Legislative Update

In the BVI, the BVI Business Companies Act , 2004  has been amended  and the BVI Business Companies Regulations, 2012 have been passed. Together, they introduce a number of improvements and enhancements and to address a number of proposals that BVI practitioners had requested. The amendments came into effect on 15 October 2012.  The detailed Harneys Guide on the amended Act and the Regulations can be found here.

None of the changes are revolutionary but there are a couple of specific issues which are particularly relevant to investment funds. Segregated portfolio companies are now able to terminate a particular segregated portfolio without having to go through the formal liquidation process. The main practical impact of terminating a portfolio will be to reduce the annual fees that are otherwise payable on every active segregated portfolio. Staying with SPCs, there is now a formal process whereby a SPC can re-attribute a liability in the event that a SPC incorrectly attributes a liability to a segregated portfolio. Counterparties dealing with funds should be aware of the change and, in particular, should be aware of the 30 day window available to challenge a re-attribution.  An important practical change arises as a result of a new requirement to seek the consent of the Financial Services Commission to appoint a voluntary liquidator of most formerly regulated companies (previously consent was only required if the company was still regulated at the time the liquidation commenced).  There are also new restrictions on the identity of a voluntary liquidator.  

In the Cayman Islands, the main sources of statutory law affecting investment funds were recently codified, the reference points now being the Mutual Funds Law (2012 Revision), the Companies Law (2012 Revision) and the Exempted Limited Partnerships Law (2012 Revision). The recent legislative initiative to revise the Mutual Funds Law to clarify the requirement to register master funds which have a single feeder fund is ongoing and the government draft Bill has been the subject of comment by the local financial sector. A further revised draft Bill is awaited.

Litigation Update

There has recently been some important clarification to the insolvency world as the UK Supreme Court has rejected the "universalist" doctrine and established that common law rules as to the enforcement of foreign judgments do not (or should not) apply to insolvency orders. The Harneys summary can be found here.

In a recent judgment, the Eastern Caribbean Court of Appeal made comments which help further clarify its landmark Westford decision.  The Court of Appeal said that that Westford held only “that a redeeming shareholder claiming redemption proceeds was not a creditor for the purposes of bringing insolvency proceedings under the Insolvency Act 2003 of the Virgin Islands.” Pereira J. noted that she had deliberately underlined this section of her judgment “to make clear that Westford did not decide that an unpaid redeeming member is not a creditor of the company.”   A summary is available here.

The Alternative Investment Fund Managers Directive ("AIFMD")

The AIFMD is due to be transposed into the national laws of all member states of the EU by 22 July 2013. The Directive seeks to regulate the activities of fund managers in relation to funds they manage or market to investors in the EU. Following the Directive coming into force in July 2011, the funds industry is awaiting the publication of the Level 2 advice which are expected to provide further clarity as to what precisely will be required. As yet, the Level 2 Regulations are yet to be published, but in the interim, both the British Virgin Islands and Cayman Islands have established specialist committees (which contain representation from Harneys) to examine the impact of the Directive upon the jurisdictions and to ensure that the governments are in the best possible place to ensure that BVI and Cayman based funds continue to have full access to the EU market after the implementation dates. We will provide a further update as soon as the Level 2 Regulations have been published and analysed.

Foreign Account Tax Compliance Act ("FATCA")

Harneys continues to evaluate the impact of FATCA on its business and clients. The recent announcement by the US IRS that certain key dates for the implementation of FATCA  reporting requirements  are to be postponed, most notably that the new account opening procedures will be required to be implemented by January 2014 rather than January 2013, was welcome, albeit widely expected.  Approximately 100 jurisdictions around the world have reportedly expressed an interest in entering into an Intergovernmental Agreement (IGA) with the US Treasury. The BVI and Cayman Governments have  both confirmed that they  have initiated preliminary discussions with the US Treasury regarding the possible entry into an IGA.  To date, the US Treasury has announced that it has entered into just one IGA (with the United Kingdom). 

In July this year, the US Treasury issued a Model IGA with a reciprocal and non-reciprocal version.  A Model IA (reciprocal) or Model IB (non-reciprocal) IGA would mean that entities in the BVI or Cayman classified as Foreign Financial institutions (FFIs) would be required to report to the BVI or Cayman Governments respectively rather than directly to the US Treasury.  The Model II IGA (the form of which has not yet been released) is described as a framework for intergovernmental cooperation to facilitate FATCA implementation. It would require FFIs to still report directly to the Treasury but is intended to overcome any local-law barriers that would otherwise prohibit FFIs from reporting directly.  It has been reported that the Model II approach has been agreed to in principle with Switzerland and Japan.  In conjunction with the private sector and financial services regulators, both the BVI and Cayman Governments are continuing to evaluate and understand the impact of FATCA and to assess the advantages and disadvantages of entering into an IGA.  Harneys will issue further communications regarding FATCA and its impact on our clients in due course as more information becomes available.

BVI AML Penalties and Fines

Fines and penalties for contraventions of the BVI’s anti-money laundering regime have been significantly increased through recent amendments to the Proceeds of Criminal Conduct Act, 1997, the Anti-Money Laundering Regulations, 2008 and the Anti-money Laundering and Terrorist Financing Code of Practice, 2008 . The amendments are effective immediately and the Harneys summary can be found here.

Regulation of Directors

Still a topic of intense debate in the Cayman Islands, the terms of any proposed legislative changes remain uncertain. It is generally true that there is an expectation of some form of registration requirement for directors acting on the boards of regulated mutual funds, but the precise nature of the legislative changes to effect that and the process for seeking and being registered are unclear.

Statistics

According to the statistics released by the BVI Financial Services Commission, as at the end of June 2012, the numbers of regulated mutual funds in the BVI were:

Professional: 1621

Private: 641

Public: 160

Total: 2,422

According to statistics released by the Cayman Islands Monetary Authority, as at the end of September 2012, the numbers of regulated mutual funds in Cayman were:

Registered: 8,596

Administered: 411

Licensed: 123

Master: 1,849

Total: 10,979