HEDGE FUNDS – BRITISH VIRGIN ISLANDS
- BVI Investment Funds: Overview
Investment funds domiciled in the British Virgin Islands (often referred to simply as “the BVI”) are regulated by the Investment Business Division of the Financial Services Commission (the "FSC"). The Investment Business Division is responsible for the regulation and supervision of securities and investment business and collective investment schemes, that carry on business in and from within the Territory. The Division ensures compliance with relevant BVI laws, as well as with the territory’s international standards of regulation and supervision.
As at 31 March 2013, there were 2,303 open-ended investment funds recognised by or registered with the FSC, of which 1,538 were established as professional funds, 574 as private funds and 146 as public funds. It is not possible to state with any accuracy how many of those 2,303 open-ended investment funds can be classified as “hedge funds”, but the proportion is generally considered to be something in the order of 75%, making the BVI the world’s second largest offshore centre of alternative management after the Cayman Islands.
Closed-ended funds have no obligation to be filed with the FSC and so it is not possible accurately to estimate the number of closed-ended funds domiciled in the BVI. It may be assumed that closed-ended and other types of unregulated fund comprise a substantial proportion of the one million or so companies and limited partnerships registered in the BVI as at 31 March 2013.
As at 31 March 2013 there were additionally 530 licensed providers of investment business services (the majority of which were management companies appointed by BVI registered investment funds) and 5 management companies utilising the new “Approved Manager” regime that was introduced in 2012, and which is considered below.
- Regulatory Regime
The FSC was established in 2001 as the autonomous financial services regulatory authority in the BVI. In addition to the regulation of financial services, the FSC is responsible for the Registry of Corporate Affairs at which all publicly available documents pertaining to companies and limited partnerships registered in the BVI are maintained.
The Investment Business Division of the FSC administers and enforces the Securities and Investment Business Act, 2010 (“SIBA”) (which replaced the Mutual Funds Act 1996), the Mutual Fund Regulations, 2010 and the Regulatory Code, 2009. This is the primary legislation that governs investment funds in the BVI, the centerpiece of which is SIBA.
The 2,303 investment funds recognized by or registered with the FSC as at 31 March 2013 derive their regulatory status in the BVI by virtue of being considered “mutual funds”. This definition is unique to the BVI, bears no resemblance to that term as it is commonly understood in North America, and is defined in SIBA as a company, partnership or unit trust that:
- collects and pools investor funds for the purpose of collective investment; and
- issues fund 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, 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 fund not registered or recognised under SIBA.
Three points of note flow from this definition:
- the reference to single investor funds brings such funds within the definition of “mutual fund” in order to ensure that master funds (which may have only one investor) are brought with the ambit of SIBA;
- the definition in SIBA of “fund interests” expressly excludes debt interests, and so funds issuing debt interests are excluded from the licensing and other requirements of SIBA; and
- closed-ended funds are not brought within the ambit of SIBA.
The following types of mutual fund fall within the SIBA licensing regime:
- mutual funds established as BVI entities (companies, limited partnerships and unit trusts);
- mutual funds established outside the BVI but which carry on business in the BVI through a branch operation or representative office; and
- mutual funds established outside the BVI which promote themselves to persons who are BVI citizens or residents, or who are physically present in the BVI.
SIBA also regulates:
- mutual fund administrators, managers and custodians established as BVI entities; and
- mutual fund management or administrative entities established outside the BVI but which carry on their business in the BVI.
- Categories of Mutual Fund
For regulatory purposes, there are three principal types of mutual fund under SIBA: private funds, professional funds and pubic funds.
SIBA defines a private fund as a mutual fund which by its constitutional documents:
- has restricted the maximum number of its investors to fifty; or
- has specified that all invitations to subscribe for interests in the fund shall be made on a private basis.
On application, a proposed private fund will be expected to demonstrate the "private basis" of offering its shares to prospective investors. SIBA provides that a private invitation to subscribe fund interests will include an invitation:
- to specified persons and which is not calculated to result in fund interests becoming available to other persons or to a large number of persons; or
- by reason of a private or business connection between the fund and the subscriber.
