On 2 January 2014, an extension to the BVI’s Approved Manager regime was brought into legal force. When this lighter touch regulation was introduced at the end of 2012 demand was strong. The product proved, perhaps, to be more popular than the Islands’ financial regulator, the BVI FSC, had originally expected.
In its initial incarnation, any manager running an open-ended BVI fund with no more than USD400million in AuM or a closed-ended fund with USD1billion of aggregate capital commitments could apply for the Approved Manager license. The reason for introducing it in the first place was to allow smaller managers and start-ups to avoid the Category 3 investment business licensing regime under the Securities Investment Business Act (SIBA), which became the BVI’s principal legislation in 2010.
“When it came out at the end of 2012 people liked the regime and the feedback that kept coming back was that it would be great if it applied to more than just BVI funds. The BVI FSC has now done that,” explains Michael Doyle, a senior associate at law firm Harneys.
Now, thanks to the extension, managers of non-BVI funds that are located in recognised jurisdictions can avail of the Approved Manager regime. This is a significant development because what it means is that a Cayman exempt manager running a Cayman fund, for example, can retain their Cayman fund but become licensed under the BVI FSC; something that could well prove to be advantageous for smaller managers and start-ups who are looking to gain an edge on their peers and become more attractive in the eyes of potential investors.
“The expanded Approved Manager Regime is a really positive move for the BVI,” enthuses Simon Schilder, a partner at Ogier. “The effect of it is that a manager will be able to manage a fund from a number of recognised jurisdictions such as Cayman, Bermuda, Channel Islands and all the usual onshore jurisdictions. The effect of this change will be to broaden the appeal of this regime in the market.
“Under the old regime, a BVI approved manager could only manage BVI funds or foreign funds investing substantially all of their into BVI funds (ie foreign feeder funds). Whilst that was great for managers managing BVI structures there were plenty of people who were interested in the Approved Manager regime that couldn’t utilise it because they were managing funds from other jurisdictions. We expect that this will enable a lot more managers to apply to be licensed as an Approved Manager.”
Marie-Claire Fudge, the head of Mourant Ozannes’ funds practice in BVI, confirms that they have already had a good number of enquiries this year. “I think it will attract more start-up managers to the BVI and potentially more funds to the BVI as well. The BVI is a respected funds jurisdiction, investors are comfortable investing in BVI funds and BVI Approved Managers are able to benefit from this regulatory light regime whilst still being approved by the BVI FSC. The ongoing obligations are less onerous than under the SIBA manager licensing regime. For example, there is no requirement for a BVI Approved Manager to prepare audited accounts.”
What this demonstrates is a willingness by the BVI’s leadership to respond quickly to market forces and deliver a more attractive product that is both in line with the size of the managers who can apply for it, and sensible enough to appreciate the validity of funds based in other jurisdictions.
A lot of the provisions under SIBA are simply not applicable to BVI fund managers and as Doyle observes, “it was making the fund manager comply with requirements that were designed more for the banking industry. For small managers, family offices, start-ups, the ongoing obligations of a full SIBA licensee are quite onerous and if you don’t keep on top of it you will trip up.”
That burden was removed when the Approved Manager regime was introduced, and whilst the ongoing obligations are more bearable and less costly, there should be no mistake that this is soft legislation. The FSC will not let any Tom, Dick or Harry through the door. In that sense, the approval process is just as tough as it would be for a large manager applying for a SIBA license.
It has to be this way because the BVI has an international reputation to uphold. That the regime has now been extended to allow managers of non-BVI funds further underscores this point.
“The FSC are looking closely at people’s CVs, asking questions during the approval process. They want complete confidence that each manager knows what they are doing and they have the relevant experience. Whilst the application process is simpler, it’s more the ongoing regulations that are lighter; that’s where the benefit comes,” says Doyle, adding: “There are two levels of protection. Firstly, the manager has to certify that everyone is fit and proper and conforms to various standards. Secondly, we, the law firm, have to give a declaration that everything that the manager provides in their application is true. There may be a requirement to answer additional questions from the FSC but once you’ve got through that hurdle it’s not going to trip people up and present a significant administrative burden.”
