Saxon Brothers is a private bank founded in the mid-19th century, with branches in London and New York. By the end of the 20th century, the range of investment opportunities and techniques available had rapidly expanded, which proved challenging for Saxon Brothers, as its wealthy investors became more sophisticated and alternative investment types offering higher rates of return emerged.
In the 1980s and 1990s, Saxon Brothers responded to demand for innovative investment vehicles by creating several managed funds. By the mid-1990s, the fund management subsidiary (Saxon Trust Group) had become by far the most important branch of the company, with a wide range of mutual funds and other funds.
Like many other fund managers, Saxon Trust reacted to the inexorable increase in taxation by creating offshore funds for its clients, who were themselves increasingly free and independent, in the strict sense of the term, of course. Initially, Saxon used Luxembourg to list and domicile its offshore funds, for the usual reasons: Luxembourg being an EU member, public marketing of funds is permitted there, and income generated by these funds is not subject to any withholding tax.
Saxon Brothers’ New York branch adopted different behavior, using limited partnership structures to direct its clients’ assets toward different types of investments, following the trends of the 80s and 90s. Unlike London, the New York branch did not develop significant activity in public mutual funds, preferring to remain in the less regulated and more flexible territory of limited participant funds. More specifically, Saxon Brothers New York did not venture into offshore funds, largely due to the “Ten Commandments,” the set of IRS rules prohibiting offshore funds from conducting virtually all of their activities in the United States. Saxon was unwilling to abandon detailed control and management of its clients’ assets for what it considered dubious custody.
Between the mid and late 1990s, several events led Saxon to rethink its business model:
- It became evident that the Internet would offer a new marketing, sales, and even operational channel for banks and financial institutions; several of its main competitors launched online marketing sites.
- The Saxon Trust group began questioning the use of Luxembourg for offshore funds intended for its wealthy clients; European regulation became increasingly strict; and the shadow of European withholding tax began to loom over the investment fund sector.
- In 1997, the IRS repealed the Ten Commandments, thus allowing virtually all administration of an offshore fund to be performed onshore; and the “check-the-box” rule allowed an offshore fund incorporated as a company to be taxed as a limited partnership from the perspective of American investors.
- A joint US/UK working group was created and quickly decided that the Internet would enable global marketing of offshore funds and that the company should develop a strong offshore presence in an appropriate jurisdiction.
Saxon wanted to continue listing its funds as soon as possible, in order to obtain the greatest possible marketing freedom in highly regulated target countries. Given its predominantly American and European clientele, time zone constraints, and growing concerns about the EU tax regime, the choice fell on Bermuda and the Cayman Islands.
Both jurisdictions have a solid mutual fund sector and excellent infrastructure; listing conditions and regimes are similar; both are listed on Bloomberg, allowing each fund to have its own stock ticker, with daily net asset value updates. Importantly, both exchanges offer Internet services, with free home pages for each listed fund, and both (the Cayman Islands being somewhat ahead) implement marketing and operational support solutions for mutual funds on their servers, which will allow fund administrators to directly access transaction details and net asset value calculations, and deal directly with existing and potential subscribers.
Ultimately, the choice came down to a regulatory issue: which jurisdiction would grant Saxon the greatest freedom to market funds in its existing markets? Bermuda won by a narrow margin, being an OECD member country (via the United Kingdom), designated as an offshore securities market by the SEC, and having obtained UK designated investment exchange status in August 2005.
Saxon therefore decided to create a new fund management company in Bermuda. In accordance with its usual practice, its partners would be the sponsor (owner) of the funds as well as the manager. A new holding company would be created in Bermuda, separate from its London and New York branches, thus allowing owners to be exempt from tax on Bermudian profits.
The legal and corporate arrangements for the new business involved several distinct steps:
- The creation of a Bermudian holding company and documentation of the first six funds were handled by a Bermudian law firm in conjunction with Saxon’s London lawyers;
- Fund listing was entrusted to a Bermudian brokerage firm, already known to Saxon through its London brokers;
- Fund custody and administration arrangements were concluded with the BerCo group, which had already developed strong Internet links with the Bermuda Stock Exchange and was already administering a large number of Bermudian investment funds.
A long list of administrative tasks could thus be entrusted to the online administrator, resulting in substantial savings; these tasks include:
- Downloading broker transactions and transmitting them to the custodian
- Calculating net asset value on demand and in real time
- Updating portfolio and dividend records
- Receiving transaction requests from clients and managers; transmitting them to the broker
- Updating subscriber/unit holder registers, producing advice and transaction notes
- Performing regular and ad-hoc portfolio analysis and performance measurements
- Maintaining accounting records, calculating and debiting fees
- Feeding derivative product action planning systems
- Feeding VAR and other risk measurement systems
Although BerCo also offered to outsource marketing and commercial activities, Saxon decided to open an office in Bermuda for this purpose. Saxon therefore created its own website on BerCo’s server, with their assistance, and established a commercial and marketing presence on the Internet by using the services of a London website design agency and an e-commerce consulting firm, which provided and assembled the various necessary IT tools, according to Saxon’s specifications.
Internet clients can settle their purchases by bank card or direct debit, using digital signature, or register offline by fax or mail. All usual communications between clients and Saxon, including requests for fund share trading and valuation, can be conducted via the Internet site. Sales made on Saxon’s site are transmitted to the administrator’s site for detailed upstream processing.
The first batch of six Bermudian funds was launched at the end of 1999, via Saxon’s new Internet site, complementing traditional direct mail and coupon advertising methods in Saxon’s established markets. Initial results showed that a significant portion of new sales was generated via the Internet site, and that even clients who had registered offline mostly chose to transfer management of their accounts to the Internet site. However, it was clear that traditional marketing methods would remain dominant for several more years.
