A Quarterly Newsletter from the UAE and Oman member firms of PKF International Ltd.

VOL 13, Issue 1 January 2011

Offshore Update

BVI Securities and Investment Business Act

The long-awaited British Virgin Islands’ Securities and Investment Business Act, 2010 (“SIBA”) has finally been introduced and has come into force on 17 May 2010.

SIBA provides for a number of pieces of subsidiary legislation including the Mutual Funds Regulations, Investment Business Regulations, Public Funds Code, Public Issuers Code, Market Abuse Regulations and a new section of the recently issued Regulatory Code relevant to SIBA licensees, all intended to detail the exact requirements of the new regime.

In a nutshell, SIBA provides for:

  • A new investment business licensing regime to regulate investment advisors, broker-dealers, market makers, custodians and operators of investment exchanges.
  • Adoption of restrictions on, and regulation of, public issues of securities in a non-mutual funds context.
  • Repeal of the Mutual Funds Act 1996 and replacement with Part III of SIBA and the Mutual Funds Regulations and Public Funds Code.
  • Introduction of a market abuse regime which provides for offences of insider trading, circulating misleading information and market manipulation.

SIBA provides a new investment business licensing regime also a market abuse regime which provides for offences of insider trading, circulating misleading information and market manipulation

Key provisions of the SIBA are summarized below:

  • Investment Business Regime
    Any person conducting ‘investment business’ in / from within the BVI will be mandatorily required to hold a license, issued by the BVI Financial Services Commission (‘FSC’), covering the relevant categories of investment business. Investment business is defined by reference to certain ‘investment activities’ in relation to ‘investments’.

    These terms are set out in detail in Schedules 1 and 2 of SIBA. It is important to note that the scope of SIBA includes:

    • Any BVI Business Company which carries on investment business anywhere in the world even if the only link with the BVI is the location of its registered office; and
    • Any person who solicits a person in the BVI (including BVI companies) in order to offer the investment Service.

    As a result of certain exclusions in SIBA, coupled with provisions setting out the territorial scope of the regime, a non-BVI person providing investment services to a BVI Business Company [‘BVI BC’] (i.e. whose only link with the BVI is the location of its registered office) should not fall within the scope of the new regime, however every case requires it own analysis and legal advice should be obtained where necessary.

    Once licensed, firms will be required to implement a number of systems and controls for the operation of their businesses, in particular rules on corporate governance, the control of advertisements, approved persons regime, conduct of business rules and other administrative requirements.

    Under BVI law, contracts and transactions may, in some cases, be rendered unenforceable where they are entered into by persons who conduct investment business without a license and in breach of the ‘perimeter’ set out in SIBA. Resultantly, this has very important implications for the structuring of many transactions involving BVI companies.

  • Public Issues of SecuritiesPart II of SIBA introduces a new regime to regulate any person that wishes to offer issues of securities to ‘the public’ in the BVI. If within the scope of the new regime, the firm issuing securities will be required to register a prospectus with the FSC and to comply with a number of requirements to be set out in the forthcoming Public Issuers Code. This regime is not intended to be extra-territorial. i.e., a BVI BC will not be restricted from offering its securities outside of the BVI. Additionally foreign issuers, and their agents, can continue to send offerings of securities to BVI BCs provided such offers are not received in the BVI.

    Issues of securities by mutual funds registered or recognized under SIBA do not fall within the new public issuer regime. In addition a number of exclusions exist where the offer is made to qualified investors (which includes listed companies, FSC regulated entities and persons having a close connection with the issuer and professional investors).

    On this basis, potentially very few issues of securities will fall within the scope of this new regime. Further, unlike the rest of SIBA, this Part did not come into force on 17 May 2010. The new system is expected to be in place before the end of the year.

  • Mutual FundsAs at 17 May 2010 the Mutual Funds Act, 1996 has been repealed and replaced with Part III of SIBA, the Mutual Funds Regulations and the Public Funds Code.

    The general structure and landscape of the BVI mutual funds industry is to remain with the categories of public, private and professional funds being retained. Investment managers and fund administrators which are currently licensed under the Mutual Funds Act, 1996 will be licensed under Part I of SIBA.

    Many of the proposed changes codify current FSC practice but particular points to note are as follows:

    • A general audit requirement for private and professional funds although funds may apply to be exempt from this requirement.
    • The minimum initial investment for a professional fund of USD 100,000 will apply to all investors other than certain exempt investors (primarily functionaries and their employees) rather than applying to a majority of investors as is currently required.
    • All funds, managers, administrators and other licensees will be required to have an authorized representative unless they have a ‘significant management presence’ in the BVI – such term to be defined in subsidiary legislation.
    • There is a general requirement for private and professional funds to have an offering document and to appoint a manager, administrator and custodian. However, the FSC may exempt a fund from any requirement other than the requirement to have an administrator.
    • A requirement to notify the FSC of various matters including changes of directors and functionaries and updates to offering documents
    • A requirement for all funds to have at least two directors, one of whom must be an individual
  • Market AbuseSIBA introduces criminal offences for individuals, based in the BVI, who conduct insider dealing, carry on market manipulation or make misleading statements relating to investment business. In general, the legislation seeks to bring the BVI in line with internationally accepted standards for the prevention of market abuse and similar financial crimes.

    Insider dealing occurs, when an insider – a person in receipt of ‘inside / relevant information’, deals in or encourages another person to deal in price-affected securities, or discloses the information to another person otherwise than in the course of his employment. A person commits the offences of misleading information and market manipulation, where he makes a statement, promise, or forecast he knows to be deceptive, dishonestly concealing any material facts or recklessly makes a statement which is misleading, false and / or deceptive.

    SIBA introduces criminal offences for insider dealing, market manipulation or making misleading statements and seeks to bring the BVI in line with internationally accepted standards for the prevention of market abuse and similar financial crimes

    Fines of up to USD 50,000 and prison terms of up to three years may be levied on persons found guilty of these new crimes.

    Ironically, as a result of the recognition of market abuse as a financial crime in the BVI under SIBA, persons committing such crimes outside the BVI (e.g. traders based in other jurisdictions) but who use BVI vehicles to structure transactions or process profits which make use of the proceeds of these crimes will now be more likely to commit a money laundering offence in the BVI!

(This article is contributed by Mr. Chaitanya Kirtikar, Asst. Manager – Offshore Department).