Monday, February 19, 2007

BVI Securities and Investment Business Act could be enacted this year

There is wide range of regulated financial services available on the BVI: insurance, banking and trust business, mutual funds - each of them is regulated by particular Division of Financial Services Commission - Banking and Fiduciary Services; Corporate Services; Insolvency Services; Insurance; Investment Business. Also there is wide range of regulated entities - registered agents, insurance managers, agents, brokers, accountants, auditors, insolvency practitioners, mutual funds’ administrators and managers etc., all of them being controlled by the Financial Services Commission.

However there are still some niches of financial services that need to be taken under control in the BVI. One of them is forex exchange trading and broker dealing business. It is expected that Investment Business division could take under control these businesses, and currently the Securities and Investment Business Act is being drafted by the BVI authorities. It could be enacted by the third quarter of 2007.

Another financial service sector that should be regulated by the enactment of the Securities and Investment Business Act is hedge funds. The BVI regulator currently has almost no means of getting detailed information on hedge funds that are located in different countries, and has little means how to control them. Currently there are more than 2.5 thousand hedge funds registered in BVI. The jurisdiction has become especially popular for registering funds by US and European fund managers, because of the possibility for non-US and non-European investors to avoid paying taxes on their non-US and non-European investments in their domicile countries.

In accordance to the newly drafted legislative act, funds registered in the BVI could be required to conduct regular audits, have 2 directors and appoint “whistleblowers” to root out fraud. Ruth Chadwick, the investment business director at the Financial Services Commission, has said the legislation was being drafted to keep up with hedge funds investing in "exotic, difficult to value products". She added, “There is much more room for fraudulent-type activity in a professional fund because of this lack of clarity".

Funds would also be required to have two directors, independent of each other, to increase transparency and accountability. Currently there is no such requirement.

Some words about “whistleblower” as far as this doesn’t exist in the US. The act will probably include a clause creating an “authorized representative of a hedge fund in the BVI. This person would act as a whistleblower informing on the facts of breaking the terms of the fund's public placement memorandum, or on detecting any improper asset valuation or trading.

Currently this is quite a questionable idea as far as several lawyers in the BVI are warning that whistleblowing requirement, if not handled carefully, could have a chilling effect on the business in the territory.

Let’s see what will be included in the BVI Securities and Investment Business Act that we will hopefully get presented in 3rd quarter of this year. Notwithstanding the final version of the act, there is no doubt it is needed for the BVI to strengthen its positions in this niche of offshore financial services market, and to keep its popularity and high reputation.

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