British Virgin Islands: Hedge fund managers/advisors

Last Updated: 23 August 2010
Article by Tanis McDonald

Regulation

Authorization requirements and process

In common with those serving other forms of collective investment fund, hedge fund managers, administrators, and advisors providing services in or from within the British Virgin Islands (BVI) are generally required to obtain a license under the Mutual Funds Act, 1996 (as amended) (the Act). There are two types of license:

  • Restricted license: services provided to private or professional funds only.
  • General license: services provided to private, professional, or public funds.

The requirement to obtain a license under the Act may be disapplied in the following circumstances:

  • Where a manager or administrator of mutual funds is operating under the laws of a recognized country or jurisdiction, and written permission to carry on business in or from within the BVI is received from the relevant BVI government minister.
  • Where a manager meets the definition of a recognized manager under the Mutual Funds (Recognized Managers and Family Trusts) (Exemption) Directions, 1997. This refers to a manager who is subject to the control of a person entitled to provide investment management services under the laws of a recognized country or jurisdiction, who is of sound repute and in good standing with the competent authority in that recognized country or jurisdiction. The business carried out in the BVI by a recognized manager must be delegated to a manager or administrator licensed under the Act (that is, they will operate as a managed fund manager).

Prospective license holders are required to complete and submit the relevant general or restricted license application form, both of which are available from the Investment Services Division of the BVI Financial Services Commission (the Investment Services Division or BVI FSC).

The forms set out the detailed information to be provided, the purpose of which is to demonstrate that the applicant is suitably fit and proper to be licensed under the Act.

The information requirements cover areas such as the applicant; the persons owning the applicant; the persons managing the applicant; existing relationships with regulators; the fund client base, type of services proposed, and banking arrangements; previous refusal or disciplinary measures; previous civil judgments; previous criminal or civil convictions; previous bankruptcy; any other relevant information; and in the case of a general license, details of professional indemnity cover held.

Once submitted, the application is processed by the BVI FSC, and during this process further questions or points for discussion may be raised between the commission and the applicant.

A proposed new 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 in place to allow time to ensure compliance. Once SIBA has been enacted, the Mutual Funds Act, 1996 will be repealed.

In addition to the licensing requirements for investment managers and administrators as outline above, SIBA, once enacted, will require that custodians and investment advisors, who provide services in, or from within, the BVI, obtain the relevant licenses.

Prospective licensees under SIBA will be required to complete and submit the approved application form for the relevant license, including with it all documents and information as specified in the application. Licensees may further be required, at the discretion of the FSC, to provide additional documents and information as the FSC determines to be necessary with regards to the application.

Typical timescale to receive approval

The Investment Services Division aims to process applications in six weeks or less, although this is dependent upon the circumstances of each applicant.

A straightforward, materially complete, application might be progressed in as little as two weeks; more complex applications would take longer.

Regulatory capital requirements

While there are no specific regulatory capital requirements at present, prospective license holders under the Act are required to demonstrate the existence of adequate financial resources as part of the license application process.

Significant restrictions on marketing to investors

There is a general prohibition on the promotion of unregulated collective investment schemes to the general BVI public.

A Fund which makes an invitation to subscribe to a BVI resident, BVI citizen, or other individual who is physically present in the BVI, will become subject to the registration or recognition requirements under the Act.

Conversely, Funds which are approached directly by a BVI resident wishing to make a subscription, without any prior invitation having been made by the Fund, will not be subject to the registration or recognition requirement under the Act.

Hedge fund structures

Regulation

Authorization requirements

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.

The Act, defines three types of funds, as follows:

  • Private funds are those funds whose constitutional documents either:
    • limit the number of investors to no more than 50; or
    • 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:
    • 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.
    • 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.

The forthcoming enactment of SIBA (and subsequent repeal of the Act) will not result in any changes to the definition of a fund.

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 2010. Accordingly, funds recognized under the Mutual Funds Act, 1996 are in the meantime excluded from the requirements of the Code.

Restrictions on types of investments, concentration levels and the manner in which hedge funds can invest and/or strategies

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.

Rules regarding the publishing of the accounts and prospectuses

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 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, 2005. These financial statements must be audited, and filed with the BVI Financial Services Commission within six months of the funds year-end.

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 funds 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.

Time-scale of establishment of a hedge fund

This depends on specific circumstances. In practice, the process of setting up a legal entity, drafting fund documentation, and being registered or recognized under the Act, might take a matter of weeks, or longer.

Investors

Regulation

Restrictions on which type of investors can invest in a hedge fund and/or the minimum/maximum number of investors in a hedge fund

There are no restrictions on the maximum or minimum number of investors.

The constitutional documents of private funds recognized under the Act may limit the number of investors to no more than 50; or state that invitations to subscribe will be made on a private basis.

Professional funds recognized under the Act have a minimum initial subscription of USD 100,000 or currency equivalent.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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