Feb 2011

BVI Hedge Fund Services 2011

SIBA legislation Cost-effectiveness Court decisions boosts BVI profile in gives foothold to back managers in competitive market start-up managers winding-up disputes C o n t e n t s In this issue…

03 BVI fund sector’s virtues come into focus By Simon Gray

05 Winding up funds in the BVI By Ross Munro, Harney, Westwood & Riegels

09 Competing in the global marketplace By Derek Adler, Ifina

11 Opportunity knocks as market comes back to life By Simon Gray

13 Facilitating investment in emerging markets By Peter Todd, Drake Fund Advisors

16 BVI targets new opportunities in 2011 By Sherri Ortiz, British Virgin Islands, International Finance Centre

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Special Reports Editor: Simon Gray, [email protected] Sales Managers: Simon Broch, [email protected]; Malcolm Dunn, [email protected] Publisher & Editorial Director: Sunil Gopalan, [email protected] Graphic Design: Siobhan Brownlow, [email protected] Photographs: British Virgin Islands Tourist Board; iStockphoto.com Published by: GFM Ltd, 1st Floor, Liberation Station, St Helier, Jersey JE2 3AS, Channel Islands Tel: +44 (0)1534 719780 Website: www.globalfundmedia.com

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BVI fund sector’s virtues come into focus By Simon Gray

The fact that the number of funds domiciled increase from the figures 12 and 24 months in the British Virgin Islands has barely earlier. In September 2008, the month when budged over the past two years – a period the bankruptcy of Lehman Brothers tipped during which the hedge fund industry the global financial industry into free fall, a as a whole has seen a sharp decline in total of 2,922 funds were registered in the fund numbers and an even larger one in BVI, including 2,695 private and professional assets under management, followed by a funds (the remaining 227 public funds partial rebound – testifies to the extent to are more tightly regulated and include which the jurisdiction’s virtues of solid but funds aimed at retail distribution, although flexible regulation and cost-efficiency in industry members say this category almost fees and other expenses have come to the certainly includes some vehicles aimed at fore in the wake of the financial crisis and sophisticated investors). At the end of the economic downturn. third quarter of 2009 the number of BVI- While the Cayman Islands, the world’s domiciled funds totalled 2,923, including largest offshore fund domicile, experienced 2,704 private and professional funds. a significant dip in numbers in sync with the Over this period the number of fund industry’s 2008-09 contraction, as the no. 2 functionaries licensed by the regulator has jurisdiction the BVI has largely ridden out the fluctuated, albeit not very significantly. In storm. The British dependent territory had a September 2008 there were 576 managers, total of 2,951 funds at the end of September administrators and entities combining the 2010, the latest period for which statistics two roles, rising to 582 a year later before are available from the industry regulator, the slipping back to 577 last September. Notably, BVI Financial Services Commission, of which over the past two years the number of 2,740 were private and professional funds, licensed administrators has declined from 40 the main categories used by sponsors of to 35, reflecting the difficulties experienced alternative investment vehicles. by service providers worldwide as a result The number of funds represents a slight of the alternative fund industry’s travails 6

BVI Hedgeweek Special Report Feb 2011 www.hedgeweek.com | 3 Timing is a combination of awareness, responsiveness [ and action. ]

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With over 20 lawyers specialising in the investment funds Hong Kong space we advise on all aspects of British Virgin Islands and London Cayman private equity and hedge funds including establishment, restructuring and closure. Ours is the oldest Montevideo and largest funds practice in the BVI, and we deliver service www.harneys.com which is cost-effective, timely and commercial. H a r n e y s Winding up funds in the BVI By Ross Munro

