There is no doubt that the harmonization of the Unit Trust Act and the Mutual Funds Regulations was an important development in the collective investment scheme market in Jamaica. It streamlined and modernized the requirements for pooled products which allow the average investor to be able to access investment products that he or she normally would not have had the resources to access. However, it may be time to consider further developing the collective investment scheme market in Jamaica by allowing collective investment schemes to use a segregated accounts corporate vehicle to better safeguard the assets of one portfolio in an umbrella fund from other portfolios under the fund.
Segregated Accounts Companies
A segregated accounts company (“SAC”) is not currently provided for under Jamaican laws, however, this writer understands that such a vehicle is being contemplated by law makers in Jamaica and a draft Bill is presently being considered. A SAC is a company which is capable of creating ‘segregated accounts’ within the company and these accounts allow the assets and liabilities attributable to one account to be firewalled from those attributable to other accounts and from the SAC’s general account (the assets and liabilities of the SAC itself). It is important to note that segregated accounts are not necessarily separate legal entities (albeit incorporated segregated accounts can exist) but are separate accounts which are a part of the same company.
What are Collective Investments Schemes?
A ‘collective investment scheme’ (“CIS”) includes any scheme in whatever form, whether in Jamaica or elsewhere, whereby members of the public are invited or permitted to invest money or any other property in a portfolio of assets managed as a whole by or on behalf of the operator of the scheme and on terms on which those investors, being two or more in number, and in which they hold a participating interest in, receive profits or income arising out of, or share in the risks and benefits of the scheme.
Mandatory Registration
All collective investment schemes offered for sale in Jamaica must be registered under The Securities Act, 1993 (the “Act”) in accordance with The Securities (Collective Investment Schemes) Regulations, 2013 (the “Regulations”) made under the Act (unless such scheme is exempt from registration by the Act). Further, no person ought to issue or cause to be issued, in Jamaica, any invitation to another person to become a participant in a collective investment scheme, unless the scheme is registered with the Financial Services Commission (the “FSC”).
Key FSC Requirement
The FSC requires that the service providers to the CIS (custodian, operator, trustee and manager) be independent of each other and that a fund’s portfolio of assets and cash must be held in a manner that makes it clear that the assets belong to the fund and its investors, not the entity acting as custodian (manager or operator). Therefore, the assets must be segregated, and the accounts clearly identified as belonging to the particular fund.
Understanding SACs Abroad
Foreign statutes allowing for the creation of SACs abroad generally restrict a fund manager from using any asset which attaches to a particular account to meet liabilities of other accounts and protects such accounts from the general shareholders of the SAC as well as creditors of the SAC who are not creditors of the particular segregated account. Consequently, it would appear that the SAC corporate vehicle can satisfy an important requirement of the FSC for collective investment schemes, in that a fund’s portfolio of assets would be deemed to be held in a manner that makes it clear that the assets belong to the fund and its investors, and not the entity acting as custodian, manager or operator.
How about SACs a ‘yaad’?
SACs do not presently exist under Jamaica’s laws. While contractual segregation of assets and liabilities can and do exist in Jamaica and a court in Jamaica will enforce such contractual segregation, Jamaica’s statutes do not safeguard and protect this segregation. It is a requirement under the Companies Act, for example, that, with respect to companies that are being wound up, the holders of investors shares in a collective investment scheme company shall be entitled to any surplus assets available for distribution on a winding up of the CIS company, ahead of any other shareholder in the company. The Companies Act, therefore, distinguishes between investors of the CIS and the operators of the CIS, but not amongst the investors themselves. There is therefore no corporate vehicle that presently makes a distinction between the assets of one portfolio and the assets of another portfolio operated under the same CIS.
The SAC model could be a good tool used by fund managers of collective investments schemes in Jamaica to satisfy the FSC’s requirement of them to “make it clear” that the assets of a particular fund belong to that particular fund and its investors, and not the service providers of that fund. Though not yet available in Jamaica, if ever enacted, the laws providing for the SAC model would also afford the separate account owners in a CIS greater protection from the liabilities incurred by separate accounts and also by those of the manager of the CIS. As the lawmakers consider legislation to make SACs possible in Jamaica, we encourage them to also consider including provisions to allow for incorporated segregated accounts companies which create segregated accounts with separate legal personality: a “company within a company”.
Jezeel Martin is an Associate at Myers, Fletcher and Gordon, and is a member of the firm’s Commercial Department. He may be contacted at jezeel.martin@mfg.com.jm or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.
