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Collaboration the way ahead for fund leaders

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At the recent G20 meeting convened for world leaders to deliberate on the financial crisis, UK Prime Minister Gordon Brown urged his counterparts to work together.

At the recent G20 meeting convened for world leaders to deliberate on the financial crisis, UK Prime Minister Gordon Brown urged his counterparts to work together. ‘The way forward is not countries working in isolation or against each other, but countries co-operating together,’ he said.

From the point of view of the funds industry, in the current volatile times it should not be a complete surprise for this way of thinking to be applied to different fund jurisdictions as well. It is only logical that the two leading jurisdictions for investment funds, the Cayman Islands and Luxembourg, should initiate stronger ties to create simpler and broader solutions for investment fund sponsors.

Luxembourg is one of the leading jurisdictions for setting up Ucits-type funds distributed throughout the European Union, whereas the Cayman Islands are the flagship destination for setting up offshore non-EU/Ucits funds. These are two very different fund jurisdictions, but Cayman and Luxembourg are not competing head to head; rather, they compete in different markets.

Luxembourg has been very successful in providing onshore investment fund structures compliant with EU regulatory requirements, notably Sicavs (open-ended investment companies) and Specialised Investment Funds, in a low-tax jurisdiction. The Cayman Islands, on the other hand, has become dominant in providing offshore, mainly non-retail, zero-tax fund structures for sophisticated and high net worth investors.

Both jurisdictions have common features, including very high standards of living for its residents and citizens, high per capita income, near full employment, a highly skilled and trained workforce, sophisticated infrastructure and telecommunications, and thriving financial services, banking and support sectors that complement the investment fund industry.

Given the strengths and common characteristics of the two jurisdictions, it would make sense for both countries – and their respective banking, legal, accounting and fund service providers – to consider developing stronger ties to offer simpler and broader solutions for investment fund sponsors.

Amid a global financial downturn, working together makes even more sense. Many economists would agree that in the face of difficult economic conditions, industry consolidation is on the cards. The investment fund industry, like many others, is set to experience contraction and downsizing. The number of newly incorporated investment funds will decline and some existing funds will be placed in inactive/dormant status or liquidated outright to avoid paying fixed annual fees and overheads.

There may also be increased litigation to settle investor claims and disputes between service providers, directors and other persons and organisations connected with the funds. Should this happen, regulatory bodies and governments may look to impose increased regulatory measures and oversight on the investment fund industry.

Both Cayman and Luxembourg have been careful not to over-regulate and have instead sought a balanced approach to regulation that safeguards investor interests while ensuring that each jurisdiction remains attractive, responsive and affordable to fund sponsors.

It is clear that there would be an obvious synergy created as a result of joint marketing of the two jurisdictions – essentially creating a one-stop shop experience for offshore and onshore fund products.

Wilton G. McDonald II (photo) is head of investment funds at Truman Bodden & Company and Oliver Peters is a senior associate at Arendt & Medernach in Luxembourg

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