The supervision of offshore mutual funds

1
The supervision of offshore mutual funds

• Day 1
• Authorisation of Mutual Funds

2
Authorisation of mutual fundsAgenda

• Applications
• Private and professional funds
• Public funds
• Fund managers and fund administrators
• Withdrawals and refusals
• Cancellations
• Voluntary
• involuntary
• International standards and best practice

3
Authorisation of mutual funds

• What is your role as regulator in the
  authorisation of mutual funds and also of their
  administrators and managers?
• Protection of investors
• Protection of reputation of jurisdiction
• Is there any scope for differentiation between
  products being authorised or licensed?
• Private professional vs public funds
• Mutual funds vs fund functionaries

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Authorisation of mutual fundsPrivate
Professional Funds Your Process

• What is required by your legislation?
• What is required within your application forms
  (including supplemental documentation)?
• What do you check?
• How long do these checks take?
• Are the checks efficient given the nature of the
  product?

5
Authorisation of mutual fundsPrivate
Professional Funds BVI Process

• What is required by BVI legislation?
• Legal constitution
• Section 26 notice (registered agent declaration)
• Evidence of nature of mutual fund (ie private or
  professional fund)
• What is required within BVI application forms
  (including supplemental documentation)?
• All of the above, including originals of
  constitutional documents
• Details of functionaries

6
Authorisation of mutual fundsPrivate
Professional Funds BVI Process

• What does BVI check?
• All constitutional documents must be originals
• No bearer shares permitted within MA
• For private fund, must check that limit on number
  of investors in MAs
• For professional fund, must check that offering
  document includes professional investor
  declaration and subscription document has minimum
  investment clearly indicated
• All functionaries are in recognised jurisdictions
  (cf against recognised jurisdictions list which
  must be current and published) if not, then
  require further information
• Check functionaries (if not known) by check on
  WorldCompliance and Lexis Nexis

7
Authorisation of mutual fundsPrivate
Professional Funds BVI Process

• What does BVI check?
• Custodian listed if not, then require reason why
  no custodian (eg hedge funds use prime brokers,
  property funds hold title deeds, which may be
  held by the manager)
• Independence of custodian
• Statutory general notice signed and attached
  (contains details of local registered office)
• If offering document included, will review
  investment objectives, details of managers (age,
  relevant experience), details of other
  functionaries (in particular, who will carry out
  valuations)
• Name of fund not misleading also check against
  prohibited words listing
• One peer review followed by one manager review

8
Authorisation of mutual fundsPrivate
Professional Funds BVI Process

• How long do the BVI checks take?
• Routine applications take less than 48 hours and
  can take as little as 10 minutes to process to
  review stage
• Non-routine applications will take the length of
  time necessary to obtain answers to queries
  raised
• Is this efficient given the nature of the
  product?
• Yes, however, not economic as no application fee
  required for BVI private and professional funds!

9
Authorisation of mutual fundsPrivate
Professional Funds International Standards and
Best Practice

• What are the international standards?
• IOSCO
• What is best practice?
• Various industry associations (eg Alternative
  Investment Management Association in UK, Hedge
  Fund Association in US, Managed Funds Association
  in US Chartered Alternative Investment Analyst
  Association in US)
• Offshore Group of Collective Investment Schemes
  (OGCISS)

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Authorisation of mutual fundsPrivate
Professional Funds International Standards and
Best Practice

• EXERCISE
• Review your processes and assess them against the
  IOSCO principles.
• What needs to be altered or improved upon in
  order to meet the international standards?

11
Authorisation of mutual fundsPrivate
Professional Funds Improving the Process

• What further can be done to improve the process?
• Use of checklists for regulators (to ensure
  consistency and thoroughness of approach)
• Familiarisation with list of recognised
  jurisdictions and listing of prohibited words
• Education of registered agents
• Transparency of process (eg place on website)
• Clarity and completeness of application forms
• QAs?

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Authorisation of mutual fundsPublic Funds Your
Process

• What is required by your legislation?
• What is required within your application forms
  (including supplemental documentation)?
• What do you check?
• How long do these checks take?
• Are the checks efficient given the nature of the
  product?

