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, as amended (the "Companies Act");
- the Investment Funds Act 2006, as amended (the "IFA");
- the Investment Funds (Definition) Order 2019 (the "Definition Order");
- the Investment Fund Offering Document Rules 2019 (the "Fund Offering Document Rules"); and
- the Investment Fund Rules 2019 (collectively, with the Fund Offering Document 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:
- a company limited by shares;
- a limited partnership;
- a limited liability company ("LLC");
- a segregated accounts company;
- an incorporated segregated accounts company; and
- a unit trust scheme.
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 arrangements must be such that the participants do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions. The arrangements must also have one or both of the following characteristics: (a) the contributions of the participants and the profits or income out of which payments are to be made to them are pooled; or (b) the property is managed as a whole by or on behalf of the operator of the fund.
Additionally, the Definition Order prescribes certain arrangements which fall outside the definition of "investment fund" in accordance with the IFA, for instance, a vehicle where the units of the participants confer rights in respect of only one asset. Any "arrangement" prescribed under the Definition Order is not be defined as an "investment fund" for the purposes of the IFA and will not need to apply for registration prior to its launch with the BMA.
The arrangements can be open-ended or closed-ended.
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" (described below) in Bermuda. Pursuant to the IBA, 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 of authorised funds (as described below), 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.
The Economic Substance Act 2018 (as amended) (the "ES Act") and the Economic Substance Regulations (as amended) (the "ES Regulations", together with the ES Act, the "ES Law"), became operative on 31 December 2018. The ES Law applies to any "relevant entity" that conducts a "relevant activity" in a "relevant financial period". A "relevant entity" includes a company incorporated or registered under the Companies Act, including a permit company and an overseas company, a Bermuda LLC and a Bermuda exempted partnership, exempted limited partnership or overseas partnership that has elected to have separate legal personality in accordance with section 4A of the Partnership Act, 1902. The ES Act does not apply to a "non-resident entity" which is resident for tax purposes in a jurisdiction outside Bermuda that is not on the EU "black list". Additionally, an entity that is not a "relevant entity" is out of scope and has no obligations under the ES Law.
Under the ES Law, "fund management" is a "relevant activity". Where a "relevant entity" is conducting "fund management" as a business, it must satisfy the economic substance requirements, as prescribed in section 3 of the ES Act and the ES Regulations.
Guidance Notes on the general principles relating to the economic substance requirements in Bermuda were issued on 24 December 2019. Sector-specific guidance has been issued in draft and remains subject in all respects to review by the EU Code of Conduct Group on Business Taxation and by the OECD Forum on Harmful Tax Practices.
For managers physically 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, a person (not being a "market intermediary" (described below)) carrying on investment business shall be exempt from the requirement to obtain a licence under the IBA where such person provides investment business services exclusively to:
- 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, meaning the year in which he or she purchases an investment.
- 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.
- 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.
- Collective investment schemes approved by the BMA under the IFA (or any provision of law amending or replacing the IFA), and includes collective investment schemes established or registered outside Bermuda.
- 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.
- 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.
- Bodies corporate, all of whose shareholders fall within one or more of the categories of this list, except category f).
- Partnerships, all of whose members fall within one or more of the categories of this list, except category f).
Trusts, all of whose beneficiaries fall within one or more of the categories of this list, except category f).
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".
Persons who provide investment services to not more than 20 persons at any time, and do not provide investment services to the public are also exempt from the IBA licensing requirement.
Fund administrators are required to obtain a licence under the Fund Administration Provider Business Act 2019 (the "Fund Administration Act") to carry on the business of a fund administrator in or from Bermuda. It should be noted that only certain classes of authorised funds require a Bermuda licensed fund administrator (see question 1.3).
1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a regulatory body?
Due to the recent legislative amendments, which have been effective from 1 January 2020, all investment funds meeting the definition under the IFA must be authorised or registered with the BMA. Amongst others, the legislative changes brought closed-ended funds (arrangements in which the participants are not, at their election, entitled to have their units redeemed) into scope. Closed-ended funds (i.e. certain private equity funds) must now register with the BMA on or before 30 June 2020. Additionally, overseas investment funds managed or promoted in or from within Bermuda must be designated by the BMA as an overseas fund.
Under the IFA, designated funds, registered funds and authorised funds must now all receive the permission of the BMA, and are as follows:
1. Designated Funds
Overseas Fund – is a fund incorporated outside Bermuda, that complies with the applicable rules and requirements of the overseas regulatory authority in the country or territory in which it is incorporated or established and complies with all the requirements of the IFA and any conditions imposed on it by the BMA.
