Bermuda continues to exceed expectations at the forefront of the offshore world, demonstrating itself to be a flexible but intelligently regulated offshore centre with excellent service providers and depth of knowledge. The next chapter of business in Bermuda looks bright and ready to meet emerging challenges of the evolving global economy.
Amidst talk of global economic crisis, the dreaded fiscal cliff and continued thirst for new ways of raising capital, bettering yield, while at the same time lowering risk, Bermuda is a beacon of innovation and sophistication.
Bermuda is one of the world's leading international financial centres, being a dynamic jurisdiction of choice for insurance/reinsurance, funds, asset finance and international business. Bermuda has one of the highest sovereign debt ratings for an offshore jurisdiction of its size and is the world's third largest reinsurance market and home to around 950 insurance companies with total assets of US$524.7bn.1 It has an S&P sovereign foreign-currency rating of AA- Stable and a T&C assessment of AAA.2 In the second quarter of 2012, funds (including unit trusts) and segregated accounts companies had a combined net asset value of US$184.26bn.3 The global client base of the jurisdiction includes a majority of FTSE 100/Fortune 500 companies.
Bermuda has a well-established excellent reputation based on the jurisdiction's insistence on providing quality service and a strong commitment to its entrepreneurial heritage. Bermuda was recently named "Best Global Hedge Funds and Captive Insurance Destination 2012" by Global Banking and Finance Magazine. The Bermuda Monetary Authority (BMA) was also awarded the Best Regulatory Initiative of the Year 2012, a US Captive Award at the Captive Live USA Conference.
The acclaim that Bermuda has received is welldeserved and is the result of the efforts of its regulatory bodies working in partnership with both the Government and private sector to ensure Bermuda's continued competitiveness with other offshore and onshore jurisdictions. These efforts have been further recognised with Business Bermuda – an organisation working with Bermuda resident companies and government to develop and promote Bermuda internationally – being awarded the 'New Economy Award for Best Offshore FDI Facilities, Americas, 2012'.
Bermuda business trends to watch
Convergence of the insurance and funds sectors – alternative capital
Bermuda is well-known as the premier offshore (re)insurance jurisdiction, born predominantly out of its accessible and informed regulators, coupled with recognised legal and accounting expertise and innovation. This large concentration of insurers and re-insurers coupled with the number of fund managers domiciled in Bermuda, strategically aligned with industry efforts to find effective risk transfer mechanisms and solutions to constrained capacity, quickly pushed Bermuda into a leading position in the insurance linked securities (ILS) and related special purpose insurer (SPI) space. This is particularly interesting as the hedge fund sector increasingly turns its attention to ILS products to counter low returns and negative yields with a product designed not to be correlated to the markets.
During the second quarter of 2012, nine new SPIs were registered in Bermuda, including Everglades Re Ltd., the underwriting vehicle for Florida Citizens Property Insurance which sold US$750m in cat bonds for hurricane cover, the world's largest single-peril catastrophe bond deal to date.4 According to the Bermuda Stock Exchange (BSX), as at December 31, 2012, the launch of, inter alia, the specialist exchange traded fund Blue Capital Global Reinsurance Fund, raised the number of ILS listed on the exchange to 38, with an approximate market capitalisation of US$5.81bn.5 It is also interesting to note that there were 23 new collective investment vehicles listed as at the end of 2012.
Speed to market and cost are obviously key components when considering a jurisdiction, which factors have been recognised by the Government (see commentary below on key legislative changes), the BMA in both the creation of sensible SPI legislation and the halving of its registration fees forisland's competitive edge in this arena. Law firms on the island have also realised the need for speed and efficiency, whilst not sacrificing quality. Appleby (Bermuda) Limited, for example, has introduced a groundbreaking new package where, on certain conditions, a company can be incorporated on a disbursement only basis (i.e. no professional fees for the incorporation itself).
In discussing Bermuda as a marketplace for the convergence of the insurance and capital market space, it is important to consider the role of not just the regulators but also the exchange domiciled in Bermuda.
The BSX, established in 1971, is a full member of the World Federation of Exchanges and affiliate member of IOSCO. It is recognised by the US Securities and Exchange Commission as a "Designated Offshore Securities Exchange", by the UK Financial Services Authority as a "Designated Investment Exchange" (although not bound by the European Union Listings Directive or the US SEC regulations), by HM Revenue & Customs as a "Recognised Stock Exchange" and is an "Approved Stock Exchange" under Australia's Foreign Investment Funds taxation rules.
