Directive - Concerto Alternative Alpha Inc. (2013-01-25)

Summary

This is an enforcement Directive issued by the BVI Financial Services Commission under section 40(1)(b) of the Financial Services Commission Act, 2001, amending an earlier Directive dated 15 August 2011. It applies to Concerto Alternative Alpha Inc. and a group of related public funds named in the notice, imposing enhanced reporting, cost restrictions, and remediation requirements.

• Weekly reporting: Each named fund must submit to the Commission, weekly, detailed information on portfolio assets and values, cash balances, explanations of portfolio value changes over US$500,000, liabilities, subscription and redemption schedules, unpaid redemption requests, payments and expenses (with supporting invoices), investor complaints, legal proceedings, and any regulatory investigations or actions by other regulators.
• Fee freeze: The funds must cease and desist from paying all fees and expenses except management fees, load fees, entry fees, exit penalties, Bloomberg fees and in-house legal costs, and except fund administration, brokerage/custody, audit and legal service fees paid without the Commission's prior written approval.
• Cost discontinuation: Funds must stop incurring administrative and operating costs of their investment manager, investment adviser or other functionaries/third-party service providers, including office costs, corporate accommodation, IT fees, and other administrative expenses.
• New fee structure: Each fund must develop, by 31 March 2013, a fee structure (including a compensation scheme for the investment manager) consistent with current industry practice and approved by the Commission, and implement it within a period the Commission directs.
• Governance evidence: Funds must provide the Commission with copies of directors' and members' resolutions approving the new compensation scheme or fee structure.
• Prospectus amendment: Funds must amend their prospectuses to remove references to accrual/payment of administrative and operating costs of the investment manager/adviser or other functionaries, and to add enhanced disclosure on fees and expenses, related-party services/contracts (including those involving Castlestone Management Incorporated), conflicts of interest, and any other disclosure required under the Public Funds Code, 2010.

The Directive is a targeted enforcement measure against the named funds rather than a general rule of industry-wide application, though it illustrates the type of remedial conditions the Commission may impose on public funds under section 40(1)(b).

Key obligations

• Submit weekly reports to the Commission covering portfolio assets/values, cash balances, large portfolio value changes, liabilities, subscriptions, redemptions (paid and unpaid), payments/expenses with invoices, investor complaints, legal proceedings, and other regulators' actions, until directed otherwise.
• Cease paying fees and expenses except the specifically permitted categories, and obtain prior written Commission approval for fund administration, brokerage/custody, audit and legal service fees.
• Discontinue incurring specified administrative and operating costs of the investment manager, adviser or other service providers.
• Develop a Commission-approved fee structure (including investment manager compensation scheme) by 31 March 2013 and implement it within the period the Commission directs.
• Provide the Commission with copies of directors' and members' resolutions approving the fee structure or compensation scheme.
• Amend the fund's prospectus to remove references to accrual/payment of certain administrative costs and to add enhanced disclosure on fees, related-party services, conflicts of interest, and Public Funds Code requirements.

Applies to

public funds, investment business licensees

Deadlines

• commencing on 30th June 2011, weekly, until directed otherwise: Weekly submission of detailed fund reporting information to the Commission.
• no later than 31st March, 2013: Deadline to develop a Commission-approved fee structure and compensation scheme for the investment manager.