2. Registered Funds
- Private Funds – are open-ended or closed-ended funds where the number of participants does not exceed 20 persons and the fund does not promote itself by communicating an invitation or inducement to the public generally. The operator of the fund is required to appoint a local service provider authorised and regulated by the BMA (which can be its corporate service provider). The operator, officers and service providers must be "fit and proper" to perform their particular functions. An open-ended private fund must appoint a custodian with regard to safekeeping of fund assets (although the BMA may waive this requirement if the fund meets certain criteria as determined by the BMA from time to time) and a fund administrator.
- Professional Class A Fund – is a fund that is open only to "qualified participants" (defined below) and the operator of the fund has appointed an investment manager for the fund who is either: licensed under the IBA; is authorised or licensed by a foreign regulator recognised by the BMA; or is carrying on business in or from Bermuda or in a jurisdiction recognised by the BMA and whose gross assets under management are of an amount that is not less than US$100 million or is a member of an investment management group that has consolidated gross assets under management of an amount that is not less than US$100 million. The fund must appoint an officer, trustee or representative resident in Bermuda who has authority to access the books and records of the fund. The fund must appoint a fund administrator, a registrar, an auditor and a custodian who are deemed "fit and proper" to perform that particular position and must prepare financial statements in accordance with the International Financial Reporting Standards ("IFRS") or Generally Accepted Accounting Principles ("GAAP").
- Professional Class B Fund – is a fund that is only open to "qualified participants". The fund must appoint an officer, trustee or representative resident in Bermuda who has authority to access the books and records of the fund. The fund must appoint an investment manager, a fund administrator, a registrar, an auditor and a custodian who are deemed "fit and proper" to perform that particular position. Financial statements must be prepared in accordance with IFRS or GAAP.
- Professional Closed Fund – is a "closed ended" investment fund that is only open to "qualified participants" and where all such "qualified participants" shall be provided with an investment warning prior to the time of the purchase of the units, containing such statements and information as the BMA deems appropriate. The fund must appoint a local service provider who is licensed by the BMA (which can be its corporate service provider) or an officer, trustee, or representative resident in Bermuda who is deemed "fit and proper" and who has authority to access the books and records of the fund. The fund must also appoint an auditor and a designate responsible for safekeeping the fund property, although these requirements may be waived upon application to the BMA in accordance with section 10D of the IFA and financial statements must be prepared in accordance with IFRS or GAAP.
3. Authorised Funds
- Institutional Funds – are only open to "qualified participants" or require each participant to invest a minimum of US$100,000 in the fund.
- Administered Funds – must have a fund administrator that is licensed in Bermuda by the BMA and requires that investors invest a minimum of US$50,000 in the fund or the fund is listed on a stock exchange recognised by the BMA.
- Specified Jurisdiction Funds – are those funds where the Minister by Order recognises the jurisdiction outside of Bermuda in which the fund operates e.g. Japan or recognises a particular law, or set of laws of such jurisdiction, as applicable to the fund.
- Standard Fund – is a fund that does not fall within any other class of fund and can be used for retail investors. The fund must have a Bermuda-based administrator or custodian.
All authorised funds must appoint an officer, trustee or representative resident in Bermuda who has authority to access the books and records of the investment fund. The fund must appoint an investment manager, a fund administrator, registrar, an auditor and a custodian who are deemed "fit and proper" to perform that particular position. The fund must prepare audited financial statements.
A "qualified participant" is defined under the IFA as:
- High income private investor: an individual who has had a personal income in excess of US$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 US$300,000 in each of those years, and has a reasonable expectation of reaching the same level of income in the current year.
- 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 US$1,000,000, excluding the value of that person's residence.
- 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.
- Bodies corporate, each of which has total assets of not less than US$5,000,000, 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.
- Unincorporated associations, partnerships or trusts, each of which has total assets of not less than US$5,000,000, 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.
- Bodies corporate, all of whose shareholders fall within one or more of the above.
- Partnerships, all of whose members fall within one or more of the above.
- A trust, all of whose beneficiaries fall within one or more of the above.
- Limited liability companies, all of whose members falls within one or more of the above.
1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment Funds (or otherwise differentiate between different types of funds or strategies (e.g. private equity vs. hedge)) and, if so, how?
Yes, the IFA does distinguish between open-ended and closed-ended Alternative Investment Funds and, as a result of the recent legislative amendments to the IFA, both open-ended and closed-ended funds are now regulated by the BMA. Existing closed-ended funds that fall in scope must register on or before 30 June 2020 (see question 1.3).
