British Virgin Islands: Mutual Funds

The Mutual Funds Act 1996 was brought into force with effect from 2 January 1998 to regulate mutual funds, their managers and administrators that carry on their business either in or from within the Territory. The Act covers funds which are domiciled in the British Virgin Islands that operate elsewhere and funds which are domiciled elsewhere that are sold in the British Virgin Islands.

The Mutual Funds Act defines a mutual fund as a legal vehicle organised under the laws of the British Virgin Islands or of any other country or jurisdiction that ‘collects and pools funds for the purpose of collective investment’. It is an entity that issues shares or similar interests, ‘that entitle the holder to receive on demand or within a specified period after demand and amount computed by reference to the value of a proportionate interest in the whole or part of the net assets of the legal vehicle’. The Act only applies to open-ended funds (those which stand ready to redeem their participants’ interest upon demand by reference to net asset value) and no to closed-end funds.

The Mutual Funds Act distinguishes between three classes of mutual funds:

• Public – a fund that sells its shares to the public.
• Private – a fund that sells its shares on a private basis or a fund that has less than 50 investors.
• Professional – a fund that is only made available to professional investors who are either a financial institution or an individual who has signed a declaration that he/she has net worth in excess of $1 million and consents to be treated as a professional investor.

In addition, a separate subclass of public funds has been created, the ‘selective’ public fund where the fund sells shares to the public via an intermediary.

A public fund must apply for and obtain registration to carry on its business or administer its affairs in or from within the British Virgin Islands. The registration process is intended to be relatively quick and easy. Promoters are able to seek advance consent to be registered, prior to proceeding with the fund’s lawful constitution.

A private or professional mutual fund must be recognised in order to carry on its business or manager or administer its affairs in or from within the British Virgin Islands. A professional fund can benefit from a fast track launch procedure, which means that it may commence operations up to 14 days before being recognised. The recognition procedure itself is intended to be quick and efficient.

Mutual funds are typically set up as open-ended investment companies under the International Business Companies Act, with limited liability as a unit trust governed by their own trust deed or as an international limited partnership governed by their own memorandum and articles of partnership. Mutual funds in the British Virgin Islands are typically very flexible. Companies incorporated under the International Business Companies Act have, inter alia, no minimum capital restrictions, may issue bearer shares as well as acquire and hold their own shares as treasury stock subject to certain specified restrictions.

The Mutual Funds Act establishes the requirement for any person, which includes companies or partnerships, carrying on business as a manager and/or administrator of mutual fund, in or from within the Territory, to be licensed. This requirement applies both to resident service providers in the British Virgin Islands, such as trust companies and also to any special purpose vehicles that are established using British Virgin Islands entities to provide management and/or administrations services to funds.

Under the Mutual Funds Act a manager of a mutual fund is a person ‘who for valuable consideration provides a mutual fund with management services alone or together with investment advice or administrative services’.

An administrator of a mutual fund is a person who ‘for valuable consideration provides a mutual fund with administrative services alone or together with accounting services’.

The Mutual Funds 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.

There are two types of licenses – general and restricted non-resident. A general licence is required if the applicant provides management services to a public fund or administration services to a mutual fund. For a general licence the applicant is required to provide a detailed business plan, which includes details of the entity’s human resources, administrative facilities and information technology systems and financial projections for the two years following the application, on which the applicant’s auditors must issue an opinion.

The application for a restricted licence to act as a non-resident manager of private or professional funds is relatively simple. The basic test for eligibility is that the applicant must be judged a ‘fit and proper’ person. Key elements of the fit and proper test are the availability of adequate financial resources; a track record in the business being proposed and demonstrable integrity and competence. The applicant’s entity will be required to appoint auditors. The application forms require disclosure of beneficial ownership, names of directors (with a copy of a résumé for each director), a list of related parties that are regulated by other regulatory authorities and details of the funds for which the manager will act.

The Mutual Funds Act provides an exemption from the requirement to be licensed to non-resident persons provided that:

• They are an established manager or administrator of mutual funds under the laws of a recognised country or jurisdiction; and
• They receive written authorisation to act as a manager or administrator of a mutual fund in or from within the British Virgin Islands.

A special exemption from the requirement to be licensed under the Mutual Funds Act is provided to a British Virgin Islands entity that meets the conditions set down for a ‘Recognised Manager’. Such a manager could be a special purpose management company established in the British Virgin Islands for fiscal reasons and is associated with a range of in-house mutual funds.

All resident trustees must be licensed under the Banks and Trust Companies Act 1990.

There are no restrictions on the investment policies of mutual funds in the British Virgin Islands other than those specifically contained in a fund’s prospectus or its memorandum and articles of association, trust deed or memorandum and articles of partnership, as appropriate.

There are no restrictions on the power of mutual funds in the British Virgin Islands to borrow other than those specifically contained in a fund’s prospectus or its memorandum and articles of association, trust deed or memorandum and articles of partnership, as appropriate.

There are no legal restrictions on the percentage of ownership in a mutual fund that may be held by one person or related group of persons.

A registered public fund is required to prepare financial statements in respect of each financial year of its operation. The Mutual Funds Act requires that financial statements must be prepared in accordance with generally accepted accounting principles and be audited by an auditor approved by the Registrar of Mutual Funds (the ‘Registrar’). The financial statements should be provided to or made available for examination by the Registrar or any other person authorised by the Registrar, and to investors of the registered public fund.

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 authorised its publishing. A copy of the prospectus must be filed with the Registrar. The Mutual Funds Act 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 and informed investment decision’. A prospectus must also contain a summary statement of the statutory rights of investors as provided in the Act and be accompanied by or contain reference to the availability of financial statements and the auditor’s report thereon.

The Mutual Funds Act provides that a person who invests in a public fund as a result of a prospectus containing a misrepresentation is given a statutory right of action for recission of the purchase or for damages against the fund and every person who ‘while aware of the misrepresentation or would have been aware of the misrepresentation had he made reasonable investigations..authorised the signing of or approved the prospectus’.

Legislation in the British Virgin Islands does not define the entitlement to income. It is generally accepted that a participant in a fund, albeit a shareholder, unit holder or partner is entitled to income only when distributed by a fund and not when it is received by or accrues to the fund.

The supervisory authority in the British Virgin Islands is the Registrar of Mutual Funds. The Registrar is responsible for the supervision of registered or recognised mutual funds and licensed mutual fund managers and administrators. The Registrar 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 licence to provide management and/or administration services to mutual funds.

The largest expense associated with the launch of a fund in the British Virgin Islands is professional fees for the preparation and review of the fund’s prospectus and related material contracts. Depending on the complexity of the fund and the familiarity of the promoters preparing the prospectus, professional fees typically are in the range of $15,000 to $35,000. It takes 24 hours to set up an IBC and approximately two to three weeks to finalise all of the fund’s documentation, including the prospectus. Applications for registration and recognition of funds are usually processed within two weeks and applications for a licence to provide management and/or administration services are usually processed within four weeks.