BERMUDA: INVESTMENT FUNDS

Bermuda Investment Funds

Collective investment schemes in Bermuda had assets worth in excess of $178 billion as of 2006. In recent years Bermuda has become a popular location for the registration of Japanese investment funds.

Bermuda has traditionally lagged behind the Cayman Islands in the number of new hedge funds that it attracts. Although both boast educated work forces, friendly tax regimes, and good communications infrastructures, Bermuda is seen as having stricter policies on expatriate work permits.

The Bermuda Monetary Authority (BMA) regulates the collective investment industry and vets new applicants to determine their qualifications and experience.

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 and is used on a de facto basis under the Bermuda Monetary Authority to govern most aspects of the setting-up and operation of investment funds.

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 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 to the United Kingdom authorities 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.

UK Recognised Schemes are of course listed on the Bermuda Stock Exchange and their shares or units can be traded via brokerages on the Stock Exchange system (see below). Some other types of fund are permitted limited distribution in the UK, while others are private 'closed-end' funds utilising limited partnership or 'limited life' company forms in order to provide tax transparency for US investors.

In 2000 The Companies Amendment Act took effect. Under the new law the minimum capital requirement for Bermuda mutual funds was reduced from US$12,000.00 to US$1.00. Before the amendment was introduced the minimum annual government fee payable was US$3,635.00 but under the updated legislation, it could be as low as US$1,780.00.

An amendment was also made to the Companies Act (1981) to indicate that the share premium paid for shares in Bermuda mutual funds are omitted from the fund's capital when calculating the annual fee. A further amendment made to Section 29 (1) of the Act allows for supplementary particulars to be filed when particulars in a fund's prospectus ceases to be accurate. This negates the previous requirement for Bermuda funds to annually re-file their prospectus with the Registrar of Companies which involved legal fees and administrative expenses.

The Investment Business Act 2003, which came into force at the end of January, 2004, provided 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.

In February, 2004, the Bermuda Monetary Authority proposed a new primary statute to regulate pooled funds, including a licensing system for fund managers, although from an institutional standpoint, the BMA noted that regulation will be “much lighter”.

Bermuda’s Deputy Premier, 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 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.

A government statement indicated that the collective investment schemes were to 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 (CISA 2005) was drawn up in that year to require Bermuda-based fund administrators to be in possession of a license unless otherwise exempted, allow the Bermuda Monetary Authority (BMA) to revoke the license of a fund administrator if it is deemed by the BMA that the minimum criteria have not been fulfilled, require fund administrators to maintain adequate accounting records, systems and controls and insurance coverage, and widen the legal definition of collective investment schemes.

In December, 2005, Finance Minister Paula Cox announced that certain funds registered with the Bermuda Monetary Authority which had been unintentionally caught by disclosure rules under the European Savings Tax Directive in Switzerland would be removed from its scope under amendments to fund regulations.

While Bermuda is not directly affected by the Directive, which seeks to facilitate the sharing of information about individuals' overseas savings income with their home states, funds domiciled in Bermuda can be adversely impacted if they have 'paying agents' located in EU member states or third party countries (such as Switzerland) that have signed up to the legislation.

However, Minister Cox confirmed that funds exempted from Bermuda’s Collective Investment Scheme Regulations 1998 would be out of scope for the purposes of the EUSD in Switzerland.

• 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.