Guide To The Mutual Funds Act 1996

INTRODUCTION

Definition of Mutual Fund

The Mutual Funds Act 1996, as amended (the "Act") defines a mutual fund (see Endnote 1) as a company incorporated, a partnership formed, a unit trust organised or other similar body formed or organised under the laws of the British Virgin Islands or of any other country or jurisdiction which:

i) collects and pools investor funds for the purpose of collective investment; and

ii) issues shares (defined as shares in the share capital of a company, an interest in a mutual fund partnership and a unit in a mutual fund unit trust) 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 company, the partnership, the unit trust or other similar body, as the case may be; and includes

• an umbrella fund whose shares are split into a number of different class funds or sub- funds, and
• a fund which has a single investor which is a mutual fund not registered or recognised under the Act.

The Act therefore applies only to open-ended and not to closed-end funds and only regulates administrators and managers of such open-ended funds.

Application

It would appear that the Act will apply to the following:

• Mutual funds which are formed under the laws of the British Virgin Islands;
• Mutual funds formed under the laws of a jurisdiction other than the British Virgin Islands but which carry on business in the British Virgin Islands through a branch operation or representative office;
• Foreign mutual funds which solicit the purchase of their shares to individual persons who are British Virgin Islands residents or citizens and individuals who are physically present in the British Virgin Islands;
• Mutual fund administrators and managers which are formed under the laws of the British Virgin Islands including International Business Companies; and
• Foreign mutual fund management or administrative entities which carry on their business in the British Virgin Islands, for example, through a branch operation or representative office.

AMBIT OF PRINCIPAL PROVISIONS

The Act came into force on 2 January 1998. Policy Guidelines have also been issued by the Registrar of Mutual Funds. The Act provides that no public fund shall carry on its business or manage or administer its affairs in or from within the British Virgin Islands unless it is registered under the Act (see Endnote 2). A private or professional fund (subject, in the case of a professional fund, to the provision referred to at paragraph titled Definitions) may not carry on its business or manage or administer its affairs in or from within the British Virgin Islands unless it is recognised under the Act (see Endnote 3). A manager or an administrator of a mutual fund may not, in or from within the British Virgin Islands, carry on or hold himself out as carrying on business as a manager or administrator of a mutual fund unless licensed pursuant to the Act (see Endnote 4).

The Act provides that every company incorporated, partnership formed or unit trust organised under the laws of the British Virgin Islands for the purpose of carrying on business of a mutual fund, a manager or administrator shall, if carrying on business anywhere outside the British Virgin Islands, be deemed to be carrying on business from within the British Virgin Islands (see Endnote 5). The expression "carrying on business from within the British Virgin Islands" includes carrying on business outside the British Virgin Islands from a place of business or a registered office within the British Virgin Islands (see Endnote 6). The Act also provides that a mutual fund which is not incorporated, formed or organised or carrying on its business in or from within the British Virgin Islands shall be deemed to be carrying on business in the British Virgin Islands if it solicits an individual within the British Virgin Islands to purchase its shares except where the purchase is a result of an approach made by the individual without any solicitation being made (see Endnote 7).

DEFINITIONS

The Act provides the following definitions:

"Private fund" - a mutual fund

• the constitutional documents of which specify that it will have no more than fifty investors;
• the constitutional documents of which specify that the making of an invitation to subscribe for or purchase shares issued by the mutual fund is to be made on a private basis; or
• which is designated as a private fund by regulations (see Endnote 8).

The Act provides that, for the purposes of the definition of private fund, an invitation to subscribe for or purchase shares issued by a mutual fund on a private basis includes an invitation which is made

• to specified persons (however described) and is not calculated to result in shares becoming available to other persons or to a large number of investors; or
• by reason of a private or business connection between the person making the invitation and the investor (see Endnote 9).

The Policy Guidelines suggest that the making of invitations to as many as 300 persons might be considered an offering on a private basis if it can be demonstrated that the person made the invitations to specified persons and had no deliberate intention of making invitations to other persons. The Guidelines also suggest that the making of invitations to a significantly greater number of persons than 300 would cast doubt upon compliance with the spirit of "private basis" which is embodied in the Act.