There is an FSC policy guideline that amplifies what may be considered “private” by stating 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 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 SIBA, on the grounds that a large number of persons is not consistent with what is commonly understood to be "private"." In any case, the private fund will be limited to having at most 50 investors of record.
SIBA defines a professional fund as a mutual fund whose interests are made available only to professional investors, each of whom (unless considered an “exempted investor”) must invest at least US$100,000 (or currency equivalent) by way of initial subscription.
A "professional investor" is any person satisfying one of two possible criteria:
- a person whose ordinary business involves investment business similar to the kind the fund is undertaking;
- a person whose net worth (either individually or jointly with a spouse) exceeds US$1,000,000 (or currency equivalent).
In simple terms, therefore, a "professional investor" is (in theory at least) a person who knows what he is doing when investing in the fund, who understands the risks of an investment and can absorb the potential losses arising therefrom. It is for this reason that 1,538 of the 2,303 mutual funds filing with the FSC as at 31 March 2013, amongst which there will be a high proportion of hedge funds, are established as professional funds. It follows that the majority of mutual funds domiciled in the BVI and operating as hedge funds will take the form of professional funds.
An “exempted investor” (to which the US$100,000 minimum initial subscription requirement does not apply) is (a) the fund’s manager, administrator, promoter or underwriter, or (b) any employee of the fund’s manager.
Unlike a private fund, which must be recognised by the FSC before it commences business (broadly understood to mean publishing a placement memorandum), a professional fund may carry on its business or manage or administer its affairs for a period of up to 21 days without being recognised under SIBA. This ability is subject to some qualification, however: (a) the fund must satisfy the criteria for a professional fund, and (b) the fund must comply with and be managed and administered in compliance with SIBA.
A public fund is one that is neither a private fund nor a professional fund. A public fund offers interests to the general public. Essentially a retail product, this type of mutual fund is accorded the highest degree of regulation.
A public funds must be registered with the FSC before engaging in any business activity in or from within the BVI. In addition, SIBA requires that its prospectus shall provide "full and accurate disclosure of all such information as investors would reasonably require and expect to find for the purpose of making an informed investment decision". The prospectus is also required to contain a summary statement of investors´ rights, and must be approved and signed by (or on behalf of) the fund's directors, who take responsibility for the content thereof.
Because of the retail nature of pubic funds, this article will focus primarily on private and professional funds.
- Regulatory Application Process
The application to obtain private, professional or public status is made by the fund to the FSC using a prescribed form of application form and supported by a number of documents, including:
- the fund’s constitutional documents and certificates of incorporation or registration
- offering document (or explanation as to why no offering document is being issued)
- a prescribed investment warning in the offering document (or if no offering document is being issued, the investment warning must be provided separately to investors)
- subscription documents
- consent letter signed by the fund’s BVI legal counsel
- relevant service provider appointment exemptions (if claimed): auditor, custodian and manager must be appointed by the fund unless an exemption is available and is claimed (see the section entitled “Fund Service Providers”, below).
- US$700 application fee.
The application process for a private or professional fund typically takes one week from the submission to the FSC of the supporting documents to issue of the FSC’s certificate of registration or recognition (as applicable).
- Fund Service Providers
SIBA requires that BVI mutual funds (private, professional, public) must appoint:
- an authorised representative
- a manager
- a custodian
- an administrator
- an auditor
- two directors (minimum).
A private or professional fund must give the FSC at least seven days’ prior notice of a functionary’s appointment (or retirement or removal).
The FSC has the ability to take enforcement action against a fund if its functionaries do not meet the “fit and proper” requirements of the FSC. For these purposes, the FSC has a list of jurisdictions that it officially recognises in order to provide some certainty in relation to those of the BVI fund’s overseas service providers that it will deem as acceptable.
Every mutual fund must have an authorised representative in the BVI, the functions of which are to act as an intermediary between the fund and the FSC.
A mutual fund is required at all times to have a manager. A private or professional fund may apply for an exemption from this requirement. In addition, management entities will be subject to the licensing requirements of SIBA. These are considered below under “Management Companies”. A local manager is not required under BVI law.
