British Virgin Islands Regulation

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1 British Virgin Islands Regulation FUNDS AND FUND MANAGEMENT Type of funds Funds may take the form of unit trusts, open or closed ended companies, segregated portfolio companies, partnerships, or limited partnerships. 2.2 Laws Funds may be established under the following laws: Company or segregated portfolio company: BVI Business Companies Act, 2004 Partnership or limited partnership: Partnership Act, 1996 Unit trust: Trustee Act, 1925 Funds carrying on business or managed from within the British Virgin Islands are currently regulated under the Mutual Funds Act, 1996 (the Act). The Act defines a fund as a legal entity that: collects and pools funds for the purpose of collective investment; and issues shares (or similar interests) that entitle the holder to receive on demand, or within a specified period after demand, an amount computed by reference to the value of a proportionate interest in the whole or in a part of the net assets of the fund. This definition means that most closed-ended funds are excluded from the scope of the Act. Entities established outside of the British Virgin Islands and managed or administered by a BVI-based service provider who is licensed under the Mutual Funds Act, 1996 are also exempted from registering or being recognized under the Act. The Act, defines three types of funds, as follows: Private funds are those funds whose constitutional documents either: o limit the number of investors to no more than 50; or

2 2 British Virgin Islands Regulation o state that invitations to subscribe will be made on a private basis. Professional funds are those funds that are only made available for professional investors. The minimum initial subscription of the majority of those investors is set at USD 100,000 or currency equivalent. Public funds are those funds which are neither private nor professional funds. There are two additional sub-classes of public fund: o Selective public funds: These are public funds where all interests are offered by an intermediary who is entitled to provide investment services under the laws of the BVI or of a recognized country or jurisdiction. A written agreement must be established with the investor that covers the offering of an investment; and the intermediary must assess the suitability of the fund with regard to the agreement and the investment objectives of the investor. o Restricted public funds: These are public funds which elect to be treated as UCITS (undertakings for collective investment in transferable securities), and whose prospectus contain express statements that they will comply with the investment objectives, investment policies, and general obligations of a UCITS as defined by European Union Council Directive 85/611/EEC. Restricted public funds are the only form of BVI fund which fall within the scope of the EU Savings Tax Directive. Proposed legislation, the Securities and Investment Business Act (SIBA) is currently under development. A draft version of SIBA was issued during 2009 for public consultation and although no enactment date is yet known, it is expected that that this will occur during 2010, with a transitional period to allow time to ensure compliance. Once SIBA has been enacted, the Mutual Funds Act, 1996 will be repealed. Licensees under SIBA will also be required to comply with the requirements of the Regulatory Code, 2009 (the Code) which came into effect on 1 February Accordingly, funds recognized under the Mutual Funds Act, 1996 are in the meantime excluded from the requirements of the Code. SIBA will provide for the licensing, regulation and supervision of investment business, the registration of public mutual funds, the recognition of professional and private mutual funds and the control of offers of securities to the public in the British Virgin Islands.

3 3 British Virgin Islands Regulation Under SIBA, there is no change to the laws under which funds may be enacted, nor is there any change to the types of funds. 2.3 Managers, administrators, trustees, and custodians Individuals and entities wishing to carry on the business of management or administration of Funds are required to apply for and obtain a license under the Mutual Funds Act, 1996 (the Act). The basic test for eligibility is that the person is a fit and proper person. The Act does not apply to foreign constituted managers and administrators whose operations are based entirely in a foreign jurisdiction, even though the manager or administrator may act for a British Virgin Islands constituted fund. Non-resident persons may apply for an exemption from the requirement to obtain a license under the Act provided that: they are an established manager or administrator of funds under the laws of a recognized country or jurisdiction; and they receive written authorization from the relevant BVI government minister to act as a manager or administrator of a fund in or from within the British Virgin Islands. A further exemption from the licensing requirement is in the case of a British Virgin Islands entity that meets the conditions for a recognized manager. This might apply, for instance, where a special purpose management company is established in the British Virgin Islands for fiscal reasons, and is associated with a range of in-house funds. Licenses issued under the Act may be either restricted or general in nature. A restricted license is available where the entity is providing management services to a private or professional fund. KPMG in the British Virgin Islands understands that if an entity operating under a restricted license provides management services to more than one fund, then it will require an annual audit. A general license is required if the entity or individual provides management services to a public fund or provides administrative services to a fund. An entity operating under a general license also requires an annual audit. Although there is no express requirement, a British Virgin Islands trust usually has at least one trustee resident in the British Virgin Islands, to establish a domicile in the jurisdiction. If the trustee is non-resident, the terms of the trust should state that the trust is governed by the laws of the British Virgin Islands.

