outsourcing contract, and the appropriate licence extension is obtained from the Commission.

Previously, outsourced services could only be provided in relation to one of the 'core' activities of fund administration.

Commenting upon this change, John Aspden, Chief Executive of the Financial Supervision Commission noted that:

“The Commission is always seeking to maximise flexibility in the regulatory environment and to support new business opportunities for industry where it can do so without compromising the regulatory standards."

"The review of the inward outsourcing policy will enable local fund managers and administrators to take on more business with minimal regulatory hurdles.”

The Financial Supervision Act 1988 governs financial services in the Isle of Man, and established the Financial Services Commission which exercises regulatory powers. The legislation distinguishes various types of fund: Authorised Collective Investment Schemes.

These funds may be marketed to the public in the Isle of Man, the UK, Ireland, Jersey, Guernsey and Hong Kong. The island obtained designation under Section 87 of the UK FInancial Services Act 1986, and has equivalent arrangements with the other countries mentioned. An authorised fund must have independent Manx Manager and Trustee: the Manager must himself be licensed, and the Trustee must have a banking license.

Regulation falls under section 3 FSA and there is a statutory compensation scheme, similar to that in the UK.

Recognised Collective Investment Schemes

These are foreign funds which the Commission admits for local marketing purposes if it is satisfied that the level of supervision and regulation is adequate. Recognised funds must maintain facilities on the island where documents can be seen, and payments in or out can be effected. Regulation falls under sections 12 or 13 FSA.

Restricted Collective Investment Schemes

All other collective investment funds fall under this heading. Restricted schemes (funds) may be marketed only to Manx professional investors or to existing fund members in some cases, or to overseas investors (if permitted). They must have Managers with Manx Section 3 licenses, and Trustees who are either banks or are authorised to be Trustees in the countries with which the Isle of Man has agreed reciprocal arrangements (UK, Ireland etc as above). Regulation falls under section 11 FSA.

Professional Investor Funds

Unregulated funds that are specially designed for the exclusive use of institutional and professional investors.

Exempt Schemes

Unregulated private funds which cannot be marketed to the public and are restricted to having no more than 49 participants.

Close-Ended Funds

Strictly speaking not classified as mutual funds and are used for illiquid long-term investments.

All investment business are expected to exercise a "Know Your Customer" policy in order to minimise the possibility of being used for laundering the proceeds of drug trafficking or other criminal activities.

Fees

Annual fees are as follows:

Authorised funds pay GBP850 per fund;

Umbrella funds pay GBP450 per sub-fund;

Recognised funds pay GBP1,050 per fund;

Section 13 Single Tier Funds pay GBP1,200 per fund;

Section 13 Umbrella Funds pay GBP350 per sub-fund;

International Funds pay GBP1,000 per fund.

Professional Investor Funds and Experienced Investor Funds do not pay fees. Fund managers require a business license: it costs £6,600 for managers of authorised funds, and £4,300 otherwise.

Version date: 07.05.06