Bermuda: The International Comparative Legal Guide To: Alternative Investment Funds 2017

Last Updated: 21 June 2017
Article by Jonathan Betts and Ariane West

1 REGULATORY FRAMEWORK

1.1 What legislation governs the establishment and operation of Alternative Investment Funds?

The establishment and operation of investment funds in Bermuda ("investment funds" or "funds") is governed by:

  • the Companies Act 1981 (the "Companies Act");
  • the Investment Funds Act 2006 (the "IFA");
  • the Fund Prospectus Rules 2007 (the "Fund Prospectus Rules"); and
  • the Fund Rules 2007 (collectively with the Fund Prospectus Rules, the "Fund Rules").

The Bermuda Monetary Authority (the "BMA") is the principal body responsible for the regulation of investment funds, including those listed on the Bermuda Stock Exchange.

Investment funds in Bermuda may be structured and organised under Bermuda law in the following ways:

  1. a company registered under the Companies Act and stated to be a mutual fund ("mutual fund company");
  2. an investment company that is a closed-ended fund ("Closed- Ended Fund");
  3. a unit trust scheme; and
  4. a limited partnership.

An investment fund is defined in the IFA to include any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income. The IFA only applies to those arrangements where investors are entitled to have their shares/units/interests redeemed in accordance with the fund's constitution and prospectus at a price determined in accordance with such constitution and prospectus. The IFA therefore does not apply to Closed-Ended Funds, being funds whose investors do not have redemption rights.

Mutual fund companies, unit trust funds and partnerships funds in Bermuda (collectively "Open-Ended Funds") are all governed by the IFA and the Fund Rules. The IFA and the Fund Rules are not applicable to Closed-Ended Funds.

1.2 Are managers or advisers to Alternative Investment Funds required to be licensed, authorised or regulated by a regulatory body?

The Investment Business Act 2003 (the "IBA") governs the regulation of investment business in Bermuda. Managers and advisors can be organised anywhere and act as managers and advisors to all forms of funds. There is no requirement for a manager or adviser to be licensed in Bermuda unless they have physical premises and employees in Bermuda. All managers and advisors of authorised and exempt funds (as described below), however, will be required to act in accordance with the IFA in all dealings concerning the fund. The BMA will evaluate whether the manager is a fit and proper person and will take into account the manager's experience and expertise in relation to the fund.

For managers domiciled in Bermuda, there are exemptions available from the licensing regime if they fall within the scope of the Investment Business (Exemptions) Order 2004 (the "Exemption Order") further described below.

Investment business services are very broadly defined and include dealing in investments, arranging deals in investments, managing investments, providing investment advice and safeguarding and administering investments. To be deemed to be carrying on investment business "in or from" Bermuda, a person must carry on investment business from a place of business maintained by such person in Bermuda with employees. Therefore, unless the manager maintains an office in Bermuda with employees or has an arrangement that the Minister of Finance by order determines will constitute the carrying on of business in Bermuda, the IBA will not apply.

Under the Exemption Order, if a person (not being a market intermediary) carries on investment business with persons in the categories listed below, it is exempt from the requirement to obtain a licence under the IBA if it provides investment services exclusively to:

  1. a high-income private investor: an individual who has had a personal income in the last two years in excess of US$200,000 in each of the two years preceding the current year or has had a joint income with that person's spouse in excess of US$300,000 in each of those years, and has a reasonable expectation of reaching the same income in the current year; current year meaning the year in which he or she purchases an investment;
  2. a high-net-worth private investor: an individual whose net worth or joint net worth with that person's spouse in the year in which he or she purchases an investment exceeds US$1 million; 'net worth' meaning the excess of total assets at fair market value over total liabilities;
  3. a sophisticated private investor: an individual who has such knowledge of, and experience in, financial and business matters as would enable him or her to properly evaluate the merits and risks of a prospective purchase of an investment, and who, in respect of each investment transaction, deals in amounts of not less than US$100,000;
  4. collective investment schemes approved by the BMA under the IFA (or any provision of law amending or replacing the IFA);
  5. bodies corporate, each of which has total assets of not less than US$5 million where such assets are held solely by the body corporate, or held partly by the body corporate and partly by one or more members of a group of which it is a member;
  6. unincorporated associations, partnerships or trusts, each of which has total assets of not less than US$5 million where such assets are held solely by such association, partnership or trust or held partly by it and partly by one or more members of a group of which it is a member;
  7. bodies corporate, all of whose shareholders fall within one or more of the categories of this list, except category (iv);
  8. partnerships, all of whose members fall within one or more of the categories of this list, except category (iv); or
  9. trusts, all of whose beneficiaries fall within one or more of the categories of this list, except category (iv).

A market intermediary is defined as "a person who engages or holds himself out as engaging in the business of dealing in investments as principal or agent on an investment exchange".

