By James Williams – On the 10 December 2012, the BVI took a step forward in enhancing its competitive image with the introduction of a lighter touch regulation for smaller BVI-domiciled fund managers. Entitled the Investment Business (Approved Managers) Regulations (“Approved Managers Regulations”), the regime complements the existing Securities and Investment Business Act, 2010 (SIBA), and whilst not going as far as Cayman with its exempt manager regime, it is hoped that the new regulations will entice more managers to the BVI.
“So far the feedback has been quite positive,” says Marianne Rajic, partner, Walkers (BVI). “It is anticipated that it will lead to a greater number of investment managers being domiciled here in the BVI partly because it is better suited to the type of funds we have in the BVI. It is aimed at non-institutional managers and start-up managers. SIBA regulation is quite onerous for smaller managers, and the approval process is quite long. The Approved Managers Regulation is more streamlined and should speed up the approval process.”
Rather than taking months to become licensed, consideration of an Approved Manager license application is expected to be completed within 30 days of filing at the FSC, according to Simon Schilder, partner at Ogier: “In the intervening period, an applicant is able to commence business provided that the application is filed with the FSC at least seven days in advance of commencing business. This will enable prospective managers to respond quickly to the market.
“It’s a positive development for the Islands. For those managers who want to have an offshore-domiciled manager the Approved Managers Regime provides a level of regulation which is probably appropriate for the type of activity they’ll be doing. It’s not overly burdensome.”
Philip Graham (pictured), partner at Harneys law firm, agrees and says it’s something that the private sector has been asking for since 2010: “The SIBA manager licensing regime is perfectly sensible for a certain size of manager but was too unwieldy for start-up managers. When you have the Cayman exempt manager regime, which allows you to get up and running within seven to 10 days, it was difficult to recommend to clients that they should take the BVI manager route. It provides a credible alternative to Cayman, not least because it is more cost-effective.”
Notes Tim Clipstone, partner, Maples and Calder: “BVI approved manager fees are quite a lot cheaper than the fees for a Cayman exempt manager registration – USD1,500 per annum compared to more than USD4,000 per annum.”
Richard May, also a partner at Maples and Calder, says that the BVI now has “the bit that was missing” with this Approved Managers Regime: “Whereas originally managers might have had an exempt Cayman company structure, there’s no real need to do it anymore. The new regime is trying to address the issue of not losing business for no good reason. You’ll see less of the Cayman manager/BVI fund crossover going forward.”
To qualify as an Approved Manager with the FSC, a manager must run USD400million or less in open-ended fund, and USD1billion or less in aggregated capital in a closed-ended fund. If, down the line, an Approved Manager’s fund AUM exceeds USD400million they will have an obligation to notify the FSC.
After a three-month period, if the AUM remains above USD400million, that manager will then be required to apply for an investment business license under SIBA. Conversely, if the AUM exceeds USD400million but then falls back below USD400million within that three-month period, the manager can continue to operate as an Approved Manager.
Schilder confirms that a private sector consultation committee called SIBAC (Securities, Investment Business and Mutual Funds Advisory Committee), on which he sits, was first approached by the FSC three years ago to consider a new form of investment manager product.
“The Approved Manager Regime is the product of a paper that was prepared by SIBAC as a recommendation for the FSC to consider. It is the result of a partnership between the regulator and the private sector to try and design a product which balanced the needs of the market with the needs of the wider regulatory environment. That’s why it is a fairly pragmatic regime.”
Moreover, in today’s tough capital raising environment, the willingness for managers to be lightly regulated, as opposed to remaining exempt, is growing.
“This is something that was discussed at length by the FSC and private practitioners as to whether you should copy the Cayman exempt manager model or do something slightly different. It was felt that the world is moving away from a wholesale exemption. Managers want to hold a license and be subject to regulation not least as it helps market the fund and provides a degree of comfort to investors.
“We’ve already received five or six applications. I’m hopeful that it will be a great product for the BVI and should round off the regime as an offering,” says Graham.
Rajic confirms that one of Walkers’ clients has also recently chosen to set up the manager in the BVI “because they would like to have everything in the same jurisdiction and they also like the idea of some regulation attached to it”.
Another recent regulatory development in the BVI has been the Business Companies (Amendment) Act 2012.
“One of the key takeaways is that it will make Segregated Portfolio Companies (SPCs) more user friendly. Prior to the amendment, there were no statutory mechanisms in place for directors to go back and fix things where the SPC had done something which risks prejudicing the segregation of assets and liabilities created by the SPC structure,” explains Schilder.
