A new regulatory regime is soon to be introduced in the British Virgin Islands (the BVI) which will make it significantly easier for small to mid-size hedge fund groups to establish investment managers and advisors in the BVI. For investment managers and advisors that qualify, this new “approved manager” regime will reduce the time and cost of establishing new fund structures in the BVI and will entail significantly less ongoing regulation than is presently the case.

With over 2,400 registered funds, the BVI is one of the leading offshore domiciles for hedge funds. The popularity of BVI funds is testament to both the ease and cost-effectiveness of establishing funds in the jurisdiction as well as the quality and sophistication of the BVI’s legislative, regulatory and judicial framework. However, historically the number of hedge funds established in the BVI has not been matched by the number of investment managers and advisors established in the jurisdiction.

One reason for this discrepancy is that investment managers and advisors established in the BVI require an investment business licence under the Securities and Investment Business Act, 2010 (SIBA). [1] Obtaining such a licence can be cumbersome, and typically takes longer and is more expensive than the regulatory process for establishing a fund. Accordingly, there is a mismatch between the ease with which a fund can be established in the BVI when compared to the establishment of an investment manager or advisor. Moreover, once established, a BVI investment manager or advisor is subject to a relatively high degree of ongoing regulation under SIBA and the BVI Regulatory Code, 2009 (the Regulatory Code), which may be burdensome for smaller investment managers and advisors.

Within the BVI funds industry, it was also thought that the licensing regime under SIBA may have given the Cayman Islands a comparative advantage, as investment managers and advisors established in the Cayman Islands are typically either exempt from licensing or are simply required to make an annual filing. Asa result, the BVI Financial Services Commission (FSC) began reviewing the regulation of investment managers and advisors earlier this year in collaboration with the Securities, Investment Business and Mutual Funds Advisory Committee (SIBAC), a statutory committee established under SIBA and made up of various senior representatives of the BVI fund industry (including Robert Briant, one of the co-authors of this article). In particular, SIBAC was asked for its advice and assistance in preparing a new, more flexible regulatory regime for investment managers and advisors which would make it attractive for investment managers and advisors to domicile in the BVI whilst still ensuring an appropriate level of regulation.

Following a detailed review process by the FSC and SIBAC and subsequent consultation with the private sector, the Investment Business (Approved Managers) Regulations, 2012 (the Regulations) were published on 1 November 2012 for the purpose of introducing the new “approved manager regime.” The new regime is a “lighter touch” regulatory regime which will enable qualifying investment managers and advisors to be established through a simplified process similar to that for the establishment of a fund. Any proposed investment manager or advisor that meets the qualifying criteria may apply to the FSC for approval as an “approved investment manager” (an Approved Manager), and, if so approved, the regulations will:

• Exempt the approved manager from having to obtain an investment business licence under SIBA;
• Exempt the approved manager from having to comply with the continuing obligations under SIBA and the Regulatory Code; and
• Exempt the approved manager from having to appoint a compliance officer and maintain a compliance manual.

Qualifying criteria
In order for an investment manager or advisor to qualify as an approved manager under the new regime, it must satisfy two conditions.

(i) Funds to be managed
First, the funds which are to be managed or advised must either be (a) BVI private or professional funds; (b) funds established outside the BVI having equivalent characteristics to a BVI private or professional fund; or (c) funds specifically approved by the FSC on a case by case basis.

A professional fund is a fund whose shares are made available only to “professional investors” and in respect of which the initial investment of each is not less than US$100,000 (or its equivalent in another currency). A professional investor is a person (a) whose ordinary business involves, whether for that person’s own account or the account of others, the acquisition or disposal of property of the same kind as the property, or a substantial part of the property, of the fund; or (b) who has signed a declaration that he, whether individually or jointly with his spouse, has net worth in excess of US$1,000,000 (or its equivalent in another currency) and that he consents to being treated as a professional investor.

A private fund is a fund whose constitutional documents specify either that it will have no more than 50 investors or that the making of an invitation to subscribe for or purchase shares issued by the fund is to be made on a private basis only. An invitation made on a “private basis” includes an invitation which is made (a) to specified persons and is not calculated to result in shares becoming available to other persons or to a large number of persons; or (b) by reason of a private or business connection between the person making the invitation and the investor.

In the case of a new fund structure that includes both a BVI fund and a BVI investment manager, a simultaneous application may be made to the FSC to (a) recognise the fund as a private or professional fund; and (b) approve the investment manager as an approved manager.

(ii) AUM threshold
Second, an investment manager and advisor may only qualify as an approved manager if its assets under management do not exceed US$400 million [2] (or its equivalent in any other currency). Where a manager acts as investment manager for both a master fund and a feeder fund, the assets of the feeder fund invested in the master fund will not need to be counted twice in calculating whether the manager exceeds the assets under management threshold.

Application process
The new approved manager regime will be brought into force and the FSC will begin accepting approved manager applications on 10 December 2012.

