Bermuda: Law of Offshore
The Bermuda Monetary Authority (Collective Investment Scheme Classification) Regulations 1998 (known as the CISC Regulations) gathers together existing statutory and voluntary rules for fund management in Bermuda.
Upon authorization, funds are classified as one of the following:
Institutional Funds are targeted essentially at institutional/sophisticated investors and are restricted to qualified participants or those investing at least BMD100,000.
They are required to have an officer, trustee, or resident representative in Bermuda, being a person who has access to the books and records of the fund.
Funds qualify for classification as Administered funds if they have an administrator licensed under Part III of the Act and:
Require participants to invest a minimum amount of BMD50,000; or
A Fund listed on a Stock Exchange recognized by the Authority for the purpose of Section II of the Act
Both Institutional and Administered funds are subject to a less comprehensive regulatory and supervisory environment because of sophistication and expertise of their investors and reflecting the other safeguards in place. The majority of Bermuda funds fall into this category.
A fund qualifies for classification as a Standard fund if it does not fit within any other class of fund. Such funds are not restricted to sophisticated investors and may include a more significant retail element among their investors. Consequently they are subject to more comprehensive and regulation and supervision.
Segregated Accounts Companies
An Investment Fund may make use of the Segregated Accounts Companies Act 2000 and take the form of a segregated accounts company. See the Investment Fund Guidelines for detailed provisions regarding certain requirements applying to funds making use of this option.
The Bermuda Monetary Authority (BMA) regulates the collective investment industry and vets new applicants to determine their qualifications and experience. A draft prospectus is required as well as evidence of the investment experience of the fund manager and details of the promoters' background. The BMA does not necessarily expect promoters to be internationally-recognised investment houses, and will normally give permission fairly readily if it thinks that a fund will be honestly and competently managed.
The promoters can either form their own management company for the scheme or select an existing Bermudan management company. A Bermuda bank must be appointed as custodian although sub-custodians are permitted. Similar regulations apply to the functions of registrar and transfer agent. The entry into force in 2000 of the Companies Amendment Act meant that the minimum capital requirement for Bermuda mutual funds was reduced from USD12,000.00 to USD1.00. See Offshore Legal and Tax Regimes for details of suitable corporate forms.
The Investment Business Act 2003, which came into force at the end of January, 2004, provides that any person undertaking investment business in or from Bermuda must hold a licence from the Bermuda Monetary Authority (BMA), unless they qualify for an exemption. The IBA also prohibits persons from entering into an investment agreement with an individual in the course of or in consequence of an unsolicited call made on that person.
Entities with no physical presence in the jurisdiction will not be required to obtain an investment business licence.
The Act prohibits persons from entering into an investment agreement with an individual in the course of or in consequence of an unsolicited call made on that person.
An important factor in the increasing numbers of individual investment portfolios has been the growing popularity with scheme promoters of the use of Bermuda Segregated Accounts Companies (SACs). By the end of 2004, 29 Bermuda SAC vehicles were classified as collective investment schemes with 159 individual segregated accounts, as compared to nine SAC vehicles and 43 individual segregated accounts at the end of 2003.
A number of initiatives were launched by the BMA during 2004 aimed at streamlining the incorporations process for schemes. The Authority issued a guidance note on the processing of scheme incorporation and classification applications. This clarified the arrangements and in particular confirmed that schemes can be incorporated on a fast-track process prior to completion of the detailed prospectus review and classification approval that is required in order to operate as a scheme.
The effect is to permit the promoters to complete preparations for the scheme to begin operations by opening bank accounts and making other administrative arrangements that are necessary before a scheme opens to investors. No scheme can begin accepting subscriptions or operating as a scheme until it obtains either classification under the CIS Regulations or exemption from them.
In a further important streamlining initiative, the Minister of Finance also agreed, after detailed consultations with industry and the Authority, that collective investment schemes should be designated as unrestricted companies under the Companies Act. The effect is to permit delegation to the Authority of the Ministerial consent to incorporation that is required. The necessary changes to the Companies Act were being introduced in 2005. This policy change is intended to make the incorporation process more efficient without in any way diluting Bermuda’s rigorous vetting and approval standards for schemes.
2004 also saw continued preparatory work for the proposed new Collective Investment Schemes Act. The new legislation is intended to expand the definition of collective investment schemes beyond mutual funds and unit trusts to include certain other corporate vehicles and limited partnerships used for investing funds on a pooled basis; to introduce a licensing regime for fund administrators; and to provide the Authority with enhanced information, intervention and enforcement powers.
In December 2006, the Bermuda International Business Association (BIBA) soundly endorsed the passing in Bermuda’s House of Assembly of the eagerly anticipated Investment Funds Act 2006, which more clearly outlines how public funds are regulated and refines the framework for non-public, institutional funds.
The Act has the following key features:
- There is a clearly defined distinction between public (retail) funds and institutional or non-public funds.
- The powers to exclude funds from particular requirements are more refined so that there is certainty as to what minimum requirements must be met by fund operators.
- Exclusions from fund regulation are more clearly defined so funds of a ‘private nature’ are not captured.
- Under previous legislation, partnerships were not covered but this gap has been now closed and they are included, as well as mutual fund companies and unit trusts.
- Fund administrators are now regulated and licensed.
- A new class of funds, known as “administered funds” has been introduced. With the introduction of licensed administrators, it is now possible to register funds under this class with the level of regulation adapted, on the grounds that the administrator is based in Bermuda and subject to codes of conduct and fund rules that will ensure the proper level of governance of the fund.
- There is clearer definition of the rules for the appointment of service providers and delegation of powers.
- A new section clearly enables unit trustees to hold property in segregated accounts, and defines how these accounts will be managed. This affords trustees the same benefits as companies operating with segregated accounts.
- The rules for prospectuses of funds are clearly set down and distinguished from the general rules under the Companies Act of 1981.
- The powers of the BMA to require more information and to inspect are enhanced.
- The requirements and powers for sharing of information with other regulators are more clearly defined.
- Similar to other financial institutions, a right of appeal to an appeal tribunal was introduced.
Deputy Premier, Paula Cox, who successfully piloted the Act to unanimous approval by the House of Assembly, is confident that the legislation enhances Bermuda’s abilities and reputation as a premier fund jurisdiction.
Cox commented that Bermuda had to streamline the incorporation process for investment funds and eliminate unnecessary administrative procedures to augment Bermuda’s competitive edge by bringing more clarity and certainty to the authorization process.