"Professional fund" - a mutual fund

• the shares of which are made available only to professional investors and the initial investment in which, in respect of the majority of each of such investors, is not less than one hundred thousand dollars in United States currency or its equivalent in any other currency; or
• which is designated as a professional fund by regulations (see Endnote 10).

"Professional investor" - a person

• whose ordinary business involves, whether for its own account or the accounts of others, the acquisition or disposal of property of the same kind as the property, or a substantial part of the property, of the fund; or
• who has signed a declaration that he, whether individually or jointly with his spouse, has net worth in excess of one million dollars in United States currency or its equivalent in any other currency and that he consents to being treated as a professional investor (see Endnote 11).

"Public fund" - a mutual fund which is not a private fund or a professional fund (see Endnote 12).

"Administrator" - a person who

• for valuable consideration provides a mutual fund with administrative services alone or together with accounting services; or
• is entitled to provide to mutual funds (by whatever name called) such services and facilities as provided in paragraph (a) under the laws of a recognised country or jurisdiction (see Endnote 13).

"Manager" - a person, not being an officer or an employee of a person licensed under the Act or a mutual fund which has delegated management functions to a person licensed under the Act who,

• for valuable consideration, provides a mutual fund with management services alone or together with investment advice or administrative services; or
• is entitled to provide to mutual funds (by whatever name called), such services or advice as provided in paragraph (a) under the laws of a recognised country or jurisdiction (see Endnote 14).

The Act provides that the requirement to be licensed as a mutual fund administrator or manager does not apply to a person who

• is not ordinarily resident or domiciled in the British Virgin Islands;
• is a manager or administrator of mutual funds (by whatever name called) under the laws of a recognised country or jurisdiction; and
• has received written permission from the Minister to carry on business as a manager or administrator of mutual funds in or from within the British Virgin Islands (see Endnote 15).

RECOGNITION OF PRIVATE AND PROFESSIONAL FUNDS

Private funds must be recognised before they carry on business or manage or administer their affairs in or from within the British Virgin Islands (see Endnote 16). The Act provides that a professional fund may carry on its business or manage or administer its affairs for a period of up to 14 days without being recognised under the Act (see Endnote 17). The Policy Guidelines suggest that a fund will be regarded as having commenced its business when a prospectus, or other document the purpose of which is to make an invitation to purchase or subscribe for shares of the fund, is published.

Private and professional funds formed under the laws of the British Virgin Islands have a statutory entitlement to recognition upon proving that they fall within the definition of a private or professional fund and that they are lawfully constituted under the laws of the British Virgin Islands (see Endnote 18).

REGISTRATION OF PUBLIC FUNDS - PROSPECTUS REQUIREMENT

Registered public funds may not make an invitation to the public or any section thereof to purchase their shares unless prior to such invitation they publish in writing a prospectus, approved by and signed on behalf of the fund's directors or similar governing body, and a copy thereof has been filed with the Registrar of Mutual Funds.

Every prospectus is required to provide full and accurate disclosure of all information as investors would reasonably require and expect to find for the purpose of making an informed investment decision. An investor in a public fund has a statutory right of action for rescission or damages in respect of any misrepresentation (which includes an omission to disclose required information) contained in the fund's prospectus.

A public fund is required to have a custodian who is functionally independent of the fund's manager or administrator and must also maintain adequate accounting records and prepare audited financial statements in respect of each financial year and keep such accounting records and financial statements available for examination by the Registrar, any authorised person and all investors.

Where the required information ceases to be accurate in a material particular, the fund must publish an amendment to the prospectus within fourteen days of the change occurring.

SELECTED PUBLIC FUNDS

The Public Funds (Sub-Class) Regulations, 1997 create a sub-class of public funds known as Selected Public Funds. These are defined as public funds the interests in which are offered by a person who is entitled to provide investment services under British Virgin Islands law or under the laws of a recognised country or jurisdiction, and who

• has a written agreement with the investor which covers the offering of an interest in the fund and
• has assessed the suitability of the fund with respect to the agreement and investment objectives of the investor.