Custodian & Administrator
A mutual fund is required at all times to have a custodian and an administrator. A fund may apply for an exemption from the requirement to appoint a custodian. No exemption from the requirement to appoint an administrator is available under BVI law. A local custodian or administrator is not required under BVI law.
Private and professional funds are required to appoint an auditor and file with the FSC annual financial Statements, unless the fund is exempted from the audit requirement by the FSC. There is no local auditor sign-off requirement, not does the auditor have to be approved by the FSC.
Every mutual fund must have at least two directors, one of whom must be an individual. The directors must satisfy the FSC’s “fit and proper” requirements, and a private or professional fund must give the FSC at least fourteen days’ prior notice of a director’s appointment, retirement or removal. There is no residency requirement for the directors.
The directors of private and professional funds are generally expected to be individuals (as opposed to corporate entities). With respect to funds established as limited partnerships, there is no requirement that the general partner of the limited partnership be a BVI company or the general partner be resident in the BVI.
- Private and Professional Funds: Ongoing Obligations
In order to enable provide the FSC with sufficient information to enable it to monitor the BVI funds industry and plan its development, SIBA requires private and professional funds are subject to certain reporting obligations to the FSC, primarily relating to:
- the cessation or termination of a functionary’s appointment
- any amendment of its constitutional documents
- any change of its place of business, whether in or outside the BVI
- the issuance of any offering document not previously provided to the FSC
- the amendment of any offering document previously provided to the FSC
- financial information for the relevant reporting period, including start- and end- NAVs, total subscriptions, total redemptions, net income/loss, dividends/ distributions and year end gross assets.
This information, in respect of the previous calendar year, is contained and sent to the FSC in an annual prudential or statistical return that the fund must lodge with the FSC no later than 30 June in the current calendar year.
Unless exempted, private and professional funds must prepare annual audited accounts and file the same with the FSC within six months of year end or any extended period permitted by the FSC and not exceeding 15 months in total.
The FSC has the ability to require funds to provide such additional information that it considers necessary to remedy any inaccurate, incomplete or unverified information already provided.
- Investment restrictions on Mutual Funds
There are no requirements or restrictions under BVI law relevant to a fund’s investments, investment strategy, liquidity profile and use of leverage or derivative instruments.
- Offering & Subscription Document Content
A BVI mutual fund must issue and offering document, or furnish the FSC with an explanation as to why it seeks to dispense with an offering document and the means by which it is proposed that investors are provided with all relevant information.
BVI law makes very few demands on the content of a fund’s offering document, other than the requirement under SIBA that investors in private or professional funds must be provided with an investment warning, prominently located in the offering document, to the effect that:
- the fund has been established as a private or professional fund, as the case may be;
- in the case of a private fund, the fund is suitable for private investors only and that the fund is limited to 50 investors or any invitation to subscribe for interests in the fund may be made on a "private basis" only;
- in the case of a professional fund, the fund is suitable for professional investors, and with respect to each investor, a minimum initial investment of US$100,000 (or such larger sum as may apply with respect to the fund) is required;
- the fund is not subject to supervision by the FSC or by a regulator outside the BVI and that the requirements considered necessary for the protection of investors that apply to public funds do not apply to private or professional funds;
- an investor in a private or professional fund is solely responsible for determining whether the fund is suitable for his investment needs; and
- investment in a private or professional fund may present a greater risk to an investor than investment in a public fund.
Where a private or professional fund does not issue an offering document, this investment warning must be provided to each investor in a separate document.
SIBA additionally requires that applicants for fund interests may only be accepted by the private or professional fund if that applicant has provided a written acknowledgement that it has received, understood and accepted the prescribed investment warning. In practice this acknowledgement is contained as a representation in the fund’s subscription documents.
- Management Companies
A private, professional and public fund in the BVI is required to appoint a manager. The conduct of investment business in or from within the BVI is subject to the licensing requirements of SIBA.
SIBA licensing Regime
The term "in or from within the BVI” means that the licensing requirements 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, as considered below) and any person who solicits a person in the BVI in order to offer investment services.
