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Electronic Products
Business to Business Case Study
- Electronic Products
Consumer Case Study
- Physical Products
Business to Business Case Study
- Physical Products
Consumer case Study
- Offshore Corporate
Functions Case Study
Saxon Brothers
is a private bank established in the mid-19th
century with branches in London and New York.
In the late 20th century the available range
of investment opportunities and techniques expanded
very rapidly, and this proved challenging for
Saxon Brothers, as its high-net-worth investors
became more sophisticated and alternative types
of investment appeared offering higher rates
of return.
During the 1980s
and 1990s Saxon Brothers responded to the demand
for innovative investment vehicles by creating
a number of managed funds. By the mid '90s the
fund management subsidiary (Saxon Trust Group)
had become by far the most important part of
the firm, with a large array of unit trusts
and other funds.
Like many other
fund managers, Saxon Trust reacted to the remorseless
increase in levels of taxation by creating offshore
funds for its clients, who were themselves increasingly
footloose and fancy free, in a strictly financial
sense of course. Initially Saxon used Luxembourg
to list and domicile its offshore funds, for
the standard reasons: because Luxembourg is
an EU member, public marketing of funds is allowed
in the EU, while at the same time there is no
withholding tax on income from the funds.
The New York branch
of Saxon Brothers behaved rather differently,
using limited partnership structures to channel
client assets into different types of investment
as fashions changed during the 80's and 90's.
Unlike London, the New York branch did not develop
a large business in public mutual funds, preferring
to remain within the less-regulated and more
flexible territory available to funds with limited
numbers of participants. Specifically, Saxon
Brothers New York did not venture into offshore
funds, largely because of 'The Ten Commandments'
- the set of IRS rules which prohibited offshore
funds from carrying out almost any activity
at all inside the US. Saxon was not prepared
to relinquish detailed control and management
of its clients' assets into what it saw as being
doubtful custody.
In the mid- to
late 90s, several developments took place which
caused Saxon to rethink its business model:
- It became clear
that the Internet would provide a new marketing,
sales and even operating channel for banks
and financial institutions; several of Saxon's
main competitors launched Internet marketing
sites.
- Saxon Trust
Group began to have misgivings about the use
of Luxembourg for offshore funds for its high-net-worth
clients; the trend of EU regulation was ever
tighter; and the shadow of an EU withholding
tax began to fall across the investment fund
sector.
- In 1997 the
IRS repealed The Ten Commandments, allowing
virtually the whole of an offshore fund's
administration to be carried out onshore;
and the 'check-the-box' rules permitted an
incorporated offshore fund to be taxed as
if was a limited partnership from the point
of view of US investors.
A joint US/UK Saxon
working party was set up and decided early on
that the Internet would allow world-wide marketing
of offshore funds, and that the firm should develop
a strong offshore presence in a suitable jurisdiction.
Saxon wanted to continue to list its funds whenever
possible, as part of gaining the greatest possible
degree of marketing freedom in highly-regulated
target countries. Given Saxon's predominantly
US and European client base, time-zone considerations,
and growing fears about the EU's tax regime, the
choice came to be between Bermuda and the Caymans.
Both jurisdictions
have strong mutual fund industries with excellent
infrastructure; the listing requirements and
regimes are similar; both are carried on Bloomberg
so that individual funds have their own stock
tickers, with daily updates to NAVs; importantly,
both exchanges provide Internet services, with
home pages provided free of charge for each
listed fund, and both (with the Caymans rather
in the lead) are implementing mutual fund marketing/operational
support packages on their servers which will
give fund administrators direct access to trading
details, NAV calculations and which will allow
direct dealings with existing and prospective
subscribers.
Finally the choice
came down to a regulatory issue: which jurisdiction
would give Saxon the greatest freedom to market
funds in its existing markets? The winner by
a short head was Bermuda, which is both a member
of the OECD (via the UK), an SEC Designated
Offshore Securities Market, and was granted
UK Designated Investment Exchange status in
August 2005.
So Saxon decided
to start a new fund management company in Bermuda.
According to its normal practice, its partners
would be the sponsor (owner) of the funds as
well as the manager, and a new holding company
would be set up in Bermuda with separate ownership
from the existing London and New York branches,
gaining freedom from taxation for Bermudian
profits for the owners. Corporate and legal
arrangements for the new venture involved a
number of separate stages:
- The setting
up of a Bermudian holding company and documentation
for the first six funds was undertaken by
a Bermudian law firm with links to Saxon's
London lawyers;
- Listing of
the funds was the responsibility of a Bermudian
brokerage, again previously known to Saxon
through its London brokers;
- Arrangements
for custody and fund administration were made
with the BerCo group, which had already developed
strong Internet links with the Bermudian Stock
Exchange, and which already administered a
large number of Bermudian investment funds.
A long list of administrative tasks could thus
be passed over to the Internet-based administrator,
gaining substantial cost savings; these tasks
include:
- Download brokers'
trades and pass to custodian
- Calculate NAV
on demand and in real time
- Update portfolio
holding and dividend records
- Receive clients'
and manager's transaction requests; pass to
broker
- Update subscriber/unit
holder records, produce advice, transaction
notes
- Conduct routine
and ad hoc portfolio analysis and performance
measurement
- Maintain accounting
records, calculate and debit fees
- Feed derivative
action-planning systems
- Feed VAR and
other risk-measurement systems
Although BerCo
offered to outsource marketing and sales activities
as well, Saxon decided to set up an office in
Bermuda for these purposes. Saxon therefore
set up its own web-site on BerCo's server with
their help and constructed a sales and marketing
presence on the Internet using the services
of a London-based site-design agency and an
e-business consultancy firm which procured and
knitted together the various systems tools that
were needed, according to Saxon's specification.
Internet clients can set up payment either by
credit card or by direct debit, using digital
signatures, or can choose to sign up off-line
by fax or mail. All normal communication between
clients and Saxon including requests for trading
of fund shares and valuation can take place
though the Internet site. Sales that take place
on Saxon's own site are passed through to the
administrator's site for detailed processing
at an early stage.
The first batch
of six Bermudian funds were launched in late
1999, using Saxon's new Internet site in addition
to traditional methods of direct mail and coupon
advertising in Saxon's established markets.
Early results showed that a significant proportion
of new sales were being generated through the
Internet site, and that even those clients who
had subscribed off-line were mostly choosing
to switch administration of their accounts onto
the Internet site. However it was clear that
conventional methods of marketing were going
to remain dominant for some years to come.
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