There are other notable positive improvements that this Act has brought into force.
One such improvement is the addition of conversion of share classes as a right attaching to shares, which will help avoid triggering unnecessary taxable events. As Rajic explains: “Previously it had to be done through redemption or repurchase of shares of the original class and issue of shares in a new class. It is now possible to list the conversion from a class to another class as a right attaching to a share in the memorandum and articles of association, which should streamline the conversion process; corporate records can now show the shares being converted from one class to another without the realisation for tax purposes.”
Another benefit, in respect of directors meetings, is the lowering of the threshold for consent to a shorter notice for shareholders’ general meetings. The Act now allows that to be set in the memorandum and articles, whereas previously 90 per cent consent was required by the company’s board of directors.
Under SIBA, all audited financial statements now have to be filed with the regulator (BVI FSC). This has resulted in firms such as KPMG receiving requests from clients to accept audit appointments that cover historical periods “or commence with the first year of filing requirements on the basis that prior periods had not been audited”, comments Grant Green, Director, Audit, KPMG (BVI).
The requisite filing should enhance regulatory compliance and further protect investors’ interests but as Green points out, the BVI does not currently have any requirement for the fund auditor to be BVI-based: “While this provides flexibility for BVI funds in their choice of auditor, it reduces the need for audit firms to have a physical presence in the BVI. KPMG is firmly of the view that in order to provide specialist advice to BVI mutual funds and other clients, we need to have that physical presence in the BVI.”
Currently, there are plenty of external regulatory initiatives for the BVI FSC to keep pace with. FATCA is a major piece of US legislation although its recent delay for implementation means that Europe’s AIFM Directive is the primary focus for offshore jurisdictions currently, given that it is due to come into effect on 23 July 2013 (“Transposition Day”).
One of the initial concerns was that managers would turn their backs on jurisdictions like the BVI and move completely onshore to benefit from the “fund passport” under the Directive but such fears have proved to be a false dawn. European institutions are not allocating to hedge funds to anywhere near the same extent as US institutions: USD24billion in net inflows were recorded for US hedge funds in 2012 compared to USD2.7billion in net outflows for European hedge funds according to Eurekahedge.
Which begs the question: why have an onshore UCITS fund? Some ambitious managers wishing to diversify their global investor base will want parallel fund structures in the Caribbean and, perhaps, Luxembourg; but for the majority of managers, it’s economically unviable.
“I know from speaking to a number of US-based managers that they got very excited in 2010 around UCITS fund launches, but generally found that the European product wasn’t overly successful for them. It takes a long time to get to market, it’s very expensive. The take-up among US managers was not very substantial,” says Graham.
Clipstone confirms that the FSC is making positive steps to ensure that non-European managers can continue to operate and offer their products under the private placement regime in Europe from July onwards.
“The reality is everybody is in the same place and getting ready for it; it’s very much driven by ESMA as to what will be required.
“There are some discussions over possible alternative structures. The Irish QIF in particular seems quite popular among larger managers who are having initial thoughts about where they might need to go but for a lot of US managers, FATCA and Dodd-Frank are all-consuming as far as their compliance teams are concerned.”
Adds Rajic: “I had instructions from a European manager for two new BVI funds just recently. With our European clients, we have not lost a single fund. It’s business as usual.”
FATCA will not directly affect audit firms but KPMG’s Green confirms that they are assisting clients in understanding their FATCA requirements.
“There are a number of entities that are either directly impacted by FATCA (banks, custodians) or those that service those entities (administrators, trust companies, law firms). KPMG has played a leading role in communicating the impact of FATCA to these entities, industry groups and the Government,” says Green.
Looking ahead, the FSC will have to continue treading a tightrope, providing sufficient regulation to appease global regulators, but not too much regulation that it ends up destroying its competitive profile. The Approved Managers Regulations and Business Companies (Amendment) Act are considered, balanced responses. Given the former’s appeal to smaller managers, it might now be necessary for BVI to introduce lighter touch fund regulation.
“Personally speaking, I would like to see some kind of formal incubator-type vehicle to appeal to start-up managers,” proposes Schilder. “Something that will allow start-up investment managers to build up a track record within an incubator vehicle using friends and family money, which could then transition into a more formal fund structure once they’ve grown and come out of that incubator stage.”
