The Regulatory Code, 2009 issued by the Financial Services Commission (the “FSC”) will apply, as of 31 March 2011, to licensees under the Securities and Investment Business Act, 2010 (“SIBA licensees”). This note deals with some of the obligations that SIBA licensees will now have to comply with in light of this.
SIBA licensees would typically include BVI licensed managers, administrators, broker-dealers, advisers, arrangers and custodians. The obligations outlined in this note do not apply to mutual funds.
Principles for business
Six principles for business which SIBA licensees must embody within the conduct of their licensed business are: integrity, management and control, adequacy of financial resources, due regard for customers’ interest, transparency in business arrangements, and being open and cooperative with the FSC.
Conduct of business obligations
The conduct of business obligations, through variable depending on the particular business in question, in summary include the following:
- fund functionaries must act in the best interest of their clients’ funds and treat investors fairly;
- special requirements for written client agreements with retail customers;
- disclosure of charges and professional experience (the latter relates to retail customers only);
- suitability requirements where a SIBA licensee provides services to a customer;
- timely execution requirements;
- responsibility in respect of the way orders are aggregated;
- providing best execution or else relying on third party execution providers that can do so;
- restrictions on churning, switching and front-running;
- requirements to manage conflicts of interests.
Financial statements and auditing
SIBA licensees will need to prepare and submit to the FSC audited financial statements on a yearly basis in accordance with applicable accounting standards such as UK GAAP, US GAAP or IFRS. They may apply to the FSC for exemption from the requirement to appoint an auditor in certain circumstances.
Some SIBA licensees will not be caught for example those that are not incorporated or organised in the BVI. Equally fund functionaries benefit from an expedited approvals procedure.
Fit and proper criteria
Directors, senior management, “significant owners” and certain functionaries, such as auditors, must satisfy the fit and proper criteria prior to appointment and on an on-going basis.
Management and control
A SIBA licensee’s business will need to be well structured, so that the role of each officer is clear, well apportioned, and monitored. The directors must monitor and control the business, with the support of senior management. Systems and controls must be established, regularly reviewed and updated, and must take into account the nature, scale, complexity and diversity of the business. In practice, licensees may need to put in place risk management frameworks to identify key risks of the business and also establish an internal control framework to control and monitor staff activities.
Every SIBA licensee must appoint a pre-approved compliance officer or else apply to the FSC for an exemption from the requirement. Compliance officers must meet the FSC’s fit and proper criteria.
The compliance officer and senior management of a SIBA licensee must establish, maintain and implement a compliance policy and compliance systems and controls, as appropriate for the business. The compliance systems and controls should ensure compliance by all board members, senior management and employees and be sufficiently adequate to identify compliance breaches. Additionally, SIBA custodians will need to put in place an “internal audit” function.
Licensees will, in due course, be required to make annual compliance filings to the FSC.
Restrictions on outsourcing
The Regulatory Code contains a number of restrictions on “outsourcing” compliance and management functions to third party service providers.
In particular, a SIBA licensee will not be allowed to outsource any of the following:
- the compliance function or a “core management function”;
- any activity that would impair the FSC’s ability to supervise the licensee;
- any activity that would affect the right of a customer against the licensee.
SIBA licensees will be under an obligation to keep safe or arrange for the safekeeping of customer investments. BVI rules describe how the licensee must operate any safekeeping procedures. In addition, licensees are required to strictly segregate client money from other money.
Capital adequacy requirements
Licensees will need to ensure at all times that they maintain capital resources at a level that is adequate to support the investment business, taking into account the nature, size, complexity, structure and diversity of that business and its risk profile. They must also maintain adequate systems and controls to monitor and assess its capital adequacy requirements on an ongoing basis.
The board and senior management of a SIBA licensee will need to make their own determination of the capital resources that are reasonably required to support the business. Importantly, no minimum thresholds for capital contributions have been specified in the Code.
Professional indemnity insurance
SIBA licensees will be required to put professional indemnity insurance in place.
That said, a licensee may ‘self-exempt’ from this requirement where it determines that, having regard to the nature, size, complexity, structure and diversity of its business, professional indemnity insurance is not appropriate. It will need to notify the FSC of its reasons.
SIBA licensees will be required to retain, for at least 5 years, records including:
- documents relating to compliance with obligations under financial services legislation,
- records of its business transactions;
- internal records.
Fraud and disclosure
SIBA licensees will need to establish and maintain policies systems and controls that promote high ethical and professional standards; that prevent it from being used intentionally or unintentionally for fraud or other criminal activities, and that enable the licensee to detect and remedy fraud or other criminal activities.
SIBA licensees must not, knowingly or recklessly, issue or assist in issuing an advert which is misleading in a material way or contains an incorrect statement of fact.
Whilst not an obligation under the Code it is worth remembering that SIBA licensees should have by now appointed an “authorised representative.” The authorised representative can be an individual who is ordinarily or habitually resident in the BVI, a BVI company or a partnership formed under the laws of the BVI.