Various recent cases have highlighted issues wind down its business does not necessarily relating to the winding up of funds domiciled justify the appointment of a liquidator. in the British Virgin Islands and the right The ruling follows another BVI case or otherwise of investors to demand that involving an investor seeking the winding up control over the process be taken away from of a fund. In September 2010 the Court of the directors and the funds’ managers and Appeal of the Eastern Caribbean Supreme given to court-appointed liquidators. They Court set aside a winding-up order made also reflect apparent differences between in the case of Westford Special Situations the approach taken by courts in the BVI and Fund Ltd. v. Barfield Nominees Limited those in the Cayman Islands. and another, and dismissed liquidators The case of Aris Multi-Strategy Lending Ross Munro is a partner and appointed over Westfield at the application Fund Ltd v Quantek Opportunity Fund, Ltd, head of BVI investment funds of an investor that had not received and regulatory with Harney, decided by the Commercial Court of the Westwood & Riegels redemption proceeds. British Virgin Islands in December 2010, These decisions have been made on the was the most recent in the jurisdiction merits of each case; in other circumstances involving an investor wanting to put a fund the courts might decide to appoint a into liquidation on the ground of loss of liquidator. However, they run counter to a substratum – the fund’s reason for existence. series of cases where the Cayman court The facts of the case concerned the has been willing to put a fund in the process Quantek Opportunity Fund, a BVI-domiciled of wind-down into liquidation against the feeder fund, which announced in October wishes of the manager and to appoint a 2008 that due to the level of requests for formal liquidator in place of the manager to return of capital, it would be suspending handle the disposal of the assets and the redemptions. The manager obtained return of capital to the investors. Comments shareholder approval to undertake an from the judge suggested this would be the orderly liquidation of the assets held by the normal course of action in cases where the master fund. manager has acknowledged that the vehicle However, some two years later, when will not re-open as a functioning fund. around 35 per cent of the master fund’s This is a point of considerable importance assets had been distributed to investors in to both investors and managers, one the feeder fund, Aris, a minority shareholder, that puts clear water between the judicial sought to have liquidators appointed on the approaches in the two jurisdictions. Beyond grounds that since the fund was no longer the impact on existing funds that are winding accepting new investments or making formal down, it has prompted a fresh look at redemptions, it had lost its substratum. the provisions to be incorporated into the However, the court decided that the offering documents of new funds. More fact the Quantek fund had suspended appropriate disclosure of how managers subscriptions and redemptions did not make anticipate that the fund might eventually it impossible to carry out its business, in this wind down its affairs and return capital case to hold investments in the master fund to investors could subsequently prevent for the benefit of its shareholders. It ruled a liquidator being appointed against the that the mere fact a company intends to manager’s wishes. n

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3 and a general trend toward consolidation not end up on some sort of blacklist or in the sector. find itself subject to sanctions. What they Sherri Ortiz, executive director of the appreciate about doing business in the BVI BVI International Financial Centre, the is our reputation for being well regulated and government-sponsored body that leads respected, and that’s something we are very efforts to promote the territory’s financial anxious to protect. The BVI is in the perfect sector, acknowledges that encouraging position to maintain its standing and regard, growth in the fund services infrastructure is a and that means a lot of clients. It’s important priority for the coming year and beyond. “We to give our clients the level of confidence are pleased to see that investment business they need.” in the BVI has been picking up recently,” An important step last year was the she says. “But we are hoping to see more passage of the long-awaited Securities provision to the industry of value-added and Investment Business Act, which came services such as fund administration and into effect on May 17, 2010. The legislation accounting here in the territory.” not only updated the Mutual Funds Act, Like other international financial centres, which had been the legal basis of the the BVI has also undergone a verbal territory’s fund industry since 1996, but buffeting over the past couple of years brought the jurisdiction into line with the over issues such as taxation, regulation recommendations of the International and transparency from the world’s leading Organization of Securities Commissions, economic powers, who appeared keen to pin which the BVI joined in April 2007. at least some of the blame for the subprime In addition to changes to the BVI’s fund mortgage collapse and its chain reaction of regulatory regime, the legislation established financial mayhem on offshore jurisdictions an investment business licensing regime and alternative investment funds. regulating investment advisors, investment The BVI initially found itself in April 2009 managers, market makers, broker-dealers, on the ‘grey list’ of countries and territories administrators, custodians and operators deemed by the Organization for Economic of investment exchanges, set out rules on Co-operation and Development to have made public issues of securities, and outlawed insufficient efforts to implement international market abuse offences including insider standards on the exchange of tax information. dealings, making misleading statements and However, by the following August the BVI market manipulation. was on the white list of jurisdictions that The new regime for funds includes had demonstrated their commitment to the requiring professional and private funds to OECD’s principles by signing at least 12 tax appoint an auditor, with some exceptions, information exchange agreements with the setting the minimum initial investment for organisation’s members and other countries. professional funds at USD100,000 for all On February 10 this year the government rather than just a majority of investors, brought the BVI’s total to 20 Tieas by signing subject to exceptions such as functionaries an agreement with India. and employees of the investment manager, Ortiz accepts that in order to compete in and requiring all funds without a significant the global marketplace, financial centres such management presence in the BVI to appoint as the BVI must play by rules set by bigger nations. “We look at it very pragmatically,” she says. “We are in an environment where there is an increased focus on regulatory standards, and it’s incumbent upon jurisdiction such as the BVI to demonstrate that we are capable of satisfying regulations set out by others – as long as it is the kind of regulation that bolsters and protects the business that we’re in. “Clients want to know that the BVI is the kind of jurisdiction that is not about to