It is envisaged that Selected Public Funds will be distinguished from public funds generally in that they will enjoy a greater degree of regulatory flexibility.

ADMINISTRATORS AND MANAGERS

Applications for administrator's or manager's licences must include a statement of the financial and human resources and administrative facilities available to the applicant for the competent and efficient conduct of its business. Licences shall not be granted unless the Minister is satisfied that the applicant

• is a fit and proper person to be engaged in the business proposed;
• has available adequate knowledge, expertise, resources and facilities necessary for the nature and scope of the business proposed; and
• has appointed an auditor satisfying such conditions as may be prescribed by the Minister.

RECOGNISED MANAGERS

The Mutual Funds (Recognised Managers and Family Trusts)(Exemption) Directions, 1997 create an exemption for certain managers ("Recognised Managers") from the requirement to be licensed under the Act. A Recognised Manager is defined as a person

• who is subject to the control, whether by majority shareholding or otherwise, of a person who is entitled to provide investment management services under the laws of a recognised country or jurisdiction; and
• which is of sound repute and in good standing with a competent authority in that recognised country or jurisdiction.

The British Virgin Islands business of a Recognised Manager must be delegated to a manager or administrator licensed under the Act (the responsible licence holder) who is responsible for ensuring that the Recognised Manager complies with all relevant laws in the British Virgin Islands.

FUNDS FOR FAMILY TRUSTS

The Mutual Funds (Recognised Managers and Family Trusts) (Exemptions) Directions, 1997 also provide that a fund which is maintained by a group of family trusts for the sole purpose of facilitating investment and without any solicitation being made for the sale of a right to participate in the fund shall be exempt from the requirement to be recognised under the Act. The Policy Guidelines indicate that, in this context, family trusts would be regarded as trusts which have been established for the benefit of one or more members of the same family including the father, sons, daughters, adopted and stepchildren and immediate blood relations and the respective spouses of any of these persons. However, administrators and managers to such family funds do not enjoy any specific exemption from the requirement to be licensed pursuant to the Act.

RESTRICTIONS ON USE OF WORDS "FUND" AND "MUTUAL FUND"

The Act provides that, except where a person is a mutual fund within the meaning of the Act or except with the written consent of the Registrar of Mutual Funds, no person may use or continue to use the words "fund" or "mutual fund" in the name, description or title under which that person carries on business in or from within the British Virgin Islands nor may they make or continue to make any representation in any advertisement, letter, notice, etc. or in any other manner that they are carrying on business as a fund or mutual fund.

Closed-end or other types of funds (for example, venture capital funds) will be caught by this restriction and it appears unlikely that the Registrar of Mutual Funds will grant permission to exempt such funds to enable them to use the restricted words.

TRANSITIONAL PROVISIONS

Managers and administrators carrying on business before the Act came into force were obliged to comply with its provisions by no later than 31 March, 1998. Mutual funds carrying on their business or engaging in any activity as a mutual fund on the date the Act came into force must comply with the provisions of the Act by no later than 30 September, 1998. Mutual funds which do not comply with the licensing provisions of the Act within the specified period will be required to pay a non-compliance penalty of US$5,000 per month up to a maximum of three months beyond the transitional period. Any fund (not qualified for exemption) which has not been registered or recognised after this three-month period will commit an offence under the Act.

ENDNOTES

1 Mutual Funds Act, s 2(1)
2 Mutual Funds Act, s 8
3 Ibid., s 18(1)
4 Ibid., s 22(1)
5 Ibid., s 2(2)(a)
6 Ibid., s 2(2)(b)
7 Mutual Funds Act, s 2(2)(c)
8 Ibid., s 2(1A)(a)
9 Ibid., s 2(1)
10 Mutual Funds Act, s 2(1)
11 Ibid., s 2(1)
12 Ibid., s 2(1)
13 Ibid., s 2(1)
14 Ibid., s 2(1)
15 Mutual Funds Act, s 22(2)
16 Ibid., s 18(1)
17 Ibid., s 18(2)
18 Ibid., s 19(1)

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