Mutual Funds

INTRODUCTION

The object of this Memorandum is to provide clients of Walkers with general information on the formation and operation of mutual funds in the British Virgin Islands

BRITISH VIRGIN ISLANDS OVERVIEW

As a British Overseas Territory, the BVI offers all the security and stability traditionally associated with the British flag. The territory is responsible for its own internal self-government. The BVI has an independent legal and judicial system based on English Common Law, with a right of final appeal to the Privy Council in London.

The United Kingdom remains responsible for the territory's external affairs, defense, internal security and the courts. However, based upon BVI's integrity, and responsiveness to the interests of the financial community, it has become the only Caribbean Overseas Territory to which the British Government has devolved responsibility for developing and managing its own financial services industry.

The BVI offers state-of-the-art telecommunications, infrastructure and support services, and a well-trained management and workforce. The BVI enjoys one of the world's highest literacy rates, at 98%, and has developed a wide range of specialized programs to train its people in financial service skills.

The BVI's policies and legislation have been developed in close partnership with the private sector to ensure that they meet the needs of the financial community. Through this partnership, the BVI government has established sophisticated and efficient supervision and regulation to safeguard the integrity of the jurisdiction while creating an operating environment that is highly attractive to private enterprise.

In the tradition of that partnership, the BVI on June 6, 1996, enacted the territory's first mutual funds law entitled the Mutual Funds Act 1996 ("Act"). The Act came into force on January 2, 1998 along with a suite of secondary measures designed to smooth the operation of the regulatory regime.

TYPE OF FUNDS

The Act defines a mutual fund as:

1. A legal vehicle organised under the laws of the BVI or of any other country or jurisdiction that collects and pools funds for the purpose of collective investment, and
   
   
2. That issues shares, or similar 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 part of the net assets of the legal vehicle.
   
   

This definition means that closed-end funds are generally excluded from the scope of the Act.

The Act distinguishes between three types of mutual funds:

Public Funds

A fund that offers its shares to the public.

Private Funds

A fund that sells its shares on a private basis or that has less than fifty investors.

Professional Funds

A fund that is made available only to professional investors (either a financial institution or an individual who has signed a declaration that he/she has net worth in excess of US$1,000,000.00 and consents to be treated as a professional investor) with a minimum initial investment of US$100,000.00 for the majority of investors.

REGISTRATION AND RECOGNITION

A public fund must apply for and obtain registration with the Financial Services Commission ("FSC") to carry on its business or administer its affairs in or from within the BVI. In most instances the registration process will be quick and straight forward. Promoters of public funds are able to seek advance consent to be registered, prior to proceeding with the fund's lawful constitution.

The majority of BVI funds are Private or Professional Mutual Funds. A Private or Professional Mutual Fund must be recognised with the FSC in order to carry on its business or manage or administer its affairs in or from within the BVI. A Professional Mutual Fund can benefit from a fast track procedure whereby it may commence operation up to 14 days before being recognised. The recognition procedure itself has been designed to be quick and efficient.

The Act applies to funds that carry on business "in or from within the BVI". The term 'in or from within the BVI has been interpreted to include:

1. a BVI constituted entity that carries on business in the BVI;
   
   
2. a BVI constituted entity that carries on business elsewhere; and
   
   
3. a foreign constituted entity that carries on business in the BVI.
   
   

A mutual fund that is not constituted in the BVI is deemed to be carrying on business in the BVI if it solicits an individual within the BVI to purchase its shares except where the purchase is made as a result of an approach made by the individual without any solicitation being made.

LEGAL STRUCTURES

Mutual funds may be set up in the BVI as an open-ended investment company, a unit trust, or an international limited partnership.

The majority of funds are constituted as open-ended investment companies under the International Business Companies Act, (Cap 291) with limited liability.

International Business Companies ("IBC's") are very flexible vehicles with, no minimum capital restrictions, and may acquire and hold their own shares as treasury stock subject to certain specified restrictions.

MANAGERS, ADMINISTRATORS, TRUSTEES AND CUSTODIANS

Individuals and entities wishing to carry on the business of management or administration of mutual funds are required to apply for and obtain a license under the Act. The Act does not apply to foreign constituted managers and administrators whose operations are based entirely in a foreign jurisdiction, even though the manager or administrator may act for a BVI constituted fund. The basic test for eligibility is that the person is a "fit and proper applicant" and the FSC has issued guidelines on such matters.

The Act provides an exemption to non-resident persons from the requirement to be licensed provided that:

1. they are an established manager or administrator of mutual funds under the laws of a recognised country or jurisdiction; and
   
   
2. they receive written authorisation from the Minister to act as a manager or administrator of a mutual fund in or from within the BVI.
   
   

Certain jurisdictions have been "Recognised" under the Act.

A special exemption from the requirement to be licensed under the Act is provided to a BVI entity that meets the conditions set down for a "Recognised Manager." Such a manager could be a special purpose company established in the BVI for fiscal reasons and is associated with a range of in-house mutual funds.

A restricted managers licence may be available where the entity is a BVI IBC providing management services to a private or professional fund. No annual audit is required by a restricted licence holder where management services are provided to one fund and the activities consist solely of the receipt of fees and the appointment of other service providers.

A general licence is required if the entity or individual provides management services to a public fund or provides administrative services to a mutual fund. A company operating under a general licence also requires an audit. An application for a general licence must include a resources statement, financial statements and a business plan.

INVESTMENT RESTRICTIONS

There are no restrictions on the investment policies of mutual funds in the BVI other than those specifically contained in a fund's prospectus or its memorandum and articles of association, trust deed or memorandum and articles of partnership.

BORROWING

There are no legal restrictions on the power of mutual funds in the BVI to borrow other than those specifically contained in a fund's prospectus or its memorandum and articles of association, trust deed or memorandum and articles of partnership.

ACCOUNTS AND PROSPECTUS

A registered public fund is required to prepare financial statements in respect of each financial year of its operations. The Act requires that financial statements must be prepared in accordance with generally accepted accounting principles and be audited by an auditor approved by the Director of Investment Business at the FSC ("Director"). The financial statements should be provided to or made available for examination by the Director or any person authorised by the Director, and to investors of the registered public fund.

Prior to offering its shares or interests to the public, a registered public fund is required to publish in writing a prospectus signed by or on behalf of the fund's directors, or equivalent governing body in the case of other structures, who have approved its contents or authorised its publishing. A copy of the prospectus must be filed with the Director.

The Act does not impose a statutory format for the prospectus but requires that it must provide "full and accurate disclosure of all information that investors would reasonably require and expect to find for the purpose of making an informed investment decision." A prospectus must also contain a summary statement of the statutory rights of investors as provided in the Act and be accompanied by or contain reference to the availability of financial statements and the auditor's report therein.

STATUTORY RIGHTS OF INVESTORS

The Act provides that a person who invests in a public fund as a result of a prospectus containing a misrepresentation is given a statutory right of action for rescission of the purchase or for damages against the fund and every person who "while aware of the misrepresentation or would have been aware of the misrepresentation had he made reasonable investigations....authorised the signing of or approved the prospectus..."

SUPERVISION

The supervisory authority in the BVI is the Financial Services Commission (Director of Investment Business). The Director is responsible for the supervision of registered and recognized mutual funds and licensed mutual fund managers and administrators. The Director is empowered under the Act to have access to information and records relating to any business conducted under the authority of a certificate of registration, a certificate of recognition or a license.

FUND OWNERSHIP

There are no legal restrictions on the percentage of units in a mutual fund that may be held by one person or related group of persons.

FUND STRUCTURE

Umbrella funds and fund of funds are permitted in the BVI.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.