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panies give managers a useful tool to ponder
Key features of an SPC include
the fact that there is no separate
legal personality. <strong>The</strong> SPC is a
single legal entity within which
may be established various segregated
portfolios. Although each
segregated portfolio must be separately
identified it will not be a separate
legal entity from the company,
according to de Vries and May.
“Segregated portfolio companies
are going to be one of the main
areas of growth for <strong>hedge</strong> <strong>fund</strong>s,”
says Nigel MacPhail of Baker Tilly.
“We’re seeing more and more of it.”
According to MacPhail many of
the firm’s new clients are setting up
as SPCs. “With the old share classes
they all had cross-liability,” he says,
“with the SPC they can’t touch the
assets of the individual portfolios. I
expect we’ll see more of it.”
IDEAL HEDGE FUND VEHICLE
Kay Reddy, managing director
of Blenheim Fund Services (BVI)
Limited, says that SPCs “are the
ideal model for <strong>hedge</strong> <strong>fund</strong>s.
“With a normal <strong>fund</strong> of <strong>fund</strong>s
it invests in different products
and different portfolios. Now it’s
all one company with the assets
and liabilities of each cell distinct
from each other.” Reddy points out
that “a claim against one cell is not
against the whole <strong>fund</strong>.”
She thinks it will allow <strong>hedge</strong>
<strong>fund</strong>s to have “risky and non-risky
classes.” <strong>The</strong>re used to be umbrella
companies, through which <strong>fund</strong>s
were structured “but the SPC eliminates
the need for that,” she says.
She adds that “middle-tier investment
managers don’t want to set up
four or five <strong>fund</strong>s—they’d rather
set up four or five cells through a
segregated portfolio company.”
“We have clients who use them
when they are looking to trade different
strategies that have different
risk profiles,” says Simon Schilder,
partner at Ogier. “<strong>The</strong>y may be used
because there are a lot of <strong>fund</strong>s that
want to trade different things.”
He points out that the BVI SPC
vehicle has only been around
for about 18 months and is now
starting to grow faster.
Another requirement of the law
is that an SPC must include the letters
“SPC” or the words “segregated
portfolio company” in its name.
DIRECTORS’ DUTIES
In addition, the directors have a
duty to establish and maintain the
segregation of each segregated
portfolio’s assets from those of
other segregated portfolios and
also the general asset of the SPC,
according to de Vries and May.
When dealing with an SPC, a
third party is needed to establish
clearly which segregated portfolio
of the SPC it is dealing with and so
which of the relevant segregated
assets it has recourse against.
<strong>The</strong> advantages of an SPC over
traditional methods of creating
contractual legal divisions between
asset pools (such as setting up subsidiary
special purpose vehicles
and putting in place contractual
limited recourse provisions with
third parties) include greater legal
certainty, reduced complexity and
administrative costs savings. <strong>The</strong>
SPC is also now an internationally
recognised vehicle for both mutual
<strong>fund</strong>s and insurance companies,
which can provide greater comfort
to shareholders, according to de
Vries and May.
Another advantage of an SPC
is the concept of segregation of
assets and liabilities within one
legal entity. Under the BVI Business
Companies Act the assets and
liabilities of each portfolio within a
segregated portfolio company are
legally separate from those of the
other segregated portfolios.
Creditors of one segregated
portfolio only have recourse to the
assets of that specific segregated
portfolio and to any general assets
of the company (being the assets
not comprised in any segregated
portfolios) to the extent that the
segregated portfolio assets attributable
to such segregated portfolio
are insufficient. <strong>The</strong> segregated
portfolios of the company all reside
within the one legal entity. It is
important to note, however, that the
statutory segregation of assets and
liabilities have not yet been tested
by the courts of the British Virgin
Islands, de Vries and May point out.
CHOICE!
<strong>The</strong> introduction of the segregated
portfolio company structure into
British Virgin Islands law has
continued to improve the BVI’s
position as a jurisdiction of choice
for both mutual <strong>fund</strong>s and captive
insurance companies and the
number of SPC vehicles incorporated
in the BVI each quarter is on
the rise.
<strong>The</strong> British Virgin Islands International
Finance Centre’s Ortiz
notes in regard to captive insurance
business: “the segregated portfolio
companies legislation has undoubtedly
attracted more captive business
to the BVI.
