BVI Securities Investment Business Act 2010 (‘SIBA’) - Wealth & Asset Management

SIBA was enacted by the BVI to become the principal legislation governing the securities and investment business in the BVI. SIBA was enacted on 17 May 2010, together with the Mutual Funds Regulations ('MFR'), and various other pieces of subordinate legislation were subsequently enacted (or will soon be enacted) including the Public Funds Code, the Public Issuers Code, the Market Abuse Regulations and a section of the recently enacted Regulatory Code, aimed to supplement the requirements of the new regime.

SIBA is the result of a thorough consultation process between the BVI Financial Services Commission ('FSC') and industry partners and ascertains the importance of the BVI as a fund domicile, as well as confirming the BVI's commitment to its obligations under the International Organisation of Securities Commissions.

SIBA has four main objectives, being to (1) regulate persons carrying on 'investment business' in or from the BVI by introducing an investment business licensing regime, (2) regulate the public issuance of securities, (3) repeal and replace the Mutual Funds Act 1996 and (4) introduce a new market abuse regime.

'Investment business' licensing regime

SIBA establishes a prohibition on any person (including companies) carrying on 'investment business', in or from within the BVI, unless they are licensed by the BVI Financial Services Commission ('FSC') to carry on that specific kind of 'investment business'.

The term "in or from within" the BVI applies to:

Persons occupying premises in the BVI for the purpose of offering to provide a service that constitutes investment business or persons soliciting other persons in the BVI for the purpose of offering to provide a service that constitutes investment business;
All BVI incorporated companies that are carrying on or are held out as carrying on, investment business outside the BVI, are deemed to be carrying on, or holding themselves out as carrying on, investment business from within the BVI.

This means that BVI companies carrying on activities which were previously unregulated outside of or within the BVI now need to consider whether they require a licence. Examples of such activities include:

BVI companies providing investment manager/adviser services to third parties, closed-ended investment vehicle irrespective of where it is domiciled; and
BVI Companies acting as an introducer or arranger of investment business for trusts, HNWIs or funds or other companies.

Amongst other categories, Part I of SIBA governs the licensing of investment managers and fund administrators who will, if BVI constituted, continue to be subject to the fit and proper criteria.

Relevant definitions

'Investments' are defined in Schedule 1 of SIBA and include, inter alia, shares, interests in partnerships or fund interests, debentures and other similar debt instruments and/or securities, instruments giving entitlement to shares, certificates representing investments, options, futures, contracts for differences, long term insurance contracts or rights and interests in any investments - although cash and real estate are not included as investments under SIBA.

Any person or entity which is buying, selling subscribing for or underwriting (i.e. dealing with) investments as an agent or in some cases as principal (save where the person or entity is dealing as principal on own account), arranging, managing, providing investment advice, acting as a custodian, acting as an administrator or operating an investment exchange, will be caught by the definition of carrying out 'investment business' under SIBA.

Exclusions

Schedule 2 of SIBA provides for the exclusion of certain types of investment activities and certain types of persons from the abovementioned prohibition.

Excluded activities
The excluded activities include, inter alia:

accepting, transferring or becoming party to (other than as debtor or surety) an instrument creating or acknowledging indebtedness in respect of any loan or credit guarantee;
the issuance, redemption or repurchase by a company of its own shares or debentures, fund interests by a unit trust or partnership interests by a partnership;
a sale of goods or services where the supplier does not hold himself out as generally as engaging in the business of buying investments with a view to selling them or regularly solicit members of the public to buy, sell subscribe for or underwrite investments;
particular transactions that are primarily carried out for risk management purposes;
dealing as agent in the course of a profession or non-investment business;
transactions relating to employee share schemes;
dealing as a bare trustee; and
transactions intermediated by licensed firms (which will entitle counterparties to benefit from the "with or through" exclusion).