13
Authorisation of mutual fundsPublic Funds BVI
Process

• What is required by BVI legislation?
• Legal constitution
• Section 26 notice (registered agent declaration)
• Prospectus
• Approved auditor
• Application fee
• What is required within BVI application forms
  (including supplemental documentation)?
• All of the above, including originals of
  constitutional documents
• Details of functionaries

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Authorisation of mutual fundsPublic Funds BVI
Process

• What is required within BVI application forms
  (including supplemental documentation)?
• Details of any prior registration/authorisation
• Details of any disciplinary actions
• Prospectus approved by fund directors
• Fund directors applications forms (as
  appropriate)
• Details of the fund
• Affidavit of at least one fund director
• Application fee
• Statutory general notice

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Authorisation of mutual fundsPublic Funds BVI
Process

• What does BVI check?
• All constitutional documents must be originals
• No bearer shares permitted within MA
• All functionaries are in recognised jurisdictions
  (cf against recognised jurisdictions list which
  must be current and published) if not, then
  require further information
• Check functionaries (if not known) by check on
  WorldCompliance and Lexis Nexis
• Custodian listed if not, then require reason why
  no custodian (eg hedge funds use prime brokers,
  property funds hold title deeds, which may be
  held by the manager)

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Authorisation of mutual fundsPublic Funds BVI
Process

• What does BVI check?
• Independence of custodian
• Statutory general notice signed and attached
  (contains details of local registered office)
• Thorough review of prospectus evidence of
  directors approval of such review investment
  objectives, risk factors (to determine whether
  adequately explained) details of managers (age,
  relevant experience), details of other
  functionaries (in particular, who will carry out
  valuations) basis of valuations fees
• Thorough review and vetting of fund directors
  (would expect at least two although not
  legislated for) using directors application
  forms, resumes, references and vetting on web and
  with WorldCompliance and Lexis Nexis

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Authorisation of mutual fundsPublic Funds BVI
Process

• What does BVI check?
• Thorough review of auditors if on approved
  auditor list then this is acceptable if not an
  approved auditor the approved auditor process has
  to be instigated (requiring details of the
  auditor, experience of auditor in auditing mutual
  funds, auditing standards adopted, personnel to
  be involved, etc)
• Name of fund not misleading also check against
  prohibited words listing
• One peer review followed by one manager review

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Authorisation of mutual fundsPublic Funds BVI
Process

• How long do the BVI checks take?
• All applications have to be presented to the
  Licensing and Supervisory Committee (unless of
  identical nature to previous registrations)
• Routine applications take up to six weeks (two
  weeks of this is the LSC process) some can take
  as little as three weeks
• Non-routine applications will take the length of
  time necessary to obtain answers to queries
  raised
• Is this efficient given the nature of the
  product?
• Yes, these funds present the most risk to
  investors and therefore, require a thorough
  vetting before they are registered

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Authorisation of mutual fundsPublic Funds
International Standards and Best Practice

• EXERCISE
• Review your processes and assess them against the
  IOSCO principles.
• What needs to be altered or improved upon in
  order to meet the international standards?

20
Authorisation of mutual fundsPublic Funds
Improving the Process

• What further can be done to improve the process?
• Use of checklists for regulators (to ensure
  consistency and thoroughness of approach)
• Familiarisation with list of recognised
  jurisdictions, approved auditors and listing of
  prohibited words
• Education of registered agents
• Transparency of process (eg place on website)
• Clarity and completeness of application forms
• QAs?

21
Authorisation of mutual fundsManagers
Administrators Your Process

• What is required by your legislation?
• What is required within your application forms
  (including supplemental documentation)?
• What do you check?
• How long do these checks take?
• Are the checks efficient given the nature of the
  product?

22
Authorisation of mutual fundsManagers
Administrators BVI Process

• What is required by BVI legislation?
• Legal constitution
• Section 26 notice (registered agent declaration)
• Business plan
• Evidence of fitness and properness
• Evidence of adequacy of knowledge, expertise,
  resources and facilities for nature and scope of
  proposed business
• Appointment of auditor
• Application fee

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Authorisation of mutual fundsManagers
Administrators BVI Process

• What is required within BVI application forms
  (including supplemental documentation)?
• All of the above, including originals of
  constitutional documents
• Details of functionaries, auditor and legal
  advisor
• Details of financial year end
• Details of all directors including an application
  form in respect of each director (accompanied by
  resume, references and police clearance
  certificate)
• Details of any other regulatory licences
• Details of funds to which services will be
  provided
• Details of where client monies will be held

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Authorisation of mutual fundsManagers
Administrators BVI Process

• What is required within BVI application forms
  (including supplemental documentation)?
• Details of any disciplinary actions
• If an existing entity which is redomiciling, a
  declaration that redomiciliation will not
  commence until written consent is given by the
  FSC
• Resources statement
• Financial statements (most recent audited
  accounts including those of the Group, if
  appropriate)
• Business plan (including, inter alia, history,
  organisation chart, business objectives, client
  base, product base, marketing strategy and
  projected financial position for next two years)