The BSX utilises a customised electronic trading system, which is fully automated, facilitating real time trading by trading members. Once executed, trade information is disseminated to Bloomberg and Reuters for distribution. In addition, for some 11 years, Bermuda has had a national securities depository.
The BSX has not only main board listings but also a mezzanine market which, similar to AIM in the UK, is an incubator listing permitting start ups and emerging companies to list on a more lightly regulated platform.
The BSX encourages growth and listings with quick turn around on applications (two days for comments to the draft prospectus) and is internationally recognised for non-onerous but commercially prudent oversight.
Islamic finance
The use of Islamic finance structures has expanded dramatically over the last decade. Bermuda through innovation and depth of ability is able to structure these types of transactions, (so characterised by, inter alia, interest free financial transactions, no fixed returns, risk sharing etc.), with efficiency. The Government continues to actively promote and encourage this area of the markets, and indeed has an existing relationship with the Gulf Cooperation Council (GCC).
Since 2010, global Islamic banking assets have increased from over US$860bn to over US$1.2trillion6 with the GCC increasingly becoming the centre of Islamic finance. Bermuda has been actively engaged with Islamic nations for several years and to date, Bermuda has signed double taxation agreements with both the State of Bahrain and Qatar, and TIEAs with Indonesia and Malaysia.
The unique considerations for Shari'ah compliant funds have been recognised by the BMA in their publishing of guidance notes on the subject, which consider the appointment, role and responsibilities of the Shari'ah Supervisory Board, indicating objectively that the regulator will have no supervisory responsibility over the supervisory board, acknowledging that this responsibility sits squarely with the fund's board of directors and investment manager.
The Fund Prospectus Rules 2007 require disclosure of a fund's material risks and in meeting these requirements the regulator would expect a Shari'ah compliant fund would provide commentary in the prospectus of how the board of directors (or equivalent) and investment manager would manage the fiduciary risks that may arise in complying with Islamic jurisprudence.7 The BMA has made it clear that it is not the authority's role to interpret Islamic financial jurisprudence.
As evidence of the recognition that Bermuda continues to view Islamic financing as relevant and important in the development of the jurisdiction, it is worth noting that accountant and audit firms, as well as and in conjunction with several of the law firms, have created specialised teams to assist in setting up and structuring Shari'ah compliant entities and structures.
New legislation
In the spirit of innovation and market leadership, there have been various changes to existing legislation in Bermuda over the last year. The most significant of these generally are the ability for a company to appoint only one director and the ability of a company to dispense with the need to hold annual general meetings. While such changes are not specifically aimed at an authorised fund, the changes do indeed demonstrate the fact that the jurisdiction listens to and is guided by industry in making these changes, which changes have been fully utilised by the larger groups of holding companies domiciled on the island, and indeed by a fund when the investment vehicle is in wind down and all investors have been fully redeemed.
Segregated accounts – new case law
Bermuda was one of the first jurisdictions to pass segregated accounts legislation enabling companiesto legally separate the assets and liabilities of one account from the assets and liabilities and from creditors of the other accounts within the same company. The Segregated Accounts Companies Act 2000 ("SAC Act") has several advantages over traditional routes to creating legal divisions between accounts. It also avoids issues of time, solvency and perfection in relation to charges.
In the context of mutual funds, the utility of legal segregation of accounts is obvious, as different programmes can be offered to investors under the same corporate structure. The SAC Act provides specifically that legally segregated accounts can be the account owner of another account, making it of particular relevance to umbrella structures and allowing for a master/feeder structure to exist within the same company, while still affording each class the same limited liability that would be obtained if separate corporate bodies were used for each category of investor.
A number of specific provisions have been included in the SAC Act in order to facilitate the use of legislation for funds (simplifying the redemption of shares and the payment of dividends or other distributions).
The Bermuda courts have only recently considered the SAC structure and the statutory segregation of accounts established by the SAC Act has been consistently upheld.
The New Stream8 case is the leading SAC case in Bermuda and has provided useful insight into the interpretation of the SAC Act. A Bermuda segregated accounts mutual fund company carried out a restructuring in response to a liquidity crisis. The restructuring had the effect of varying the rights and obligations of the segregated accounts without express consent from all of the segregated account owners. The aggrieved account owners successfully argued that the restructuring plan was invalid under Bermuda law and had a receiver appointed on just and equitable grounds.
In coming to its decision, the Bermuda court looked to the company's bye-laws, relevant loan agreements and the prospectus but placed the most emphasis on the SAC Act. The generous interpretation of key terms in the SAC Act highlighted the Bermuda court's willingness to preserve the beneficial interest of the segregated account owner.