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policy that those kinds of change were things that should be notified to them.” Ross Munro, partner and head of investment funds and regulatory at BVI-based international law firm Harney, Westwood & Riegels, argues not only that the new provisions should not deter fund promoters from using the BVI but that the changes are likely to have a positive effect overall. “It’s been a good opportunity to engage with the industry and explain what the BVI is about. “If anything it has helped to revitalise the an authorised representative in the territory. industry a bit. That’s borne out by clients In addition, SIBA requires offering showing greater interest in the BVI than they documents for private and professional funds might have done before, and I genuinely to be filed with the regulator, or an explanation believe it has improved the fund product. of why there are no such documents and Fees may have increased somewhat, but of how fund information will be provided to that doesn’t seem to be an issue – we existing and potential investors. haven’t seen any resistance to the increase. Funds must appoint a manager, Fees are still significantly lower than in most administrator and custodian, unless the competing jurisdictions.” commission provides an exemption in Schilder says that another aspect of the the case of a manager or custodian; the legislation, the unveiling at the beginning of regulator must be notified of certain changes this year of a Public Funds Code for more in a fund’s set-up, such as its place of regulated retail products, could have the business, offering documents, directors, effect of increasing the number of private auditor or service providers; funds must now and professional funds. “The code will bring have a minimum of two directors rather than greater changes to the regulation of public one previously, and one of them must be an funds than those experienced by private and individual as opposed to a corporate director. professional funds, although its requirements Professionals in the BVI note that to a probably aren’t very far away from existing large extent, the new legislation simply policy either,” he says. enshrines in law what was already standard “The code brings the BVI into line with practice in the fund industry. “It represents Iosco best practice for the regulation of retail codification of existing policy for private and funds. There are only about 270 public funds professional funds, for which it is business anyway, but those that are genuine retail as usual,” says Simon Schilder, a partner in funds and are not already in compliance the BVI office of law firm Ogier. with the code’s provisions will need to make “Take the example of audit. Pre-SIBA, if changes to come into compliance. But there a fund applied for a licence without having are also some public funds that are not really an auditor, it would have to answer a lot of targeted at a retail market, and if they find the questions from the regulator as to why it new obligations too onerous, they might opt thought it was appropriate for it to not have to convert into private or professional funds. an auditor, because their starting point was However, it’s too early to tell, as the code that all funds ought to have an auditor. does not come into force until March 31.” “Under SIBA, if a fund wants a Overall, Schilder is convinced that the dispensation from the audit requirement, it SIBA legislation is having a positive impact must formally apply for an exemption and on the BVI’s international image. “It adds demonstrate in the application why it is certainty for fund promoters,” he says. appropriate for it not to have an auditor. There “Previously we had a statute and a range of are plenty of ongoing notification obligations policies, some written and some unwritten, under SIBA, but these were things that people but there’s far more transparency about the were generally notifying the commission regulatory regime thanks to a codification about anyway. Certainly it was the regulator’s of those policies through the Mutual Fund 10