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Authorisation of mutual fundsManagers
Administrators BVI Process

• What is required within BVI application forms
  (including supplemental documentation)?
• Declaration by at least one director
• Auditors confirmation of acceptance of
  appointment
• Application fee
• Statutory general notice

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Authorisation of mutual fundsManagers
Administrators BVI Process

• What does BVI check?
• All constitutional documents must be originals
• No bearer shares permitted within MA
• Statutory general notice signed and attached
  (contains details of local registered office)
• Thorough review of business plan, resources
  statement and financial projections to ensure
  they all stack up
• Thorough review and vetting of directors (would
  expect at least two although not legislated for)
  using directors application forms, resumes,
  references and vetting on web and with
  WorldCompliance and Lexis Nexis
• Check against fit and proper criteria to ensure
  that all aspects covered (integrity, financial
  stability, solvency and financial control, skill,
  competence and managerial control, track record
  and viability)

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Authorisation of mutual fundsManagers
Administrators BVI Process

• What does BVI check?
• Thorough review of auditors although no
  requirement to approve the auditor, if the
  auditor appears inexperienced then will request
  evidence of appropriateness of appointment
• Regulator-to-regulator checks (if appropriate and
  always where there is redomiciliation)
• Name of manager/administrator not misleading
  also check against prohibited words listing
• One peer review followed by one manager review

28
Authorisation of mutual fundsManagers
Administrators BVI Process

• How long do the BVI checks take?
• All applications have to be presented to the
  Licensing and Supervisory Committee (please see
  over)
• Routine applications can take as little as six
  weeks (two weeks of this is the LSC process)
  some can take as much as three months
• Non-routine applications will take the length of
  time necessary to obtain answers to queries
  raised BVI had one application ongoing for over
  four years!
• Is this efficient given the nature of the
  product?
• No, the industry continually complains that this
  is too long and indeed it is too long. Most of
  the delays are due to incomplete, missing or
  inaccurate submission of information

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Authorisation of mutual fundsManagers
Administrators BVI Process

• The Licensing and Supervisory Committee (LSC)
• Comprises all regulatory directors, Managing
  Director, Deputy Managing Directors and Director,
  Legal Enforcement
• Meets weekly papers submitted for inclusion on
  agenda a week before and circulated to members a
  couple of days before meeting decisions
  delivered in writing to applicants immediately
  following meeting
• Meetings must have a quorum and decisions are
  taken on a consensus basis
• All meetings are minuted
• All papers include background information on the
  application and are in standard format
  appendices contain pertinent information

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Authorisation of mutual fundsManagers
Administrators BVI Process

• The Licensing and Supervisory Committee (LSC)
• All papers are presented by the relevant
  regulatory director all papers which involve
  more than one regulatory division must be jointly
  presented
• All papers must contain a recommendation all
  recommendations for refusal must be submitted to
  the Director, Legal Enforcement for an opinion
  prior to submission to the LSC opinion must be
  attached to paper as appendix
• Papers may be deferred pending the obtaining of
  additional information or explanations (this
  delays the process by a week or more)

31
Authorisation of mutual fundsManagers
Administrators International Standards and Best
Practice

• EXERCISE
• Review your processes and assess them against the
  IOSCO principles.
• What needs to be altered or improved upon in
  order to meet the international standards?

32
Authorisation of mutual fundsManagers
Administrators Improving the Process

• What further can be done to improve the process?
• Use of checklists for regulators (to ensure
  consistency and thoroughness of approach)
• Familiarisation with list of recognised
  jurisdictions, approved auditors and listing of
  prohibited words
• Encourage preliminary meeting with potential
  applicant to discuss proposed business and
  regulatory process use to iron out
  misunderstandings, to give realistic expectations
  about likelihood and timing of licensing
• Education of registered agents
• Transparency of process (eg place on website)
• Clarity and completeness of application forms
• QAs?

33
Authorisation of mutual fundsWithdrawals
Refusals Your Process

• What is required by your legislation?
• What processes do you follow when you receive a
  withdrawal or when an applicant is refused?
• Do you supply reasons for refusals?
• What documentation do you keep?
• What is your appeals process?