Excluded persons

In addition to the above, excluded people include people who:

do not otherwise carry on (or hold themselves out as carrying on) investment business and does not receive remuneration separately for activities that constitute investment business and
are directors, partners, trustees or participants in joint ventures who provide investment business services to their respective company, partnership, trust or joint venture; or
are companies that undertake an activity that constitutes investment business exclusively with, or for, a company within the same group; or
are public, private or professional funds or a recognised foreign fund which undertakes an activity that constitutes carrying on business as a mutual fund in or from within the BVI; or
are in most cases, persons that provide services to sophisticated persons.

Geographic scope

Given the above, the 'investment business' provisions contained in SIBA will be applicable to BVI entities conducting 'investment business' outside the BVI as well as BVI and non-BVI entities conducting 'investment business' within the BVI (unless those activities constitute an excluded activity or are conducted by excluded persons) and any person who solicits a person in the BVI in order to offer investment services.

Further to the exclusions, however, a non-BVI person who provides investment services to an 'international BVI business company' (i.e. a BVI company whose sole link with the BVI is having its registered office in the BVI) should not fall within the scope of the new regime, although every case should be considered on its facts.

Following licensing

Once licensed to carry on an 'investment business', SIBA sets out various ongoing obligations on the licensee regarding systems and controls for the operation of the licensee's business, including, inter alia, corporate governance, capital resources, the appointment and removal of directors, changes to ownership structures, insurance, advertising, segregation of client assets, an approved persons regime, conduct of business rules and other administrative requirements.

Non compliance and transition

Importantly, in some cases, contracts and transactions entered into by persons who conduct 'investment business' without a compliant licence may be rendered unenforceable.

SIBA did, however, provide for a transitional period during which any persons who were carrying out 'investment business' may make necessary arrangements to comply with the new provisions and such transitional measures applied for six months following the enactment of SIBA.

Public issues of securities

Part II of SIBA deals with the regulation of the offering of securities to the public in the BVI (except securities issued by mutual funds or offers to qualified investors). Notably, an 'international BVI business company' is not be restricted form offering its securities outside the BVI, and foreign issuers (and their agents) can continue to send offerings of securities to 'international BVI business companies' provided such offers are not received in the BVI.

In summary, SIBA provides that no security may be offered to the public in the BVI unless the offer is contained within a prospectus registered with the FSC and that such prospectus complies with the Public Issuers Code, which includes prospectus content requirements. Any further amendments or supplements to a registered prospectus will also have to be registered with the FSC.

SIBA also gives Courts the power to grant compensation orders (against the issuer, its directors, any guarantor of the issuer, any promoter of the offer and any other person taking responsibility for the prospectus or authorising its contents) in favour of subscribers that purchased securities offered pursuant to a public offer in reliance on a prospectus and suffered loss or damage as a result of a untrue or misleading statements contained or omitted from the relevant prospectus.

Repeal of the Mutual Funds Act 1996

Further to the above changes, SIBA also has the function of repealing the Mutual Funds Act 1996, which has now been replaced by Part III SIBA, the MFR and the Public Funds Code. However, issues of securities by mutual funds registered or recognised under SIBA do not fall within the new public issuer regime detailed above.

This section of SIBA and the accompanying legislation have mainly codified existing FSC policies and market practices without materially altering the regulatory framework for BVI funds. For example, the former categories of professional, private and public funds remain the same, as does the definition of 'mutual fund', meaning that open ended funds are subject to SIBA whilst closed-ended funds will continue to fall outside its scope, although functionaries of closed-ended funds may be caught by the new licensing requirements.

Notable new introductions regarding funds

Notwithstanding the above, notable new introductions do exist and are summarised as follows:

BVI funds to have at least two directors, one of whom must be an individual;
all BVI funds must appoint an authorised representative resident in the BVI (save where the fund already has a significant management presence in the BVI);
minimum initial investment requirement for all (rather than a majority, as previously enacted) investors in professional funds (US$100,000 or the equivalent in another currency) subject to limited exceptions;
a requirement for private and professional funds to appoint an investment manager, administrator or custodian and have an offering document (although application may be made to the FSC for an exemption from appointing a manager and/or a custodian and producing an offering document); and
a general requirement for private and professional funds to appoint and at all times have an auditor for the purposes of preparing audited financial statements in accordance with recognised international accounting standards (although funds may apply for an exemption to this requirement).
Further minor changes also include:

a requirement to provide the FSC with 7 days prior written notice of the proposed appointment of a private or professional fund functionary (unless agreed otherwise with the FSC);
a change in the timeframe in which professional funds are able to commence business before receiving recognition as a BVI mutual fund from the FSC (21 days, previously 14);
a requirement that custodians of private or professional funds be completely independent of such funds' administrator or manager; and
a requirement for BVI funds to retain records of transactions that will enable their financial position to be determined, their financial statements to be prepared and audited, for at least 5 years following each relevant transaction.

Notable new introductions regarding fund mangers and administrators

In addition to the above, with regards to licensed fund managers and administrators ('licensees'), SIBA has introduced the following requirements:

directors and senior officers of licensees must not be appointed without the prior written consent of the FSC;
licensees must appoint a BVI resident authorised representative unless the licensee otherwise has a significant management presence in the BVI;
the acquisition or disposal of a 'significant interest' in a licensee must be approved in writing by the FSC prior to the transaction taking place;
a licensee must obtain the prior written approval of the FSC to open, maintain or carry on a branch, representative or contact office or for the incorporation, formation or acquisition of a subsidiary outside the BVI;
any changes in the licensee's corporate name must be notified to the FSC within 21 days;
if a licensee has control of, or is responsible for, any client assets, such assets must be identified and appropriately segregated, accounted for and properly protected; and
licensees are also required to keep records for at least 5 years, such records must be sufficient to determine the licensee's financial position, and prepare and audit its financial statements.

Implementation of the changes

As per the provisions regarding 'investment business', a six month transitional period was applicable to entities that were formerly licensed under the Mutual Funds Act 1996.

With regards to professional funds, however, SIBA's provisions required the amendment of professional funds' constitutional documents to be completed by 12 October 2010. For example, professional funds constitutional documents should all now clearly state that the equity interests of the fund will exclusively be issued to 'professional investors' only and that the initial investment of each investor will be no less that US$100,000. For clarity, however, the minimum initial investment requirement does not have retrospective effect.

With regards, again for example, to offering documents of private funds, these should contain, inter alia, an investment warning indicating that the fund has been established as a private and that it is suitable for private investors only and is limited to 50 investors (or any invitation to subscribe may be made on a private basis only), that the fund is not subject to requirements considered necessary for the protection of investors and that they may present a greater risk than public funds, and, finally, that the investor is solely responsible for ascertaining whether the fund is suitable for his or her investment needs.

In terms of procedural steps, no person should be accepted as an investor in a private or professional fund unless they have provided a written acknowledgement that they have received, understood and accepted the prescribed investment warning.

It is also worth mentioning, at this stage, that by effect of the Financial Services Commission (Securities and Investment Business Fees) Regulations 2010, the application fee and the annual recognition fees of private and professional funds have increased since 1 January 2011 (respectively now US$700 and US$1,000).

Market abuse regime

To bring the BVI in line with internationally accepted standards for the prevention of market abuse and similar financial crimes, SIBA has introduced criminal offences for individuals based in the BVI who engage in insider dealing, market manipulation or make misleading statements relating to 'investment business'. Fines of up to US$50,000 and prison terms of up to three years may be levied on persons found guilty of these new crimes.

In summary, insider dealing occurs when a person in possession of 'insider information' deals (or encourages another person to deal) in price-affected securities or discloses the 'inside information' to another person otherwise than in the course of his or her employment.

With regards to misleading information and market manipulation, these occur when a person makes a statement, promise or forecast that he knows to be deceptive or dishonestly conceals any material facts or recklessly makes a statement which is misleading, false or deceptive.

It is also important to note that persons who commit such crimes outside the BVI, but who use BVI vehicles to structure transactions or process profits which make use of the proceeds of these crimes, will now be more likely to be found to have committed a money-laundering offence in the BVI.

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.

British Virgin Islands: BVI Securities Investment Business Act 2010 (‘SIBA’)