4 4 British Virgin Islands Regulation All resident trustees must be licensed under the Banks and Trust Companies Act, A non-resident trustee is not required to obtain any license or authorization in the British Virgin Islands unless, under the Mutual Funds Act, 1996, they also carry on the business of management or administration of Funds in which case the relevant provisions described above apply. Although there is currently no express requirement, the BVI Financial Services Commission will not register or recognize a fund unless the custodian (or trustee) is independent of the fund s management. There are no statutory restrictions on the fees which may be charged by trustees, managers or any other third party service providers. They may be specified by the terms of the trust deed, management agreement, or other third party service agreement. The pending enactment of SIBA whilst not changing the above requirements significantly will require custodians and investment advisors providing services from within the British Virgin Islands to be licensed, subject to certain exceptions, in addition to the investment manager and administrator as detailed above. 2.4 Investment restrictions There are no statutory restrictions on the investment policies of funds in the British Virgin Islands. Such restrictions may be set out in a fund s prospectus/offering memorandum, its constitutional documents, or similar. 2.5 Borrowing There are no statutory restrictions on the power of funds in the British Virgin Islands to borrow. Such restrictions may be set out in a fund s prospectus/offering memorandum, its constitutional documents, or similar. 2.6 Accounts and prospectus A public fund registered under the Mutual Funds Act, 1996, is required to prepare annual financial statements in accordance with generally accepted accounting principles (GAAP). These financial statements must be audited by an approved auditor. It is customary to provide the financial statements to the BVI Financial Services Commission, and to the fund s investors. Prior to offering its shares or interests to the public, a registered public fund is required to publish in writing a prospectus signed by or on behalf of the fund s directors, or equivalent governing body in the case of other structures, who have approved its contents or authorized its publishing. A copy of the prospectus must be filed with the BVI Financial Services Commission. The Mutual Funds Act, 1996 does not impose a statutory format for the prospectus

5 5 British Virgin Islands Regulation but requires that it must provide full and accurate disclosure of all information that investors would reasonably require and expect to find for the purpose of making an informed investment decision. A prospectus must also contain a summary statement of the statutory rights of investors and be accompanied by, or contain reference to, the availability of financial statements and the auditor s report therein. Funds that take the form of segregated portfolio companies (SPCs) incorporated under the BVI Business Companies Act, 2004, are required to produce financial statements under the Segregated Portfolio Companies Regulations, These financial statements must be audited, and filed with the BVI Financial Services Commission within six months of the funds yearend. Once enacted, SIBA will require that private, professional, and public funds all prepare annual financial statements in accordance with GAAP, and that these financial statements be audited by an approved auditor. The audited financial statements will also be required to be submitted to the BVI Financial Services Commission within six months of the fund s year-end. SIBA will further require that, in addition to the requirements detailed for public funds above, private and professional funds also file a prospectus with the FSC when applying for the funds recognition as a licensed fund. The prospectus requirements under SIBA will remain largely unchanged from those detailed above for public funds. 2.7 Supervision Funds, fund managers, and fund administrators required to be registered, recognized, or licensed under the Mutual Funds Act, 1996 (the Act), are supervised by the Director of Investment Business of the BVI Financial Services Commission. The Director of Investment Business is empowered under the Act to have access to information and records relating to any business conducted under the authority of a certificate of registration, a certificate of recognition, or a license. In addition to the above requirements, SIBA, once enacted, will require custodians and investments advisors to be licensed. Licensed custodians and investment advisors will fall under the same supervision as is currently in place for fund managers and administrators as outlined above. The contact details of the Director of Investment Business are: Broderick Penn Director, Investment Business British Virgin Islands Financial Services Commission PO Box 418 Haycraft Building