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ifina (Austria) Limited w w w . i f i n a . c o m Schottenring 16 Enquiries : Derek Adler +44 (0) 1784 433034 A-1010 Vienna (Wien) Austria [email protected] I F i n a Competing in the global marketplace By Derek Adler Despite the downturn in the international not to set fees too low, which might risk fund industry stemming from the recent cheapening the product, there is a happy financial crisis, all the indications are that medium, especially when set alongside the the British Virgin Islands have weathered the BVI’s reputation for sound regulation and storm as well as if not better than its main effective oversight of its financial sector. competitor jurisdictions. In addition, the BVI Good relations and close co-operation has benefited from its diversified business between government authorities including model and a range of other successful regulators and the private sector is an financial activities including company essential attribute for jurisdictions aiming incorporation and captive insurance. to grow and to develop their international The BVI is the world’s second-ranking Derek Adler is a director of profile. For example, the BVI International offshore fund domicile, but members of Ifina (UK) Financial Centre has played a central role in the industry do not see the islands’ goal working with industry professionals to spread as chasing rival jurisdictions or numerical the islands’ message around the world. targets. Instead it is to build on the These relationships can only become capabilities and expertise that have brought more important in the future amid an it business from fund promoters throughout increase in international regulation, including the world by improving even further the transparency requirements, and ever-growing quality of service offered in the BVI and the competition between financial centres keen range and flexibility of available products. to increase their share of fund industry An area in which the BVI could take a activity. In this respect, an ongoing dialogue leaf out of Cayman’s book is by offering an between practitioners and regulators on exempt manager product, which would offer the development of legislation and practical new fund management firms the opportunity aspects of supervisory oversight can pay to be regulated at an affordable cost during dividends by ensuring that BVI is equipped the tricky early days when they are getting to provide products and services attuned to their business up and running. the requirements of the industry. This would be particularly helpful for Ifina, The passage last year of the long-awaited which together with a group of partners Securities and Investment Business Act has established the Primary Development was helpful in bringing the BVI’s fund law Fund in Cayman, offering newcomers to the up to date and enshrining in regulatory industry a package of outsourced services requirements procedures and processes around an umbrella fund structure. To be that were already part of day-to-day practice able to offer this package together with in the jurisdiction, emphasising the islands’ exempt manager status in the BVI would commitment to global standards through its be of huge benefit to managers that would membership of Iosco. like the opportunity to launch their business But the need for fine-tuning of the legislative within a regulated framework. framework is an ongoing process that is never One of the BVI’s existing benefits for new complete, and over the coming months and managers is an advantageous cost base, years industry professionals will continue to especially in a market where managers examine how the legal environment for funds are taking longer to raise capital and face in the BVI can be improved further to enhance increased expenditure in areas such as its competitiveness in the international compliance and reporting. While it’s important marketplace. n

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7 Regulations, the Public Funds Code and the “The efforts of the Financial other measures. “In addition, the timing has been very good. Services Commission to get It’s very opportune that the statute should the BVI up to internationally be passed toward the end of a monumental recognised standards crisis in the markets because it has enabled the BVI to incorporate many of the features have been recognised by that are now required by investors, regulators independent review bodies, and supranational bodies. I believe very firmly that this modern, user-friendly statute will which is very promising for stand the jurisdiction in good stead.” the industry and leaves us KPMG director Tanis McDonald says the well placed for the future.” legislation has reassured clients that the BVI is up to speed in terms of adherence to Tanis McDonald, KPMG international standards. “The new regulations and the efforts that have been made to says. “They are things we didn’t really need a meet the requirements of the international regulator to tell us we ought to do. standard-setting bodies boost our reputation “The authorities were keen to get the and perception of stability,” she says. legislation passed before the most recent “For example, SIBA covers certain types IMF inspection of the BVI, and they engaged of licensee, such as broker-dealers, that the help of industry practitioners, but there is previously were unregulated.” still some further tweaking to be done to the McDonald believes that this is important regime. So it is an ongoing process, and I in protecting the jurisdiction from a loss expect there will be amendments to make in of confidence among investors and fund the future. That is normal with new legislation promoters. “One of the biggest risks to anywhere. I hope the regulator will maintain a the BVI, as the most recent International dialogue with the industry on ways in which Monetary Fund report last October mentioned, the regime can be further improved.” is loss of reputation,” she says. “The new Ortiz concurs, saying: “SIBA is a new legislation covers everything that needs to be piece of legislation, and there are still some licensed and is clear and transparent about areas that need refining with the aid of close what licensees’ obligations and requirements co-operation between the private sector and are. Outlining that clearly will reduce our risk the regulator. A committee was formed last in terms of international perception.” year to examine areas of the legislation that However, she insists that overall the IMF’s require a little bit more clarity and to look at report on the BVI was extremely positive. how the implementation of the new provisions “We viewed it as a good report card and can be achieved throughout the industry.” indicator for the jurisdiction,” she says. “The She believes that the way the BVI has efforts of the Financial Services Commission updated and renewed its existing, high to get the BVI up to internationally successful fund legislation typifies the recognised standards have been recognised spirit of innovation that has enabled the by independent review bodies, which is very jurisdiction to stand out in the international promising for the industry and leaves us well marketplace. “The BVI has always been placed for the future.” seen as a bit ahead of other jurisdictions Derek Adler, a director of fund in achieving and maintaining international administration firm Ifina, expects to see further best practices and regulatory standards, and fine-tuning of the SIBA legislation in the that has been a foundation of our business future, reflecting the complexities of a statute model,” she says. “You can see this in the that was first drafted almost half a decade fact that our legislation has been imitated ago before being prioritised and updated at elsewhere. Our company incorporation law the behest of the current BVI government. has been duplicated in many jurisdictions, “We were already undertaking a lot of the and already we understand that SIBA has requirements in the legislation, because many been the inspiration for new legislation in the of them, frankly, were common sense,” he Malaysian territory of Labuan.” n