Fund administrators are required to obtain a licence under the IFA to carry on the business of a fund administrator in or from Bermuda.

Incentives are currently being offered by the Bermuda Government to attract asset managers to domicile in Bermuda, such as:

  • new business work permits: new companies to Bermuda will receive up to five work permits for senior positions;
  • no term limits (that is, restrictions on the length of time an employee may stay in Bermuda);
  • reduced fees on the purchase of qualified property for expatriates;
  • key executive exemptions from work permit requirements and the opportunity for these individuals to eventually receive long-term residency for themselves, their spouse and their children; and
  • payroll tax holidays for employers who hire Bermudians to new positions.

1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a regulatory body?

Whether a fund is required to be authorised or regulated will depend on whether the fund is structured as:

  • a Closed-Ended Fund; or
  • an Open-Ended Fund,

    • if the fund is an Open-Ended Fund, whether it will be structured as:

      1. an authorised fund, classified as:

        • an institutional fund;
        • an administered fund;
        • a specified jurisdiction fund; or
        • a standard fund,
      2. an exempt fund; or
      3. an excluded fund.

Open-Ended Funds

Open-Ended Funds fall under the domain of the IFA. The IFA and the Fund Rules establish and maintain the standards and the criteria applicable to the establishment and operation of the Open-Ended Funds, with a view of protecting investors. The IFA requires that Open-Ended Funds, which do not qualify for exemption or exclusion from authorisation, are classified by the BMA as (i) an institutional fund, (ii) an administered fund, (iii) a specified jurisdiction fund, or (iv) a standard fund.

Authorised Funds

A. Institutional funds. These funds are open only to qualified participants or each participant must invest a minimum of US$100,000. The funds must have both:

  • an investment manager, fund administrator, registrar, auditor, custodian or prime broker, who may be based anywhere; and
  • a service provider, director or secretary with a link to Bermuda.

A qualified participant is defined in the IFA as:

  1. a high-income private investor – an individual who has had a personal income in excess of $200,000 in each of the two years preceding the current year or has a joint income with that person's spouse in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same level of income in the current year;
  2. a high-net-worth private investor – an individual whose net worth or joint net worth with that person's spouse in the year in which he purchases an investment exceeds $1,000,000;
  3. a sophisticated private investor – an individual who has such knowledge of, and experience in, financial and business matters as would enable him to properly evaluate the merits and risks of a prospective purchase of investments;
  4. a body corporate which has total assets of not less than $5 million held either solely by the body corporate or partly by the body corporate and partly by one or more members of the same group of which it is a member;
  5. an unincorporated association, partnership or trust which has total assets of not less than $5 million held either solely by such association, partnership or trust or partly by it and partly by one or more members of the same group of which it is a member;
  6. a body corporate whose members fall within one or more of the above;
  7. a partnership whose members fall within one or more of the above; and
  8. a trust whose beneficiaries fall within one or more of the above.

B. Administered funds. These funds require each participant to invest a minimum of US$50,000 or be listed on a stock exchange that is recognised by the BMA. The funds must have both:

  • an investment manager, registrar, auditor, custodian or prime broker, who may be based anywhere; and
  • an administrator licensed under the IFA.

C. Specified jurisdiction funds. These funds are available if both:

  • the Minister by order recognises the jurisdiction, outside Bermuda, in which the fund operates and a particular law, or particular set of laws, of such jurisdiction as applicable to such; and
  • the fund satisfies the requirements set out in the fund rules made by the BMA relating to that class of fund and that jurisdiction.

D. Standard funds. These funds are those that do not fall within any other class of fund. There is no minimum investment or investor qualification test but it must both:

  • have an investment manager, registrar and auditor, all of which can be located anywhere; and
  • have a Bermuda-based administrator or custodian.

Exempt Funds

Class A Exempt Funds and Class B Exempt Funds are exempt from authorisation under the IFA:

A. Class A Exempt Funds. These funds do not require approval from the BMA. To be eligible for Class A Exempt Fund status, the Open-Ended Fund must: only be open to qualified participants (high-income, highnet- worth, sophisticated private investors or institutional investors);

  • have appointed an investment manager who:

    1. is licensed under the IBA;
    2. is authorised or licensed by a foreign regulator recognised by the BMA (currently only the US and the EU); or
    3. for the purpose of the IFA, is carrying on business in or from Bermuda or in a jurisdiction recognised by the BMA, is a person who has gross assets under management of not less than US$100 million or is a member of an investment management group that has consolidated gross assets under management of not less than US$100 million;
  • have appointed an officer, trustee or representative resident in Bermuda who has authority to access the books and records of the fund;
  • have appointed the following persons to provide services to the fund: a fund administrator; a registrar; an auditor; and a custodian or prime broker; and
  • prepare financial statements in accordance with any of the following standards: International Financial Reporting Standards ("IFRS"); the Generally Accepted Accounting Principles ("GAAP") in Bermuda, Canada, the UK or the US; or any other GAAP that the BMA may recognise.