New Stream reaffirms that when dealing with segregated account companies, it is imperative, in order to preserve the fundamental segregation concept, that the governing instrument is clear and complete, that the bylaws are carefully drafted (particularly if it is intended to empower thedirectors to act without owner consent) and that Bermuda legal advice is sought both at the creation of the segregated account company and in the event of a complex and substantial restructuring.
Overview of Bermuda's financial services industry
The Investment Funds Act 2006 (IFA), the Investment Business Act (IBA) and the Companies Act 1981 provide the framework for regulation and supervision of the funds and securities industries.
The IFA regulates open-ended funds incorporated in Bermuda and if not exempted or excluded under the IFA, provides for four classes of investment funds:
institutional;
administered;
(c) specified jurisdiction (allows for investment by Japanese retail funds); and
standard.
All funds authorised under the IFA must appoint an investment manager, who does not need to be situated in Bermuda. To the extent an investment manager is changed, the BMA's prior consent must be obtained. In considering an application made to the regulator for an investment manager, the promoters must demonstrate to the BMA's satisfaction the investment manager's experience and expertise.
Ultimate management of a Bermuda incorporated fund is carried out by the board of directors/general partner/trustee, depending on the type of entity. Investment management decisions are usually delegated to the investment manager (who does not generally owe a direct contractual duty under Bermuda law to the investors).
The investment management agreement will set out details of the manager's duties, fees and commissions, the method by which conflicts of interest are to be resolved, segregation of client assets and the duty of the investment manager to ensure that its own deals are not aggregated with client deals, namely "piggy-backing". An investment manager remains responsible for the performance of services by any sub-adviser. Further duties may be imposed by the IBA which imposes specific fiduciary duties if subject to the licensing regime promulgated thereunder.
The IBA regulates persons carrying on investment business in or from Bermuda if such person carries on investment business from a place of business maintained by such person in Bermuda. Generally speaking, a licence would only be required if the investment manager has a physical presence in Bermuda, occupying premises for that purpose, at which it employs staff and pays salaries and expenses in connection with that business. The IBA allows persons to whom the requirement for a licence would otherwise apply to be exempt if they fall within the scope of the Investment Business (Exemptions) Order 2004. The IBA provides a minimum criteria for licensing, expressing that controllers and officers of an "investment provider" (which would include an investment manager) must be a fit and proper person to hold the particular position which he holds. In determining whether a person is a fit and proper person, the BMA will have regard to his probity and to his competence and soundness of judgment for fulfilling the responsibilities of that position. For example, the BMA will review and have regard to the previous conduct and activities in business or financial matters of the person in question, to any evidence that he has committed an offence involving fraud or other dishonesty, engaged in any business practices appearing to the BMA to be deceitful, oppressive or otherwise improper etc.
Application for a full licence can be dealt with in approximately 10-12 weeks. The investment business regime is based on a risk-based approach.
International Initiatives
The Foreign Account Tax Compliance Act, the Dodd-Frank Act and the EU Alternative Investment Fund Managers Directive (AIFMD), which subjects managers of alternative investment funds to regulation in the EU, create challenges for the entire offshore world, including Bermuda. Increased exposure to foreign regulators, who, it appears, will be able to make demands to see documentation, which it is envisioned will have a tangible impact on systems, controls and costs. Although no-one can with any certainty accurately predict the effect of the AIFMD, committees are in place to effectively respond and manage the potential and realised effect of AIFMD before implementation in 2015 or earlier and Bermuda is strengthening its regulations to satisfy global regulatory agencies.
Government, the regulators and industry are actively working together to promote a beneficial environment for growth of the asset management industry. The Government established a taskforce to promote Bermuda as an asset management jurisdiction. Legislation is constantly under review to ensure that it is as nimble and efficient as possible so that it provides Bermuda with effective market regulation whilst ensuring that it is not hindering business. Bermuda remains strong and poised to respond to challenges presented in the global marketplace.
Footnotes
1. As at December 31, 2010, figures released by the BMA on February 21, 2012
2. Standard & Poor's Sovereign Ratings and Country T&C Assessments December 21, 2012
3. BMA Regulatory Update November 2012
4. BMA Regulatory Update November 2012
5. BSX 2012 Year-End Report
6. Business Bermuda Islamic Finance Report; 'Bermuda speeds the Islamic finance revolution 2012'
7. BMA Islamic Collective Investment Schemes Guidance Notes
8. BNY AIS Nominees & Gottex ABL (Cayman) Ltd v New Stream Capital Fund Ltd [2010] Bda L.R. 34
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