The application process to become an approved manager under the regulations is straightforward. A simple application form must be completed and submitted to the FSC together with (i) basic corporate documentation and ownership information in respect of the manager/advisor and the funds for which the services will be provided; (ii) a copy of the management and/or advisory agreement; (iii) a biography and curriculum vitae for each principal, director and senior officer of the manager or advisor; and (iv) a declaration that the principals, directors and senior officers of the manager or advisor satisfy certain “fit and proper” criteria. To the extent that the investment manager or advisor will sub-delegate any of its functions (for example, if it is simply to be a flow-through management or advisory vehicle), information on the delegation arrangements and person to whom the functions are delegated also needs to be provided to the FSC, together with a copy of the delegation agreements.

A BVI lawyer or licensed BVI authorised representative will also need to submit a declaration confirming the application is complete and meets the application requirements.

Assuming all is in order, it is expected that an application under the regulations will be approved by the FSC within 30 days. However, unless the FSC otherwise objects, the manager or advisor may commence business seven days after submission of the application for a period of 30 days. If the application is not approved within this 30-day period, the FSC can authorise the manager or advisor to continue carrying on business for another 30 days while it completes the approval process. In other words, under the new regime, a new fund manager or advisor can commence business within seven days after submitting its application, thus offering a very quick route to market. This is also consistent with the rules relating to the establishment of professional funds, which can commence business for a period of 21 days prior to formal recognition by the FSC.

Continuing obligations
Once the application is complete, approved managers are subject to far fewer continuing obligations than managers and advisors holding an investment business licence under SIBA. Under the new regime, the approved manager must:

• File an annual return which (i) confirms it is in compliance with the regulations and confirms that its principals, directors and senior officers continue to be “fit and proper”; and (ii) provides details of its funds under management, including the assets under management for each fund and the number of investors in each fund it manages or advises, and whether any significant complaints have been received from investors;
• Prepare and submit annual financial statements to the FSC, although there is no requirement for these financial statements to be audited;
• At all times have at least two directors, at least one of whom must be an individual;
• At all times have a licensed authorised representative in the British Virgin Islands (a service which is provided by a number of service providers in the BVI, including Codan, the services company affiliated to Conyers Dill & Pearman);
• Notify the FSC of any change in the information provided in itsapplication form, for example to the funds it manages, its directors, senior officers, shareholders or delegation arrangements; and
• Notify the FSC of any matter which has a material impact on the approved manager or the business it carries on.

An approved manager is subject to the investigative and enforcement powers of the FSC, which has also the power to require an approved manager to (i) provide such further information as it sees fit to comply with any reporting obligation it may have (for example, under the Foreign Account Tax Compliance Act and/or the Alternative Investment Fund Managers Directive when brought into force and to the extent applicable); and (ii) apply for and obtain an investment business licence under SIBA if it considers that it is in the public interest to do so.

Exceeding the AUM threshold
If at any time following its approval the assets under management of an approved manager exceed US$400 million [3] (for example, as a result of positive performance, new subscriptions to its funds or the launch of a new fund), the approved manager is required to notify the FSC within seven days and within a period of three months will need to either (i) submit an application for an investment business licence under SIBA; (ii) reduce its assets under management to below the US$400 million threshold; or (iii) obtain the FSC’s consent to continue operating as an approved manager with more than US$400 million under management. If an application is made for the FSC’s consent to continue operating as an approved manager with more than US$400 million under management, the FSC is required to have regard to any risk that may be associated with the approved investment manager or any of the persons for which it acts and has broad discretion to refuse consent.

Converting a SIBA licence
The regulations do not expressly contemplate the holder of an existing investment business licence under SIBA “converting” to an approved manager under the regulations. However, in principle, managers and advisors which already hold a SIBA licence and qualify for the approved manager regime should be able to opt into the new regime and cancel their existing licence under SIBA.

Conclusion
The new approved manager regime significantly enhances the attractiveness of the BVI as a domicile for small to mid-size hedge fund groups. The effect of the regime is to extend the ease and cost-effectiveness of establishing a fund in the BVI to management and advisory entities. Furthermore, the new regime offers appropriately balanced regulation which will not be unduly burdensome for smaller hedge fund groups.

The BVI has always led the way in offering well balanced and effective regulation for hedge funds, and the approved manager regime now offers an equivalent regime for investment managers and advisors. As such, the BVI now offers a competitive one-stop shop for hedge fund groups wishing to establish both funds and investment managers and advisors in the BVI. When considered in conjunction with the flexibility of the BVI’s corporate statute, the strength of the BVI’s commercial court and the BVI’s competitive incorporation fees, it is expected that the new regime will consolidate the BVI’s position as one of the leading domiciles for offshore hedge funds.

Robert Briant is a partner and Head of the British Virgin Islands office of Conyers Dill & Pearman. He advises on all aspects of corporate and commercial law and provides specialist advice to hedge funds. Anton Goldstein is an associate in the British Virgin Islands office of Conyers Dill & Pearman. Goldstein has a broad corporate practice with particular expertise in joint ventures, hedge funds, private equity, and M&A.

Footnotes

[1] Prior to the enactment of SIBA, investment managers required a licence under the Mutual Funds Act, 1996.
[2] It should be noted that the threshold for managers and advisors of closed-ended funds is expected to be US $1 billion.
[3] As mentioned above, the threshold for managers and advisors of closed-ended funds is expected to be US $1 billion.