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BVI fund structuring and corporate governance developments

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By James Williams – There’s a general air of optimism among the BVI’s fund practitioners. Although the average hedge fund recorded sub-four per cent, the lowest average return since 2011, there was nevertheless a clear uptick in trading activity, principally among some of the islands’ larger managers. 

“Those with established funds attracted a lot more attention and interest and launched various offshoots of their flagship funds, which was a welcome development,” notes Grant Green (pictured), Managing Director, KPMG (BVI) Limited. 
Howard Eisen is managing director and head of sales for Conifer Fund Services, one of the BVI’s leading fund administrators. He notes that the firm saw a lot of activity across the size spectrum and across the strategy spectrum. “As you’d imagine long/short equity funds dominated but we also saw new funds launching in distressed, credit, multi-strategy. I would go so far as to say that last year was the most active since the financial crisis,” says Eisen, speaking from the firm’s New York offices. 
According to the BVI FSC’s latest statistical bulletin, through September 2014 a total of 49 Approved Managers had been licensed. This is encouraging and despite the fact that Approved Managers are now allowed to run non-BVI funds, there is good reason to believe that the regime could act as a catalyst for future fund growth in the world’s second largest offshore jurisdiction.

“If you speak to institutional allocators, they are asking for more regulation, transparency, so to the extent that a jurisdiction is putting more disclosure and registration requirements on managers, allocators are going to be strong proponents of that. They are tending to move towards managers that are more compliant and away from those that are less compliant,” says Eisen. 
“Any jurisdiction that has a respected registration and regulatory regime is going to attract new managers as they increasingly want to demonstrate to investors that they are following best practices.”

Crucially, for the BVI to build out its fund numbers in line with Approved Manager numbers, it needs to have a fund product that is better able to attract the start-up market. This is something that the legal community is now discussing with the FSC and there are hopes that two new fund products could be introduced before the summer. 
“Anything that helps to encourage new fund promoters and helps them to build a track record, whilst at the same time continuing to promote the BVI in an open and transparent way, is a good development in my view,” says Mara Spencer, Managing Director of ACE Fund Services. “The key point for the BVI as a jurisdiction is that it remains open to evolving in line with changing market conditions. I think the fact that the Approved Manager regime came into effect in 2012 and the FSC expanded it further in 2014 illustrates that the BVI is a jurisdiction that is trying to work with the different changes and requirements of the funds industry at large.”

Separately, one existing product in the BVI that continues to prove popular with managers is the Segregated Portfolio Company (SPC) whereby a manager can run a series of segregated portfolios, all under the roof of a single legal entity. 
“The most common theme we see at the moment is managers launching a raft of new SPC cells. It’s a cost-effective way to launch multiple strategies or maintain that segregation of liabilities for individual investors. By and large the bulk of them have either single investors in cells or a small number of investors,” says Green.

Eisen cannot put his finger on what the key driver is for managers creating these vehicles, noting that they tend to be very much “situation specific”. “For example, a client that has decided to oversize a position in a particular company so they create an SPC and give investors the opportunity to invest alongside them. Or they decide to create an SPC to run concentrated sub-portfolios. It is a legal tool that allows managers to do certain things, when appropriate, but I wouldn’t call it a mainstream trend,” comments Eisen.

For start-up managers, joining an SPC platform avoids some of the operational costs and in effect provides a useful stepping stone to building a track record and then spinning out to a launch a standalone fund. This is something that administrators such as Drake Fund Advisors have been enjoying success with on their Drake BVI platform; effectively an incubator platform.

“Up to a couple of years ago we were looking after a handful of South African HNW clients and the only way they could participate in the international capital markets was to invest through an offshore regulated or listed product. We developed a listed BVI fund product which was relatively time- and cost-efficient to structure, easy to invest into and it allowed a level of control. As a result we entered the fund administration game and built from there,” confirms Executive Director Nicolaas Faure.