"Investment business" is broadly defined to include (i) dealing in investments, (ii) arranging deals in investments, (iii) managing investments, (iv) providing investment advice, and (v) providing custodial or administration services with respect to investments. "Investments" is defined to include shares, interests in a partnership or fund, debentures, bonds, other debt instruments and derivatives and other interests relating to such investments.
Licensees are required to comply on an ongoing basis with a number of requirements under the SIBA and the Regulatory Code 2009 including requirements relating to capital resources, the appointment and removal of directors, changes to ownership structures, insurance, corporate governance, segregation of client assets, advertising and such other requirements to be included in a dedicated part of the Regulatory Code 2009.
Exclusions from SIBA licensing regime
SIBA provides for the exclusion of certain types of investment activities and certain types of persons from the abovementioned prohibition.
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;
- providing investment advice in the course of a profession or non-investment business;
- transactions relating to employee share schemes;
- dealing as a bare trustee, or providing advice as a trustee to co-trustees or trust beneficiaries; and
- giving investment advice as a director of a company to another director of the company, provided that the director does not otherwise carry on investment advice or investment management business.
There are no excluded activities in connection with custodial or administration services.
In addition to these excluded activities, SIBA excludes from its licensing requirements persons (a) 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 (b) who 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.
Public, private or professional funds or recognised foreign funds are also excluded when undertaking an activity that constitutes carrying on business as a mutual fund in or from within the BVI.
- Management licensing process
The licence application process will take around 6 weeks to complete. The application will entail the preparation and filing with the FSC of several documents, including (a) a detailed business plan, and (b) documents evidencing the fulfilment of the FSC’s “fit and proper” requirements in relation to the applicant’s directors, senior officers and significant shareholders.
Under the SIBA regime each in, the person seeking a licence must satisfy the FSC's. References, police reports and declarations on each such person must be provided to the FSC. A detailed business plan must also accompany the application.
- Ongoing obligations of licensees
Once licensed to carry on an 'investment business', SIBA sets out various ongoing obligations on the licensee regarding corporate governance, capital resources, the appointment of directors, a compliance officer and MLRO, preparation of audited accounts, changes of ownership, insurance, advertising, segregation of client assets, an approved persons regime, conduct of business rules and other administrative requirements.
- Approved Manager Regime
A less onerous licensing regime came into effect on 10 December 2012 for BVI entities providing investment management services or investment advice to (a) open-ended funds whose assets do not exceed US$400m, and (b) closed-ended funds whose capital commitments do not exceed US$1bn., such funds being private and professional funds and closed-end funds domiciled in the BVI. Once these limits are exceeded, a manager will likely have to comply with the licensing regime under SIBA.
An “Approved Manager” will be subject to less onerous ongoing obligations, including:
- appointment of MLRO;
- submission of financial statements to FSC (no audit requirement)
- submission of annual return to FSC by 31 January of each year
- notification of the FSC of any matter in relation to it or its conduct, which has or is likely to have a material impact or significant regulatory impact with respect to the Approved Manager or its business.
- BVI Mutual Funds: Vehicles
In general, BVI mutual funds may be organized as companies, limited partnerships or unit trusts.
Of the 2,303 open-ended investment funds recognised by or registered with the FSC as at 31 March 2013, the majority were organized as limited companies, with a handful of exceptions being unlimited companies, or companies limited by guarantee. The key attraction of a BVI limited company from an investment perspective is that it serves to limit the investor’s liability to the amount paid up or agreed to be paid up on the shares subscribed, in other words, the total amount invested in the company at any given time.
The majority of mutual funds organized as limited companies take the form of Business Companies under the BVI Business Companies Act, 2004 (as revised). Of those, 139 were (as at 31 March 2013) established or re-registered as segregated portfolio companies (“SPCs”). An SPC is a single company within which various segregated portfolios may be established. Each segregated portfolio may reference discrete portfolio assets and be represented by a separate class of shares. The assets and liabilities of each segregated portfolio, and therefore of each share class, are segregated under BVI law from the assets and liabilities of the other segregated portfolios and their corresponding share classes. The assets of the SPC are divided into those attributable to the segregated portfolios and to the company’s “general assets”. The assets of a segregated portfolio are only available for recourse by creditors of that segregated portfolio. Those assets are not available to meet liabilities to creditors of the SPC who are not creditors in respect of that segregated portfolio. The SPC’s general assets may be used to satisfy liabilities that cannot be met out of the assets of the relevant segregated portfolio.
