Bermuda: Offshore Business Sectors
Investment Fund Management
The BMA's Regulatory Update for March 2012 revealed that the total net asset value of funds held in Bermuda decreased by 0.58% in the fourth quarter of 2011 from USD160.4bn to USD159.5bn. Compared to the previous year, net asset value in Q4 2011 decreased by 10.61%. The total number of funds fell by 28 to 872 over the same period.
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. In 1994, Bermuda introduced a Code of Conduct for Collective Investment Schemes, which although strictly speaking voluntary, amounted to the 'rule-book' of the sector.
In June 2004 the Bermuda International Business Association reported that strong gains in the collective investment sector in the latter half of 2003 were evidence that Bermuda had taken the right steps with recent economic and regulatory policy. The statement by BIBA was made in response to a report by the Bermuda Monetary Authority revealing encouraging year on year gains in the total net asset values of collective investment schemes in the third and fourth quarters of 2003.
Promoters of funds in Bermuda can either form their own management company for a 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 minimum capital requirement for a mutual fund used to be $12,000, but in 2000 was reduced to $1. This change allows a fund to issue a small number of Founder voting shares and a larger number of non-voting, redeemable shares (say, 10m at $0.001 each) while still remaining below the $12,000 level of authorised capital up to which the minimum fee of $2,200 (at the time of writing) is due.
See Offshore Tax Regimes for details of suitable corporate forms.
The UK Financial Services Act 1986 (UK) included Bermuda as a "designated territory". Mutual funds which have been certified as UK-class schemes by the Minister of Finance in Bermuda can apply in the United Kingdom for classification as "recognised schemes". The funds can then be promoted to the public in the United Kingdom in a similar way to UK authorised unit trusts. Such funds use the limited liability company form. Funds formed under trust are sometimes preferred for use in other parts of the world.
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.
Bermuda’s Finance Minister, Paula Cox pledged in April, 2005, to simplify the incorporation procedures for new investment funds in an attempt to increase the attractiveness of the jurisdiction to mutual funds and hedge funds. New funds will no longer need the Minister's permission to incorporate in Bermuda, nor will they be required to undergo the full classification process before incorporation.
The move brought Bermuda more into line with other offshore fund domiciles such as the Cayman Islands and the British Virgin Islands, both of which have been successful at attracting investment funds in large numbers.
A government statement indicated that the collective investment schemes will be designated as unrestricted companies under the Companies Act.
"There is a keen willingness by the Ministry to ensure that the right balance is struck so that there is the requisite regulatory oversight coupled with a need to ensure that Bermuda maintains its competitive position as a premier financial services jurisdiction," Cox noted.
Draft legislation was drawn up in 2005 intended to improve the quality of Bermuda's financial service providers and raise the level of protection for investors, known as the Collective Investment Schemes Act 2005 (CISA 2005). This culminated in the Investment Funds Act, passed in December 2006, which outlines more clearly how public funds are regulated and refines the framework for non-public, institutional funds.
The IFA 2006 was soundly endorsed by the funds industry representatives, including the Bermuda International Business Association.
“This is yet another example of the positive results of collaborative consultation between Bermuda’s private and public sector partnership," announced BIBA CEO, Cheryl Packwood.
She continued: "When the Ministry of Finance and the Bermuda Monetary Authority (BMA) commenced writing this Act, as is the policy in Bermuda, they asked for the input of the Financial Industry in reviewing and recommending pertinent changes or additions to it prior to presenting the Act before the House of Assembly."
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.
The Bermuda Monetary Authority published a consultation paper in May, 2010, with a view to aligning the regulatory framework for funds and fund administrators. The Amendment Act included the following:
- Definition of service provider to include auditors appointed to a fund.
- Requirement for exempted funds to appoint an investment manager, registrar, custodian and broker.
- Right of objection by the Authority to change of control of a fund.
- Right of appeal by person subject to Authority objection.
- 'Four eyes' provision for funds (a minimum criteria for licensing in the amendment provides that fund administration should be carried out by a minimum of two individuals to avoid excessive control).
The amendment came into force on December 22, 2010.