The Fund enables new managers to establish and control their own segregated portfolio. Each portfolio enjoys reduced operating expenditure due to combined functionaries such as the board of directors, secretary, registered agent, local representative and legal representative.

At the same time, every cell can appoint its own functionaries, should the manager wish to, apart from the board of directors. These functionaries include the auditor, investment adviser, custodian; even Drake as the fund administrator can be replaced on a cell-by-cell basis. 
What is also advantageous is that managers who choose to go this route can still apply for Approved Manager status. “When you apply for an Approved Manager you simply have to make it clear in the application to the FSC what is to be managed; e.g. Cell B or segregated portfolio number 6 on the platform. It’s very straightforward,” adds Faure. 
One area of continued focus for BVI managers large and small is how to best address regulatory risk, specifically in relation to FATCA. According to Green, understanding their reporting responsibilities so as to be in full compliance has become a key priority; something that KPMG is only too keen to help advise on with its clients. 
“KPMG was engaged by the BVI government to assist them in drafting the BVI’s guidance notes on FATCA, the first draft of which was published last July. A new iteration of those guidance notes with incorporated changes from various industry meetings and the BVI FATCA Working Group that I chair is due out any time now. 
“The deadline for the first filing will be 31 May 2015, in line with other jurisdictions such as Cayman. The government is still working through the technological implementation part of the process [developing the online portal into which the filings will be posted] so if there are any teething problems the deadline could possibly be extended,” clarifies Green. 
Eisen says that its clients are leaning heavily on Conifer to support them with FATCA but adds that the harder, more ambiguous issue is actually AIFMD. 
“Still, to this moment, a lot of our US clients running BVI funds are taking the view that they’re not going to actively market in Europe till such time as there’s a better understanding of what ESMA is looking for, and how they define certain terms such as reverse solicitation. They are sitting on the sidelines and not doing any proactive marketing at all,” states Eisen.

A lot has been written about AIFMD. Managers, both EU and non-EU, running offshore funds will continue to appraise the worthiness of marketing into Europe but what is certain is that increased regulation has raised the bar in respect to corporate governance and best practices. One could argue that offshore jurisdictions have had no choice but to demonstrate leadership in this area. 
On 4 June 2014, Cayman introduced the Directors Registration and Licensing Law by CIMA that gives its regulator, CIMA, a clearer picture of Cayman fund directors. Part of this was in response to whether one director could correctly and accurately look after 100 funds or more; the “jumbo directorships”. The USD64k question is, will a similar register of directors be introduced in the BVI?

“I think the merits behind the whole director registration process as an attempt to solidify and properly regulate fund directorships need analysing closely. If the FSC introduces something similar it needs to be carefully thought through after consultation with the private sector and carried out properly. The fees to pay for it, for example, need to be appropriate and the principles of protecting confidentiality must always be considered. 
“At the moment there’s no talk of it, but given the focus of the BVI government to ensure that it plays on a level playing field with the rest of the international community, it wouldn’t be a complete surprise to me, however, were it to be introduced at some point in the future,” says Philip Graham, Partner at law firm Harneys.

All BVI regulated funds are already required to file details of their directors with the FSC. What is up for debate, says Simon Schilder, Partner at Ogier, is whether all BVI entities, including unregulated investment vehicles, will be required to file details of either their shareholders or directors at the Registry.

“My expectation is that the government will resist any attempts to make such information publicly available. If there are any extraterritorial enquiries, the BVI authorities would be able to determine who the directors are in different structures and pass this information back to the foreign authorities requesting it. I haven’t seen any draft legislation for this yet, but I am quite certain that’s how it will play out here,” states Schilder.

“I’m not sure whether I see the benefit of having a public register of directors, particularly when we don’t have a public register of financial statements that are prepared by regulated entities. Anything that puts the BVI at a competitive disadvantage isn’t going to be too attractive to anybody,” adds KPMG’s Green. 

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