Given that a segregated portfolios des not have any legal personality in its own right, the SPC must execute all agreements for an on behalf of each segregated portfolio. All such agreements will bear the name of the SPC together with a statement to the effect that the SPC is entering into the agreement for and on behalf of the relevant segregated portfolio.
A private, professional or public fund may be organized as an SPC. An application will be made to the FSC for registration or recognition (as applicable) of both the SPC and any segregated portfolios that may be established at launch. Following launch and the initial FSC process, private and professional funds retaining with respect to all segregated portfolios the services of those functionaries (manager, administrator, custodian, etc) previously approved by the FSC have only to provide notice to the FSC of the establishment of additional segregated portfolios. However, if any different functionary is appointed by the SPC to any new segregated portfolio, the SPC will require the prior approval of the FSC to the establishment of the new segregated portfolio.
Whilst the majority of mutual funds in the BVI are organized as limited companies, a handful take the form of limited partnerships. A BVI limited partnership is organized and operates in much the same way as its counterpart in Delaware (and are therefore intelligible to promoters and investors in the US), except that in the BVI a limited partnership has no legal personality of its own. The business of the limited partnership is conducted by the general partner which contracts on behalf of the other partners and is liable for the debts and the obligations of the partnership as a whole.
Very few mutual funds in the BVI are organized as unit trusts. Their use is typically driven by regulatory or tax rules in the manager’s home jurisdiction that prohibit or make difficult the promotion of, or investment in, shares in a company. The trust is administered by a trustee which holds the assets of the fund on trust for the investors (unitholders) and delegates the fund’s management to a professional fund manager. In most unit trusts, each unitholder is entitled to a pro rata share of the trust's assets.
BVI law on unit trusts for the most part follows the law of England and Wales.
- BVI Mutual Funds: Structures
The BVI facilitates all the hallmark investment fund structures to be found in the alternatives space. These include the following:
- single and multi-class funds, comprising one or more classes of participating shares participating in a single investment portfolio or discrete portfolio assets. Multi-class funds (also known as “umbrella” funds) are typically formed as limited companies or SPCs. Each class may rank equally with each other, or may have different rights and obligations as to, for example, return of capital and income, redemption, payment of management fees.
- master/feeder structures, beloved of US managers and used to facilitate indirect investment via “feeder” funds into a single “master” fund by different groups of investors categorised according to their geographical location, local tax treatment or local regulatory requirements. The paradigm is the use of a Delaware vehicle as a feeder fund US taxable investors and the use of a BVI vehicle for US tax-exempt and non-US investors. Running these funds as separate stand-alone vehicles would be expensive and inefficient for the manager, and so each will invest into a BVI master fund, normally structured as a limited company. The structure achieves economies of scale and enables the manager to achieve “critical mass” in the master fund as the co-investment vehicle.
- private label funds/single investor funds/funds of one: these are private, customized investment vehicles commonly used by high net worth individuals an family offices to hold and actively manage discrete assets. They are also used by managers to provide high net worth individuals or institutional clients with a managed account solution.
- Marketing of BVI Funds
An intermediary licensed under SIBA may market in the BVI:
- a professional, private or public fund established in the BVI; and
- a fund incorporated outside the BVI and registered in the BVI as a Recognised Foreign Fund.
Alternatively a manager or sponsor established outside the BVI may market both types of fund in the BVI, together with unregistered foreign funds having no status in the BVI, subject to certain regulatory restrictions.