6 6 British Virgin Islands Regulation Pasea Estate Road Town Tortola British Virgin Islands Tel: Fax Web site: Fund ownership There are no legal restrictions on the percentage of units in a fund that may be held by one person or related group of persons. 2.9 Fund structure Umbrella funds, fund of funds, and hedge funds are permitted. There are no specific legal restrictions relating to such funds Stock exchange There is no local stock exchange Bank confidentiality The BVI Financial Services Commission requires licensees to implement the Anti-Money Laundering Regulations, 2008 and the Anti-Money Laundering and Terrorist Financing Code of Practice, Both documents are based largely on the Financial Action Task Force (FATF) recommendations and the failure to apply the former can result in a prison sentence and or a fine. The regulations provide the high level requirements which the code expands upon in the areas of due diligence, monitoring transactions, identifying and reporting suspicions, training, and record keeping. The primary money laundering legislation is the Proceeds of Criminal Conduct Act, 1997, which imposes obligations on persons to report suspicious transactions that might be made through the proceeds of crime. The law also imposes requirements upon businesses to have a nominated money laundering reporting officer. Banking confidentiality is inherent under common law and the Banks and Trust Companies Act, which provide certain safeguards. The British Virgin Islands is on the OECD white list as a result of agreeing a requisite number of Tax Information Exchange Agreements with other countries approved by the OECD.

7 7 British Virgin Islands Regulation 2.12 Fund set-up The largest expense associated with the launch of a fund is professional fees for the preparation and review of the fund s prospectus and related material contracts. Depending upon the complexity of the fund and the familiarity of the promoter preparing the prospectus, professional fees are typically in the range of USD 15,000 to USD 35,000. It takes a minimum of 24 hours to incorporate a BVI business company, and approximately two to three weeks to finalize all of the fund s documentation, including the prospectus Foreign funds Under the Mutual Funds Act, 1996 (the Act), a non-resident fund is deemed to be carrying on business in the British Virgin Islands if it solicits investment by an individual within the jurisdiction. The Act does not therefore apply where the purchase is as a result of an approach to the fund by the individual, without any solicitation being made. If a non-resident fund solicits investment, it falls under the same legal requirements as a resident fund. This is as described in the laws section above. There are no restrictions over movement of capital, or exchange controls, in the British Virgin Islands. The regulation regarding foreign funds as outlined above will remain largely unchanged once SIBA is enacted Bearer shares BVI companies incorporated after 1 January 2005, are required to deliver bearer share certificates into the custody of a custodian approved or recognized by the BVI Financial Services Commission. BVI companies existing before 1 January 2005, have until 31 December 2010 to comply with the new regime. Therefore until that date, holders of bearer shares in such companies have the option of: depositing the bearer share certificates with a custodian; converting the bearer share certificate into registered shares; or redeeming the bearer shares.

8 8 British Virgin Islands Regulation Any bearer shares not in the custody of a recognized or authorized custodian from 2010 onwards will be disabled and any subsequent transfer is void. Disabled bearer shares lose their entitlement to vote and to distributions, as well as the entitlement to share in the assets of the company on a winding up or dissolution Use of the internet Whilst there are no regulations in the BVI specifically governing internet usage, all forms of gambling, including internet gambling, are prohibited in or from within the jurisdiction. Appendix Reference material The following details the relevant laws and regulations for funds and fund management companies and provides web links, as available, for where this material can be located. Regulator BVI Financial Services Commission (FSC) The FSC s Investment Business Division supervises funds and fund management companies on an ongoing basis:

9 9 British Virgin Islands Regulation KPMG in the British Virgin Islands Tanis McDonald KPMG (BVI) Limited 3rd Floor Flemming House P.O. Box 4467 Tortola VG-1110 British Virgin Islands Tel Fax The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

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