Just introducing the Approved Manager regime in its initial form required a significant leap of faith by the BVI. Ogier’s Schilder is a member of the Securities Investment Business & Mutual Funds Advisory Committee (SIBAC), which came up with the idea for the regime.
“It was quite a major concession by the FSC when the Approved Manager regime was first introduced in 2012. That’s one of the major reasons why it has taken some time for the scope of this regime to be expanded to enable an Approved Manager to manage funds from recognised jurisdictions,” says Schilder.
Another key point to note is that the expanded Approved Manager regime not only allows managers of non-BVI funds to apply for a license but also contains a catchall provision that will allow other fund products such as managed accounts to be eligible.
“We are expecting further guidance on this in the near future. There have been a couple of Approved Managers that have been licensed recently to manage managed accounts so clearly this is something that the Commission is now accepting,” confirms Schilder.
Whilst managers running non-BVI funds might be quick to adopt the license, the end game in all of this is that the BVI starts to see traction build in BVI fund numbers as well as manager numbers. Logically, this would make sense, especially among the start-up community who continue to choose Cayman exempt manager status. If they choose to become an Approved Manager in the BVI, better to launch a BVI fund as well.
“The two often go hand in hand. As the Approved Manager product continues to grow in popularity more managers will be looking at the BVI and that can only be a good thing. The Approved Manager regime is still fairly new and I’m sure the industry would like to see more managers come to the BVI to take advantage of it, as well as launch BVI funds. That’s the ongoing aim,” says Fudge.
And there’s a very good reason for why start-up managers might favour BVI funds; namely speed to market. In recent years, start-ups have refrained from launching fund products until they’ve secured seed capital. The problem with that is if there are delays in getting the fund to market, they run the risk of losing those day one investors.
“Start-ups often want to know that they can launch the fund quickly and the BVI is well placed to support that requirement. An Approved Manager application only needs to be submitted to the FSC seven days prior to the date it intends to commence business and the manager then has a period of 30 days, which can be extended, to obtain FSC approval during which time it can carry on business. Combine that with the BVI professional fund, which can launch for up to 21 days before receiving FSC recognition (provided the application is lodged within 14 days of launch) and it means that it is possible to come to market very quickly in the BVI,” says Fudge.
Doyle notes that one group who are showing particular interest in the BVI jurisdiction is South American managers. Many are well versed in the continent’s heavily regulated internal markets but few have a long track record of using offshore structures. Now, with the extended Approved Manager regime, South American fund managers are “pleasantly surprised by how commercially sensible the offshore world is”, says Doyle.
And it’s not just South American managers expressing an interest.
“We’ve had some enquiries from fund managers in jurisdictions such as South Korea who are looking to become easier to invest with. The problem with investors right now is that if they invest directly they have to overcome the language barrier. South Korea has a totally different legal system and there’s a lot of expense for the investor to assess the manager,” says Doyle.
“However, if they can come into an offshore structure everything is in English, they understand the legal structure and they know what they are getting into; so launching a new fund with a BVI Approved Manager can be beneficial to these managers.”
Speed to market. Light touch regulation. These are two major advantages that the BVI now has in its arsenal. But for Schilder, there’s always room for improvement. With respect to fund products, he would like to see the BVI consider introducing a new product that appeals to the start-up manager audience; i.e. a product that sits below the BVI’s professional and private fund range.
“At the moment, new managers are highly aware of costs and are understandably concerned about managing their cost base and the potential costs of a full fund set-up. What we are seeing is a lot of potential interest among start-up managers for incubator structures,” says Schilder.
One option is the Segregated Portfolio Company (SPC) where each new manager effectively owns a cell structure; several fund administrators in Cayman use SPCs as incubator platforms. But what Schilder is referring to is something more akin to the Bahamian SMART Fund; the Specific Mandate Alternative Regulatory Test Fund.
“What such managers are frequently looking for is a fund product which offers a not overly burdensome level of regulation, which enables them to get going quickly and cost efficiently, but which requires an independent fund administrator to verify the NAV. This would help the manager build their track record with minimum cost.
“I would like to see a new fund product like this in the BVI to attract more start-up managers. It would give them a platform to start managing their own money and build a track record before launching a full-blown professional fund further down the line.”