Marketing unrecognised and foreign funds to the public in the BVI is prohibited. The offering document for such funds should contain the following (sample) wording by way of “selling restriction”:
The Fund is not registered or recognised in the British Virgin Islands and as such interests in the Fund may not be offered to individuals in the British Virgin Islands. However, interests may be offered to British Virgin Islands Business Companies and/or persons who are not members of the public from outside the British Virgin Islands. A British Virgin Islands Business Company is a company formed under or otherwise governed by the British Virgin Islands Business Companies Act, 2004.
It follows that an offer made (i) on a cross-border basis (ie by electronic or telephonic means as opposed to physically in the BVI), to (ii) any BVI company registered under the Business Companies Act 2004, or to (iii) any of the following persons:
- a company in the same group as the first person;
- a person who is a participant with the first person in a joint enterprise;
- a person who holds an investment business licence, a licence under the Banks and Trusts Companies Act, an insurers licence under the Insurance Act or a licence issued under the Company Management Act; or
- a person licensed in a jurisdiction outside the BVI to carry on an equivalent activity which requires a licence is permitted to be made permitted without any licensing requirements being triggered under SIBA.
An invitation to a person to subscribe for or purchase fund interests is deemed not to constitute an invitation to the public in the BVI if:
- the invitation is made to, or directed exclusively at, one or more of an experienced investor, a person having a close connection with the issuer, or the Government of the Virgin Islands;
- the minimum aggregate purchase price payable by a person for the fund interests acquired by him pursuant to the invitation must be paid before the fund interests are issued, and is at least equal in amount to the minimum that the FSC may specify (no such minimum has yet been specified); or
- the invitation is made to such persons, (i) with respect to fund interests issued, or to be issued, by such persons, or (ii) in such circumstances as may be specified by the FSC (no such persons, fund interests or circumstances have yet been specified).
It follows that the private placement of foreign funds to the prescribed permitted persons will not fall to be regulated under SIBA.
The provision of generalized information to BVI investors (for example, information which does not refer (directly or indirectly) to a specific fund) will typically not constitute marketing that requires licensing under SIBA.
An approach made by a potential investor on an unsolicited basis should avoid the marketing prohibition.
Marketing prohibition should not apply where unregistered funds are marketed to BVI investors located outside of the BVI.
- Marketing BVI funds outside the BVI: AIFMD
Chapter VII of the AIFMD includes the ‘third country’ provisions where either the AIFM or the AIF is established outside the EU. These rules cover the following areas:
- AlFMs outside the EU which manage EU AlFs. ‘Managing’ means providing risk management or portfolio management services to the AIF in the regular course of business;
- AIFMs outside the EU which market one or more AIFs in the EU. ‘Marketing’ is defined as ‘any direct or indirect offering or placement at the initiative of the AIFM of units or shares in a fund it manages to or with investors domiciled in the Union’. While the AIFMD provides an EU framework for marketing to professional investors, individual Member States can choose whether to allow marketing to retail investors and may impose their own conditions; and
- an AIFM may, provided strict requirements are complied with, delegate some of its management functions. When an AIF delegates portfolio management or risk management to a BVI fund manager, a co-operation agreement will have to be entered into between the authorities of the Home Member State of the AIFM and the FSC.
EU AIFM marketing BVI Fund
An EU AIFM may market a BVI fund if the EU AIFM is authorised under the Directive and the home regulator has given its approval. EU AIFMs of BVI funds must comply with all of the provisions in the Directive except the depositary and annual reporting requirements. In addition, there must be co-operation arrangements in place between the home regulator and the FSC and tax information exchange arrangements must be in place.
Non-EU AIFM marketing BVI Fund
A non-EU AIFM may market a BVI fund to EU professional investors under Member States’ private placement regimes. However, from the date of transposition of the Directive (i.e. by 22 July 2013) the non-EU AIFM must comply with the transparency requirements on company disclosure and the asset stripping requirements. There must also be co-operation agreements in place between the relevant EU regulators, the non-EU AIFM and the FSC.