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Opportunity knocks as market comes back to life By Simon Gray

The outlook for the fund industry in the administration firm, even though the decision British Virgin Islands continues to brighten appears to have had more to do with the thanks to increasing investor confidence and problems then facing the Fortis group than reassurance that offshore funds are now the merits of the BVI as a fund services unlikely to be shut out of European markets, centre (today the remnants of Fortis are as once seemed possible. However, BVI- owned by the Dutch state, trading under the based professionals believe that longer-term name of ABN Amro, and the Prime Fund prospects might be improved by attracting a Solutions business is in the process of being broader base of service providers to Tortola. sold to Credit Suisse). Once the world’s largest domicile of The BVI fund industry does benefit from offshore hedge funds, the BVI has trailed the presence of a large legal sector featuring the Cayman Islands for around a decade, home-grown giant Harney, Westwood & but today industry members are relaxed Riegels and the rest of the ‘offshore magic about the jurisdiction’s ability to thrive in circle’ of law firms, Walkers, Maples and the shadow of its Caribbean neighbour, Calder, Ogier, Conyers and Appleby, as especially given the territory’s smaller well as the more recent arrival of Withers. population and the difficulty in building up And the Big Four audit and accounting a larger-scale fund administration industry firms are back in the BVI after for the most without straining local resources. part diverting their businesses a decade Still, there is regret about the withdrawal ago, although PricewaterhouseCoopers’ more than a year ago of Fortis Prime Fund operation is for the moment limited to an Solutions, at the time the jurisdiction’s largest insolvency practice. 14

BVI Hedgeweek Special Report Feb 2011 www.hedgeweek.com | 11 BVI_Advert_A4f.indd 1 2011/02/14 9:00 PM D r a k e F u n d a D v i s o rs Facilitating investment in emerging markets By Peter Todd The British Virgin Islands has been a leading the firm has been involved in setting up the player in the international fund industry for management company as well as the fund. years thanks to strengths that include a In addition to the BVI and its Anguillan relatively light regulatory touch, but one that presence, Drake has offices in London, the is robust enough to stand up to international Philippines and Johannesburg, and most scrutiny. The introduction last year of new recently opened an office in Dublin, where rules under the Securities and Investment the firm is in the process of being licensed Business Act has delivered the degree of as a fund administrator. In addition to regulation and standard of reputation that drawing on Ireland’s position as a centre of global practitioners now insist upon. expertise in the servicing of offshore funds, The competitiveness of the BVI as a Peter Todd is a director of the ability to establish Qualifying Investor domicile for sophisticated funds has been Drake Fund Advisors and of Funds will offer clients an alternative to enhanced significantly in recent years Osiris International Trustees offshore vehicles. by the growth in the jurisdiction of major One of Drake’s core client markets offshore law firms such as Ogier, Conyers consists of South African institutions looking and Walkers. At the same time, the territory to invest outside the country. In addition, the is home to various administration firms, country’s new international headquarters including Drake Fund Advisors, which in regime has made it an alternative to many cases draw on resources outside the Mauritius or Botswana as a base for private jurisdiction in order to complement the pool equity investment throughout the African of locally-based staff. continent as a whole. Drake is part of the Osiris International The new regime offers a comprehensive group, which has been headquartered in the range of tax benefits for companies BVI since 1999. The firm acts as an adviser to structured to make pan-African investments. firms investing in emerging markets as well For qualifying companies, these include as providing investment services to high net exemptions from exchange controls, worth individuals and families, specialising in capital requirements, corporate income tax establishing funds including private investment and withholding tax, as well as enabling vehicles and providing board directors. investors to take advantage of a tax treaty Two years ago, Drake started offering network including around double the number fund administration and accounting services of double-taxation treaties with African in response to demand from existing clients, countries concluded by Mauritius. both to provide a seamless service for newly In a global environment in which investors established funds and to provide a local are requiring greater transparency and servicing solution for BVI funds – although onshore jurisdictions insist on international the firm also provides administration to standards in areas such as exchange of tax Cayman- and Anguilla-domiciled funds where information, offshore centres such as the this is the preference of the promoter. BVI are still well placed to thrive, thanks to Currently Drake services around 36 funds, the greater ease of establishment of funds which include bespoke vehicles, often and ongoing regulatory flexibility. Although domiciled in Anguilla, for high net worth the SIBA legislation may raise the cost of families, as well as a number of property- doing business, the territory’s heightened related funds, some of them AIM-listed, regulatory standards send an important investing in the UK and Europe. In many cases signal to the international marketplace. n