“It provides an alternative for
organisations with similar businesses
and risks to form joint
ventures while segregating their
respective risks, assets and liabilities.
During 2006, a total of 10 SPCs
were licensed with 50 segregated
portfolios between them.”
NO PRECEDENT
De Vries says that the SPC has
never been tested by the courts and
that there is concern an onshore
court could try to apply its local
laws to the structure — say, if it
ended up in a New York court.
In a presentation to potential BVI
companies, Mark Chapman, partner,
Deloitte, said the SPC is appealing
to <strong>fund</strong> managers because it is just
one legal entity, with as many segregated
portfolios as it wishes and
with insolvency isolation for each
one. He also talked about the directors’
duties with SPCs.
He says that SPC directors in
other jurisdictions are personally
liable for misallocations between
portfolios. In addition, BVI SPCs
can invest from one portfolio into
another, albeit through a special
purpose vehicle (SPV), while most
other jurisdictions do not allow
owning shares in another portfolio,
even indirectly.
Other rules laid out in the SPC
legislation say that if the FSC considers
that the name, identification
or designation of a segregated portfolio
is misleading or undesirable,
it may by written notice direct the
SPC to change the name of the segregated
portfolio on or before the
date specified in the notice, which
can’t be less than 21 days after the
date of notice.
STRICT OVERSIGHT
<strong>The</strong> law also says that an SPC that
fails to comply with a notice issued
by the FSC under sub-regulation
(1) commits an offense and is liable
if convicted to a fine of $5,000.
In addition, an SPC shall, by
written notice in the approved form,
notify the Financial Services Commission
of any change in information
that it is required to submit to
the Financial Services Commission
under the regulations, within 14
days of the date that the information
changed.
<strong>The</strong> legislation also says that at
least one director of the company
must sign a declaration on behalf
of the board that: resolutions of
the directors have been passed
approving the registration of the
company as a segregated portfolio
company; that the company is solvent
and; that each proposed segregated
portfolio will, after the assets
of the company have been allocated
to the segregated portfolios, be solvent;
that the company has given
notice to members of its intention
to apply for registration as a segregated
portfolio company; and that
structuring
a copy of the offering document
for each of the initial segregated
portfolios that it is intended will be
created.
EMMA CHISIT?
Application fees for a <strong>fund</strong> that
wants to register as an SPC under
Section 135 of the Act is $1,000
for the company and $250 for
each segregated portfolio.
Application fees to create one or
more segregated portfolios under
regulation 6(1)(a) or regulation
6(1)(b) is $250 for each of the segregated
portfolios.
For the notification of the creation
of one or more segregated
portfolios under regulation 7(1)
of the Act and for each regulated
portfolio included in the notification,
the application fee is $250.
<strong>The</strong> initial fees that must be
paid under the Act include, when
the mutual <strong>fund</strong> is incorporated or
registered on or before 30 June of
any year, an initial fee on incorporation
or registration to be $1,000
for the company and $100 for each
segregated portfolio approved.
<strong>The</strong> initial fee that must be paid
when the mutual <strong>fund</strong> is incorporated
or registered on or after
1 July in any year is $500 for the
company and $50 for each segregated
portfolio.
<strong>The</strong> initial fee when approval is
granted to create one or more segregated
portfolios under regulation
6(1)(a) or regulation 6(1)(b) is
$100 when the creation of the segregated
portfolio is approved on or
before 30 June and $50 when the
creation of the segregated portfolio
is approved on or after 1 July.
<strong>The</strong> law states that the total initial
fees payable by a mutual <strong>fund</strong>
segregated portfolio company in
any year shall not exceed $10,000.
<strong>The</strong> annual fees for mutual
<strong>fund</strong> segregated portfolio companies,
which must be paid on or
before 31 March of each year following
the year of its incorporation
or registration is $1,000 for
the company and $100 for each
segregated portfolio in existence
as of 31 December of the previous
year. <strong>The</strong> total annual fee paid by
a mutual <strong>fund</strong> segregated portfolio
company may not exceed $10,000
in any one year.
<strong>The</strong> fees must be paid — and
there are late fee penalties to be
paid if they are not. A mutual
<strong>fund</strong> segregated portfolio company
that does not pay its annual
fee in full, on or before 31 March
in any year, must pay a penalty
of $250 for each month or part
thereof, that the fee or any part
remains outstanding.
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