Alternative Investment Management Association Representing the global hedge fund industry
Appleby Hunter Bailhache
Bermuda has recently approved a new regulatory regime for its investment funds industry, in the form of the Investment Funds Act 2006 (the Act). The Act was approved in December 2006 but came into force on 7 March 2007 and replaced the regime established under The Bermuda Monetary Authority (Collective Investment Scheme Classification) Regulations 1998 (the Regulations).
The Act has been welcomed by the industry. It deals with the authorisation and regulation of investment funds by Bermuda’s regulator, the Bermuda Monetary Authority (BMA) and introduces a new licensing regime for Bermuda administrators.
Scope of the Act
Although the Act kicks off with a wide definition of an investment fund, it goes on to limit its scope to those funds which take the form of a mutual fund company, limited partnership or unit trust which has been incorporated, formed and/or established in Bermuda. The Act excludes from its scope all closed-ended funds, as was the case, at least in relation to companies, under the Regulations. The regulation by the Act of partnerships set up as open-ended funds is new, as the Regulations covered only Bermuda companies and unit trusts. The Act, like the Regulations, sets out three categories under which funds must be authorised together with an exempted category. It further creates a new category of excluded funds, which it then excludes from its regulatory scope.
Classification categories under the Act
A fund can apply for authorisation under one of the following three categories;
1 - institutional funds – funds whose investors are “qualified participants” (defined in the Act as institutions or by reference to net worth and sophistication) or who each invest a minimum of US$100,000;
2 - administered funds – funds which appoint an administrator licensed under the licensing regime established by the Act and either require a US$50,000 minimum investment or are listed on a stock exchange recognised by the BMA and;
3 - standard funds – all other funds that do not fall within the institutional funds or administered funds categories.
Exempted funds are exempt from all regulation by the BMA under the Act. An application can be made to be an exempted fund by any fund which would otherwise have to have been regulated under the Act. This “exempted fund” category was originally introduced under the Regulations to allow any Bermuda fund holding such an exemption to be “out of scope” for Swiss purposes under the EU Savings Tax Directive. However, the availability of the exemption is not limited to funds desiring it for this particular purpose. The requirements for classification as an exempted fund are that it is only open to “qualified participants”; it is administered by an administrator recognised by the BMA; it has appointed an auditor and has an officer, trustee or representative resident in Bermuda with access to the fund’s books.
Private or Excluded Funds
The Regulations started from the premise that all open-ended funds were classifiable and a waiver was required for a fund of a private nature. The Act formally introduces the concept of a private fund, which is completely excluded from regulation and known as an “excluded fund”. The requirements are that there are no more than 20 investors and no offering to the public generally. This category can, where appropriate, be relied on by master funds in master feeder fund structures. Partnerships should consider whether they can benefit from this excluded fund category. Once set up, the fund should nevertheless notify the BMA that it is an excluded fund.
Position for funds classified under the Regulations
When the Act came into force, Bermuda’s funds previously categorised under the Regulations (where they were known as collective investment schemes) were grandfathered in. So, institutional schemes became institutional funds, standard schemes became standard funds and what were known as Section 3A exempted schemes under the Regulations, became exempted funds under the Act. The little-used category of recognised schemes offered by the Regulations has gone under the Act. Funds wishing to reclassify, for example, under the new category of administered funds, have 6 months to do so from the commencement date in March 2007.
Authorisation under the Act
The authorisation process under one of the three classification categories is not materially different to the process under the Regulations. To be authorised, a fund must prepare annual audited financial statements, appoint an investment manager, auditor, administrator and an independent, regulated custodian and a registrar to hold the register in Bermuda. Fund Prospectus Rules which have been issued by the BMA pursuant to the Act set out the information that must be contained in the fund’s prospectus. Fund Rules issued pursuant to the Act set out further requirements applicable to only standard funds. More clearly stated now is the availability of waivers to certain authorisation requirements, notably the appointment of a custodian when appropriate alternative arrangements are in place for safeguarding fund property, as frequently relied upon by feeder funds.
Ongoing obligations under the Act
The ongoing obligations for authorised funds to obtain the BMA’s consent to material changes to the prospectus and changes in service providers remain. A new annual fee has been imposed, payable by 30 April each year and running at US$750 for the institutional fund, the most common category of Bermuda fund. Each April, an exempted fund must file a notice with the BMA stating that it continues to qualify for the exemption and pay an annual fee.
Licensing of Administrators under the Act
The Act introduces a licensing regime for administrators based in Bermuda. There is one year from the March 2007 commencement date for the administrators to become licensed. The licensing process involves the submission of a business plan and compliance with certain minimum criteria; the administrator’s officers must be fit and proper persons and the administrator’s business must be conducted in a “prudent manner”.
Powers of the BMA
The BMA has the power to revoke a fund’s authorisation or an administrator’s licence under the Act. Alternatively it can issue directions to address any concerns it may have. Any fund or administrator aggrieved by the BMA’s decisions has the right to appeal to a Tribunal set up pursuant to the Act.
Ensuring that existing funds were grandfathered in to the new regulatory regime has made for a more easeful passing of the Act. Fund partnerships have to consider the need to be regulated; although many are likely to fall outside regulation as a result of being closed-ended or of a private nature. The regulation of fund partnerships brings Bermuda’s regulation in line with that of many other offshore jurisdictions, as does the licensing of administrators. Generally, however, the chief advantage of the Act is perceived in Bermuda to be the clarity and certainty it brings to the authorisation process and ongoing regulation, whilst allowing for the flexibility of its predecessor. It is for these reasons that it has been welcomed by the funds community both within Bermuda and internationally. Bermuda continues to be seen as one of the jurisdictions of choice for fund formation.