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11 And while the biggest names of the “Operational due diligence will administration industry have mostly set up operations in Cayman rather than the BVI, be more demanding going other players have taken the opportunity forward, and managers that to develop activities in the jurisdiction. For are successful mostly have example, Conifer Fund Services, which is affiliated with San Francisco-based Conifer found a strategic partner Securities, has grown steadily since its or seed investor. The funds establishment in the BVI at the beginning of 2007. need to be bigger.” “The firm has grown fairly steadily over Peter O’Connell, Conifer Fund Services the past couple of years,” says managing director Peter O’Connell, who was previously reputation and high-quality service providers with Fortis and its predecessor firm, Hedge is particularly compelling when many Fund Services. “The business environment managers, especially start-ups, are having to was tough in 2009, but we saw a return to work hard to woo investors. “Finding capital growth in 2010. Last year we reorganised is still the hardest thing that the manager the firm within the Conifer group, managing has to do,” he says. Conifer Fund Services as one business line “Some managers are looking to start off incorporating the two offices, in order to in a small way, perhaps a closed-ended fund provide the same client experience whether with friends and family money. They may they are serviced out of San Francisco or not be regulated on day one and they may the BVI.” be carrying out their own administration. According to O’Connell, incremental Once they have built up a track record they business over the past year has been can have audited, they may then expand dominated by new clients. “We’ve seen with a regulated product. For managers continuous new business development,” he in that position, the BVI’s cost level is says. “The funds that are launching with particularly attractive.” us tend to be larger than they might have Derek Adler, whose fund administration been two or three years ago, when it was business, Ifina, has offices in both the BVI common for managers to set up a fund with and Cayman, believes that the BVI would just USD5m in capital. Today they need to benefit from copying its rival’s exempt have more like USD25m or USD30m, and a manager status – something that is already reputation as a high-quality manager.” under consideration by the authorities – in The bar has been raised for managers order to make the jurisdiction more attractive seeking to gain traction with investors, he to start-up managers that are under pressure believes. “Operational due diligence will to control costs but want to demonstrate be more demanding going forward, and regulatory compliance to their investors. managers that are successful mostly have Ifina recently launched the Primary found a strategic partner or seed investor,” Development Fund, a Cayman-based he says. “The funds need to be bigger.” umbrella structure offering new managers Ross Munro, a partner and head of an affordable package of services including investment funds and regulatory at Harneys, administration, custody, banking and legal also reports satisfactory business flows. counsel, and Adler would like to offer the “Over the past couple of years things have same product for BVI funds. “In today’s been slow, with what new business there market there are a lot of managers who was tending to be new products from would love to have the opportunity to be existing clients, although there was also an regulated in some form,” he says. enormous amount of restructuring work. As it is, the rebound from the industry’s However, the past six to nine months have darkest hours in 2008 and 2009 has been seen a good flow of new business from all satisfactory, according to Sherri Ortiz, around the world.” executive director of the BVI International Munro says the BVI’s combination Financial Centre, a government-sponsored of a competitive cost base with a good promotional body. “The recovery has 17

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B v i I FC BVI targets new opportunities in 2011 By Sherri Ortiz

Competition between international financial the past three years. As markets strengthen, centres is keener than ever, but the British there is greater appetite for funds, although Virgin Islands has many strong arguments investor attitudes remain cautious and the to attract clients from all over the world. fundraising environment for start-ups is more Alongside the strengthening and deepening challenging than a few years ago. of relationships with existing clients, our Today, the industry is also grappling with aim at the BVI International Financial Centre regulatory changes such as the Dodd-Frank is to reach out in 2011, in partnership with Act in the US and the European Union’s members of the private sector, to new Directive on Alternative Investment Fund markets that could benefit from access to Managers. We are encouraged that in its

