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Draft BVI Public Funds Code, 2010

Ross Munro

The BVI Financial Services Commission (FSC) recently concluded public consultation on the draft Public Funds Code 2010, which is likely to be enforced later this year or early 2011. The Code will apply to all public funds registered under the Securities and Investment Business Act, 2010 (Siba). The Code is intended to make the BVI's regulatory and supervisory environment more attuned to the new standards called for by the likes of the G20, IMF and Iosco.

The Code will, when effective, have the force of law. Breach of the Code by a public fund may result in enforcement action being brought by the FSC but will not amount to an offence actionable in the courts.

The following is a summary of the provisions of the draft Code released for public consultation in June 2010.

High-level principles

The Code sets out four principles by which a public fund must conduct its business. These are: integrity, management and control, investors' interests and relationship with commission

The Code is designed to give practical effect to the principles. The explanatory notes provide that a public fund is responsible for applying the principles to its particular circumstances which may require adopting higher standards than is set out in the remainder of the Code to avoid being in breach of the principles.

The Code requires that a public fund prospectus shall not contain any matter that is "unfairly prejudicial to investors generally or to any class of investors". The explanatory notes contain statements regarding the ability of a public fund to amend its terms without shareholder approval.

A public fund must apportion responsibilities clearly between its governing body (ie, the board of directors) and its functionaries and establish appropriate, regularly reviewed systems and controls. A public fund must have an adequate number of directors who are capable of independent judgment and have sufficient knowledge to ensure that the board is able to fulfill its responsibilities.

A public fund shall establish clearly documented policies, appropriate procedures, systems and controls which shall be effectively communicated to its functionaries. These shall include policies and procedures for the identification and management of conflicts of interest.

The custodial agreement must provide for the appropriate segregation of fund property and adequate measures taken by the custodian to ensure its safekeeping

A public fund shall have appropriate, clearly documented, policies and procedures for the issue and redemption of fund interests consistent with those set out in its constitutional documents and the prospectus.

A public fund shall have appropriate, clearly documented policies and procedures for the valuation of fund property. The valuation policy shall be reviewed whenever anything occurs that affects its validity and otherwise annually. The persons controlling a public fund's investment function must be functionally independent of those controlling the valuation process and there should be (where appropriate) segregation of responsibilities between the people responsible for the process of valuing the fund property and those responsible for calculating the NAV to ensure independence in the application of the valuation policy. If the manager is involved in the valuation process this must be fully disclosed in the prospectus.

A public fund is to keep adequate and orderly records readily retrievable in the BVI including a retention policy setting out the period of time, method of storage and means of accessing those records.

A public fund is to disclose to the Commission any matter that might reasonably be expected to have a "significant regulatory impact" including, without limitation, suspension of valuations, dealings or redemptions; any matter that could impact on the ability of the fund to continue to carry on business; any relevant incidence of fraud or other criminal activity.

Disclosure to Investors

A public fund is to give notice to investors of any change to investors' rights that investors are not required to approve. Whenever practical, such notice should be given prior to the change.

The foregoing is for general information purposes only and not intended to be relied upon for legal advice in any specific or individual situation.

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