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Authorisation of mutual fundsWithdrawals
Refusals BVI Process

• Withdrawals
• Nothing set down in legislation
• Withdrawal request must come from a director of
  the applicant and not the registered agent
• Documents are the property of the regulator and
  are, therefore, retained
• Record kept of original application (as important
  for statistical purposes and also in the event of
  a resubmission)
• No return of application fee

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Authorisation of mutual fundsWithdrawals
Refusals BVI Process

• Refusals
• In relation to a private and professional fund,
  refusal may only be where (a) the fund fails to
  be lawfully constituted, in which case the reason
  must be given and an appeal may be lodged or (b)
  where it is not in the interests of investors
  that the fund be granted recognition, in which
  case no reason has to be given
• In relation to a public fund, refusal may only be
  where (a) the name of the fund is misleading or
  undesirable or (b) the fund does not have an
  independent custodian or (c) it is not in the
  public interest that registration of the fund be
  granted. In all cases no reason need be given
  and the decision may not be subject to appeal or
  review
• In relation to a manager or administrator,
  refusal may only be where (a) the applicant is
  not fit and proper (b) the applicant does not
  have adequate knowledge, expertise, resources and
  facilities (c) the applicant has not appointed
  an acceptable auditor and (d) it is not in the
  public interest to grant a licence. In all cases
  no reason need be given and the decision may not
  be subject to appeal or review

36
Authorisation of mutual fundsWithdrawals
Refusals BVI Process

• Refusals
• All refusal recommendations must be presented
  before the LSC and must thoroughly evidence the
  reason for the refusal recommendation
• Standard wording for a notification of a refusal
  must be used and cleared through the Legal
  Department
• Documents are the property of the regulator and
  are, therefore, retained
• Re-application permitted but weaknesses must be
  addressed
• No return of application fee

37
Authorisation of mutual fundsWithdrawals
Refusals International Standards and Best
Practice

• EXERCISE
• Review your processes and assess them against the
  IOSCO principles.
• What needs to be altered or improved upon in
  order to meet the international standards?

38
Authorisation of mutual fundsCancellations
Your Process

• What is required by your legislation?
• What process do you follow when you receive a
  request for a cancellation of a certificate or
  licence?
• What process do you follow when you wish to
  cancel a certificate or licence?
• What documentation do you keep?

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Authorisation of mutual fundsCancellations BVI
Process

• Voluntary cancellations
• Nothing set down in legislation
• Cancellation request must come from a director of
  the applicant and not the registered agent
• Request must be accompanied by a reason for
  cancellation and a declaration that all shares
  have been redeemed by existing shareholders and
  that there are no outstanding liabilities
• Request must also be accompanied by the original
  certificate or licence
• No requirement for dissolution of company
  (however, this is preferable)
• Documents are the property of the regulator and
  are, therefore, retained
• Confirmation of cancellation requires holder to
  confirm

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Authorisation of mutual fundsCancellations BVI
Process

• Voluntary cancellations (contd.)
• Confirmation of cancellation requires holder to
  confirm that it will cease and desist from mutual
  fund business
• The cancellation decision is published in the
  Gazette and on the FSC website

41
Authorisation of mutual fundsCancellations BVI
Process

• Involuntary cancellations
• Certificates or licences may be cancelled by the
  regulator where the holder
• Has ceased to carry on business in or from within
  the BVI
• Has contravened legislation, regulations, codes,
  terms, conditions, restrictions or limitations on
  the certificate/licence
• Has been convicted of any offence
• Has knowingly supplied false, misleading or
  inaccurate information or failed to disclose
  required information
• Is carrying on business in a manner detrimental
  to the interest of investors or the public
  interest
• Is declared bankrupt or is being wound-up or
  dissolved
• Prior to cancellation, notice must be given of
  the intention and the reason, giving an
  opportunity for representation within 30 days of
  receipt of the notice

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Authorisation of mutual fundsCancellations BVI
Process

• Involuntary cancellations
• Any representation must be reasonably considered
• After 30 days a written notice of cancellation
  giving the reason must be sent to the holder
• This decision may be appealed by the
  certificate/licence holder
• The notification of the cancellation must request
  submission of the original certificate/licence,
  removal of the word fund from the name (if
  appropriate) and a declaration that the holder
  will cease and desist mutual fund business
• Documents are the property of the regulator and
  are, therefore, retained
• The cancellation decision is published in the
  Gazette and on the FSC website

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Authorisation of mutual fundsCancellations
International Standards and Best Practice

• EXERCISE
• Review your processes and assess them against the
  IOSCO principles.
• What needs to be altered or improved upon in
  order to meet the international standards?

44
Authorisation of mutual fundsCancellations
Improving the Process

• What further can be done to improve the process?
• Use of checklists for regulators (to ensure
  consistency and thoroughness of approach)
• Use of standard letters and notifications
• Education of registered agents
• Transparency of process (eg place on website)
• QAs?

45
Authorisation of mutual fundsReview of Day 1

• Questions and Answers?