BVI services. Sherri Ortiz is executive final form, the directive no longer seems In our efforts to develop and extend director of the British Virgin to threaten non-EU jurisdictions with being contacts across the world, it has been Islands International Finance arbitrarily excluded from the European market, Centre gratifying to observe increasing interest in but we look at the situation very pragmatically. the BVI, as exemplified by the jurisdiction’s In a world of increased regulatory focus, it’s position as the world’s foremost incumbent upon jurisdiction such as the BVI to incorporation domicile as well as a leading demonstrate that we are capable of satisfying centre for fund services. Its global appeal new regulations as they arise. Clients need to is down to a sound and business-friendly know that the BVI is not the kind of jurisdiction platform of legislation combined with that will end up on blacklists or suffer flexibility and user-friendliness. sanctions. What they appreciate about doing This is the product of a close and business in the BVI is our position as a well- long-standing relationship between the regulated and well-respected jurisdiction that private sector and public bodies, including upholds international standards. the regulator, the BVI Financial Services Already the BVI meets many of the Commission. It has helped build a reputation conditions that will be required for non- for innovation that is a key competitive EU managers and funds to qualify for a advantage in the global marketplace and passport under the EU directive, such as enabled the financial industry to thrive even the conclusion of tax information exchange under adverse global economic conditions. agreements and meeting international We will be taking this message to fast- standards on measures to counter money growing markets such as Latin America, laundering and terrorist financing. China and Russia where increasing wealth Meanwhile, last year’s Securities and is prompting a greater focus on investment Investment Business Act has brought the planning and structuring issues. At the same BVI’s funds and securities regulation into time, we hope that an upturn already evident in line with the standards set by Iosco, of fund activity in the BVI will lead to the provision which the jurisdiction is a full member and of a broader range of value-added services in signatory to its multilateral memorandum of the territory, including growth in the existing understanding on information-sharing and fund administration and accounting sector. co-operation in enforcement actions. A level The industry has demonstrated an playing field with international standards encouraging recovery from the downturn and transparency principles is the key to a experienced by alternative funds globally over sustainable international financial industry. n

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14 been quite encouraging,” she says. “We “Start-up managers have are seeing more appetite for funds as markets strengthen, although there’s still traditionally liked the a lot of caution among investors, while BVI because the cost of managers remain wary about the threat of establishing a fund here and increased regulation and how it could impact their business.” its ongoing costs are lower Simon Schilder, a partner with law firm than for a Cayman fund.” Ogier, is confident that the BVI will remain Simon Schilder, Ogier the main alternative to Cayman as a domicile for hedge funds and other alternative friends and family-type money where the investment vehicles. “Start-up managers have investors all agree that they would rather traditionally liked the BVI because the cost save the cost of the audit. But funds being of establishing a fund here and its ongoing marketed to third-party investors base have costs are lower than for a Cayman fund,” generally always been audited.” he says. Ortiz says there was particular concern “One reason for optimism is that we are among New York lawyers, gatekeepers for seeing existing managers continue to use much of the territory’s fund business, about the BVI as a domicile for their new fund the impact of the European Union’s Directive products, and when market conditions on Alternative Investment Fund Managers. make it easier for new start-up managers “They were asking whether the BVI would be to raise money, this new manager business able to qualify under the directive because will come back to the BVI due to the lower they did not want to lose the possibility to do running costs.” business in the jurisdiction and to tie in fund In fact there’s not much distinction investment with the BVI Business Company between professional fees in BVI and structure,” she says. Cayman, Schilder argues, but regulatory fees Last November, however, the European are significantly higher in Cayman. “Another Parliament adopted a compromise version thing that makes a difference for many start- of the directive that promises offshore funds up managers is the absence of an local access from 2015 to a single European audit sign-off requirement in the BVI, unlike market for funds aimed at sophisticated in Cayman,” he says. investors, as long as managers comply with “This affects managers seeking to have the legislation and domicile jurisdictions their funds’ accounts audited elsewhere, for adhere to international standards on tax instance in their home jurisdiction. Choosing information exchange, measures to counter the BVI over Cayman avoids the need for money laundering and terrorist financing, a local audit firm to sign off accounts that and regulatory co-operation. In the meantime have already been prepared by auditors offshore funds should be able to continue to elsewhere. Again, this is a saving more access European investors through national significant to start-up managers than those private placement regimes. with billions under management.” The expectation is that the BVI should be However, Schilder applauds the BVI’s able to meet the conditions of the directive decision to join Cayman in requiring funds’ comfortably, although they are as yet not fully accounts to be audited. “It reflects the needs defined. “The work we’ve done to improve of investors in the current environment and our regulation and our membership of Iosco, reflects the way the whole financial world as well as the signing of tax information has changed in response to the crisis,” he exchange agreements, all contributes to says. “Even in the past it would have been what we hope will be the basis on which unusual for a fund not to be audited, but it’s they consider the private placement and then now a requirement unless the regulator gives the passporting requirements,” says KPMG them an exemption. director Tanis McDonald. The only circumstances in which the “We are confident we have done commission is likely to grant such an everything we can at this point, but we need exemption are for very small funds with to move forward with reaching agreements 19