If the Open-Ended Fund does not qualify for Class A Exempt Fund status, it can submit an application for Class B Exempt Fund status.

B. Class B Exempt Funds. These are Open-Ended Funds that must:

  • only be open to qualified participants (high-income, highnet- worth, sophisticated private investors or institutional investors);
  • have appointed an officer, trustee or representative resident in Bermuda who has authority to access the books and records of the fund;
  • have appointed the following persons to provide services to the fund: an investment manager; a fund administrator; a registrar; an auditor; and a custodian or prime broker. These persons must be, in the BMA's view, fit and proper (BMA may on application waive any of the above requirements if it is satisfied that appropriate arrangements are in place to safeguard the interest of investors); and
  • prepare financial statements in accordance with any of the following standards: IFRS; GAAP in Bermuda, Canada, the UK or the US; or any other GAAP that the BMA may recognise.

Excluded Funds

Excluded Funds are excluded from registration and the provisions of the IFA. An excluded fund is an open-ended "private fund" in which the number of participants does not exceed 20 persons and the investment fund does not promote itself by communicating an invitation or inducement to the public generally. No consent is required from the BMA for such a fund. Excluded funds must serve notice on the BMA of the fact that the fund is a private fund and therefore qualifies for exclusion as soon as practicable after the establishment of the fund.

Closed-Ended Funds

Closed-Ended Funds are structured as investment companies. The incorporation of Closed-Ended Funds in Bermuda is governed by the Companies Act and is subject to the approval of the Registrar of Companies (the "Registrar") and the BMA. The Registrar and the BMA have discretion to refuse to permit the incorporation or the formation if the proposed beneficial owners are persons that the BMA considers undesirable.

Closed-Ended Funds offering shares to the public are subject to the prospectus provisions of the Companies Act.

1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment Funds (or otherwise differentiate between different types of funds) and if so how?

Yes. Whereas Open-Ended Funds are regulated by the IFA as detailed in question 1.3, the IFA does not regulate Closed-Ended Funds. The establishment of a Closed-Ended Fund is governed by the Companies Act. Closed-Ended Funds offering shares to the public are subject to the prospectus provisions of the Companies Act. As the IFA does not apply:

  • there are no IFA fees or reporting requirements;
  • there are no prescribed service providers; and
  • there is no requirement for a prospectus or offering document unless the offer is being made to the public as defined in the Companies Act.

The incorporation of Closed-Ended Funds in Bermuda is subject to the approval of the Registrar and the BMA. The Registrar and the BMA have discretion to refuse to permit the incorporation or the formation if the proposed beneficial owners are persons that the BMA considers undesirable.

1.5 What does the authorisation process involve?

The authorisation process, as detailed below, will depend on the classification of the fund:

  • Excluded Funds – a notice is served on the BMA confirming that the fund is a private fund and qualifies for exclusion as soon as practicable after the establishment of the investment fund. Once notification is filed, exclusion is automatically granted.
  • Class A Exempt Funds – a certification is submitted to the BMA confirming that the investment fund meets the requirements for exemption prior to commencement of the fund's business (including a copy of the fund's prospectus). Once notification is filed, exemption is automatically granted.
  • Class B Exempt Funds – an application is submitted to the BMA for exemption (including a copy of the fund's prospectus). Exemption is granted within 10 days if the fund meets the requirements.

After the appropriate filings detailed above, Excluded Funds, Class A Exempt Funds and Class B Exempt Funds are required, under the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing Supervision and Enforcement) Act 2008, to register with the BMA as a Non-Licensed Person.

  • Authorised Funds – an application is submitted to the BMA, including (a) the corporate name and registered or principal office of each service provider, (b) a certificate signed by the operator confirming the fund complies (or will comply) with section 14 of the IFA, and (c) a copy of the fund's prospectus containing all the information required by the prospectus rules as the BMA may reasonably require for considering the application. Authorisation is granted within 5–7 days if the investment fund meets the requirements.

Closed-Ended Funds are not authorised or licensed but are required to comply with the provisions of the Companies Act.

1.6 Are there local residence or other local qualification requirements?

Bermuda investment funds must have:

  • either a director, trustee, officer or resident representative who is ordinarily resident in Bermuda, and who has access to the books and records of the investment fund; and
  • a registered office in Bermuda with certain records relating to the investment fund.

1.7 What service providers are required?

See question 1.3 with respect to each type of fund and the service providers required.

1.8 What co-operation or information sharing agreements have been entered into with other governments or regulators?

To date, Bermuda has 91 treaty partners around the world, has signed 41 bilateral tax information exchange agreements (TIEAs) and has 87 co-signatories under the multi-lateral Convention on Mutual Administrative Assistance in Tax Matters.

To read this article in full, please click here.

Originally published by Global Legal Group Ltd, London.

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.

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