National Private Placement Regimes (NPPRs)
In order to be able to continue to use NPPRs between 22 July 2013 and July 2015, both EU and non-EU AIFMs of BVI funds must be able to rely on the following being in place:
- cooperation agreements are in place between the relevant EU regulator and the FSC;
- the BVI remaining whitelisted by the Financial Action Task Force; and
- the fund (the AIF) complying with various reduced regulatory requirements for non-EU AIFMs marketing the fund as a non-EU AIF. This includes transparency requirements, the submission of an annual report to the relevant EU regulator within six months of the financial year-end, disclosure requirements to investors and periodic reporting on trading activity, risk management, leverage information and systematically relevant information.
On 11 July 2013, the FSC announced that the BVI had entered into a Memorandum of Understanding ("MOU") with 25 European securities regulators. The MOU is concluded in a centralized way and was negotiated by European Securities and Markets Authority (ESMA) on behalf of EU securities regulators with responsibility for the supervision AIFs, including hedge funds. The MOU covers the necessary consultation, cooperation and exchange of information requirements to satisfy the AIFMD, enabling the continued marketing of BVI funds within most of the EU on the basis of national NPPRs. The MOU is largely based on the International Organisation of Securities Commissions (“IOSCO”) Multilateral Memorandum of Understanding, the BVI being the first jurisdiction originally to be admitted to IOSCO membership.
The BVI government and the FSC have signalled that they are fully committed to ensuring that the BVI is able to satisfy the requirements of AIFMD, in part by signing cooperation agreements with all EU Member States and Tax Information Exchange Agreements with jurisdictions where marketing of BVI funds take place. The FSC is currently discussing MOUs with Austria, Croatia, Germany, Italy, Slovenia and Spain. Ultimately, in pursuing this course of action, the BVI acknowledges that it must be prepared for the possible termination of NPPRs across the EU by ESMA in 2018.
The vast majority of investment funds in the BVI are purely tax transparent pooling vehicles, with no staff in the BVI or elsewhere. A mutual fund in the BVI is not liable to any income, capital gains, withholding, corporation, estate, inheritance, succession, gift or any other kind of taxation in the BVI. All amounts of capital and income paid by a BVI fund to a non-resident investor are tax free.
The EU Savings Tax Directive (“EUSD”) was implemented in the BVI on 1 July 2005, and is designed to facilitate the exchange of information by EU tax authorities on the savings income of individuals. Individuals who are investors in funds are impacted. The EUSD requires paying agents (typically, in respect of an investment fund, a fund administrator) to report certain information to their local tax authorities. Following the receipt of the report the local tax authority discloses it to the tax authority where the individual is resident. The information thus transmitted includes the identity and residence of the investor and his account details.
Paying agents in the BVI were formerly able to opt to deduct withholding tax on “interest payments” made by mutual funds (including distributions of income and capital) as an alternative to sharing information on the investor. Now, however, BVI paying agents must automatically provide such information, subject to an important qualification: only income from UCITS or UCITS equivalents falls within the ambit of EUSD. Private, professional and public mutual funds in the BVI are considered as non-UCITS equivalents, with the result that their BVI paying agents are not required to report information on income payments to investors in such funds.
- Anti-money laundering
The BVI’s anti-money laundering regime is based on the UK model and the principles established by the EC Third Money Laundering Directive. Mutual funds recognised or registered (as applicable) with the FSC, together with any of their functionaries to which the anti-money laundering (“AML”) function has been delegated, are required to verify the identity of all investors and to update such verification information supplied from time to time.
A mutual fund is required to risk profile subscribers prior to accepting subscription proceeds. Any subscriber being a person or entity domiciled in one of the FSC’s ' recognised jurisdictions' is likely to be considered low risk unless circumstances exist which indicate that they may be in a higher risk category, such as: (i) a politically exposed person; (ii) a person located in a country considered or identified as being high risk or that has sanctions, embargos or other restrictions imposed on it; or (iii) a business activity, ownership structure, anticipated, or volume or type of transaction that is complex or unusual, having regard to the risk profile of the applicant for business or customer, or where the business activity involves an unusual pattern of transactions or does not demonstrate any apparent or visible economic or lawful purpose.
The majority of BVI recognised/registered mutual funds delegate the maintenance of their AML procedures to a third party, often its administrator, based in a BVI recognised jurisdiction.