BVI Hedgeweek Special Report Feb 2011 www.hedgeweek.com | 17 BVI and Cayman legal services Welcome to Ogier in London

Our London office is a full service office providing advice ‘Offshore Law Firm of the Year 2010’ on all aspects of both Cayman Islands and the British Chambers Europe Awards for Excellence Virgin Islands law in a European time zone. ‘Channel Islands Law Firm of the Year 2010’ PLC Which Lawyer? To find out more about how Ogier London can assist ‘Offshore Law Firm of the Year, 2008 and 2009’ you, please contact London’s Managing Partner, British Legal Awards Simon Dinning, at [email protected] ‘European Legal Services Provider, 2009’ ICFA

‘Top Offshore Law Firm, 2009’ Alpha Awards

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Bahrain • British Virgin Islands • Cayman Islands • Guernsey Hong Kong • Ireland • Jersey • London • Tokyo I n d u s t r y

17 with EU member states while we wait to in offshore funds has been restored. “It’s see how they define the details of the new come out in a way that will keep the regime. However, overall we are very positive offshore centres in the game as legitimate about the outcome and confident that we jurisdictions that managers will want to use can meet the requirements. We have done all in order to structure their funds,” he says. “I we can from the point of view of legislation have every confidence that the BVI industry and tax agreements.” will be unaffected and that we will be able to The main area where offshore centres comply with all the conditions when the time are waiting for greater clarity is the kind of comes. Touch wood, I don’t think we will see regulatory co-operation with EU member a material impact on our business.” states they will be required to undertake in A perennial question for the BVI fund order for their funds to be accepted into the industry is whether the jurisdiction would EU market. Says Munro: “Our position is that be more attractive if it could offer a broader being a member of Iosco, the organisation’s range of local service providers, including multilateral memorandum of understanding administrators but especially banks. Munro offers a framework that is already available. says expansion would be beneficial simply “What we are anxious to avoid is some because it would increase the circle kind of subjective co-operation requirement of businesses with a vested interest in that could represent a back-door method marketing the territory’s services around of restricting offshore funds’ access to the the world. EU. However, overall the directive seems to “One of our weaknesses is the fact that be workable for offshore jurisdictions, and we don’t have enough people telling the it could bring us some advantages as well. BVI story,” he says. “We don’t have as many The depositary requirements that will be administrators, custodians and banks as imposed on European but not offshore funds certain other fund centres. It would certainly might represent an opportunity.” be beneficial to have a global bank with a Indeed, there is speculation that some strong commitment to the jurisdiction.” managers may prefer to avoid having to Munro is less certain how much of a comply with the directive unless they are difference it would make to investors and specifically targeting European investors. managers. “BVI companies and funds are Says O’Connell: “If your fund is not really accepted around the world without any marketing in the EU but you have European problem, and many people want to have service providers, you might fall within the an administrator in their own time zone. terms of the directive when there is no need However, it would help us if we had some to be. There are probably a few managers big players singing from the same song- with administrators in Europe that will sheet – something that certainly does play to consider shopping around, perhaps for a Cayman’s interests. Because Goldman and Caribbean-based administrator.” UBS have offices there, they have an interest The jury is out on whether the uncertainty in pushing business toward Cayman.” over the directive, which took more than Adler believes that increasing the currently a year and a half to finalise, has affected restricted number of banks authorised in business flows to offshore jurisdictions the jurisdiction – something that reflects such as the BVI. “It’s difficult to say whether to a degree the regulator’s concern about during this time new funds actually went to the reputational risks inherent in offshore Ireland or Luxembourg rather than the BVI or banking – could help the jurisdiction’s profile, Cayman because of the uncertainty,” Schilder especially if they included global household says. “We were asked by our existing names. “Undoubtedly some top-notch banks manager clients whether it was something would give the BVI a much more solid image they should be considering, but we certainly as a financial centre,” he says, noting that did not see a mass migration of existing Chase Manhattan used to have a presence funds to the EU.” but sold its operations in the territory. However, he and other BVI professionals “Many people in the BVI would like to see believe that now the outline of the EU some big players joining the ranks of the regulations has been confirmed, confidence financial industry.” n

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