1.5 What does the authorisation process involve and how long does the process typically take?
An application for authorisation must be made by the operator or proposed operator of the fund. The application must: a) state the corporate name and registered or principal office of each service provider of the fund; b) be accompanied by a certificate signed by the operator to the effect that the fund complies, or will on authorisation comply, with section 14 of the IFA; c) contain or be accompanied by such information as the BMA may reasonably require for the purpose of determining the application; and d) be accompanied by an application fee.
Authorisation/approval is typically granted within five to seven days if the investment fund meets the requirements.
Authorised, Private and Professional Funds meet the definition of AML/ATF regulated financial institution (an "RFI"), and as such fall within the scope of the requirements of the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing Supervision and Enforcement) Act 2008 ("POCA").
Under POCA, RFIs must appoint a Money Laundering Reporting Officer ("MLRO") and a Compliance Officer ("CO") satisfying "fit and proper" criteria. The operator of the fund is required to furnish the BMA with the contact information for the MLRO and the CO, and provide a copy of the Board approved AML/ATF Policies and Procedures for its records. Where a Bermuda fund has appointed an overseas fund administrator, the operator of the fund must ensure the controls that are in place for detecting and preventing money laundering and terrorist financing are of the same standard as those prescribed under POCA.
1.6 Are there local residence or other local qualification or substance requirements?
Bermuda investment funds that are structured as exempted companies, limited partnerships or LLCs 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 rules apply to foreign managers or advisers wishing to manage, advise, or otherwise operate funds domiciled in your jurisdiction?
See question 1.2 on the rules and relevant exemptions applicable to domiciled managers and advisors in Bermuda.
1.9 What relevant co-operation or information sharing agreements have been entered into with other governments or regulators?
To date, Bermuda has over 100 treaty partners around the world, has signed over 40 bilateral tax information exchange agreements ("TIEAs"), has signed MOUs with 27 countries and is a party to the OECD Multilateral Convention on Mutual Assistance on Tax Matters with all G20 countries.
Bermuda has joined the Global Financial Innovation Network ("GFIN"), adopted the OECD Common Reporting Standard ("CRS") and is a Model II jurisdiction for the purposes of FATCA.
In addition, Bermuda is a member of the Association of the Overseas Countries and Territories of the European Union through the Overseas Association Decision, has signed cooperation agreements with the majority of EU Members for the Alternative Investment Fund Managers Directive ("AIFMD") and has signed Country by Country Competent Authority Agreements with the United Kingdom and the United States.
2. FUND STRUCTURES
2.1 What are the principal legal structures used for Alternative Investment Funds?
As noted in question 1.1, investment funds in Bermuda may be structured and organised under Bermuda law in five different ways:
- companies limited by shares – a company limited by shares can be incorporated with, or without, mutual fund objects for the purpose of investing the moneys of its members for their mutual benefit and with both the company and the members having the power to redeem or purchase for cancellation its shares without reducing its authorised share capital and stating in its memorandum that it is a mutual fund;
- partnership funds – a partnership fund is a fund under which the participants contribute funds to the partnership to be held on behalf of participating partners of the partnership. The funds are managed by the general partner or manager for the benefit of the participants. The general partner does not need to be registered in Bermuda to serve in such role. Partnerships can elect to have legal personality;
- limited liability companies – the Limited Liability Company Act 2016 enables the formation of LLCs. LLCs are hybrid entities commonly used in the US for private-equity funds and other asset-management structures. Bermuda legislation is closely modelled on Delaware law so will be very familiar to US fund managers and legal counsel;
- companies can be registered as a segregated accounts company where the assets and liabilities of one segregated account are statutorily ring-fenced and insulated from claims of creditors from other segregated accounts; or as an incorporated segregated accounts company which is a similar vehicle but each incorporated segregated account has its own legal personality; and
- unit trusts – a unit trust fund is a fund under which the property is held on trust for participants. The formation and operation of unit trust funds is governed by the trust deed by which it is established and the IFA.
2.2 Please describe the limited liability of investors in respect of different legal structures and fund types (e.g. PE funds and LPACs).
An investor in a limited liability investment fund (company or LLC) is liable to the amount agreed to be paid for the investor's shares. An investor in a limited partnership fund is liable to the amount of its capital contribution and, depending on the terms of the limited partnership agreement, its capital commitment to the fund.
2.3 What are the principal legal structures used for managers and advisers of Alternative Investment Funds?
Managers and advisers of investment funds are primarily structured as companies, limited partnerships or LLCs established in Bermuda or in other jurisdictions.
2.4 Are there any limits on the manager's ability to restrict redemptions in open-ended funds or transfers in open-ended or closed-ended funds?
Any restrictions on redemptions or transfers of investment funds would be imposed by the investment fund and provided for in its constitutional documents and offering document.
2.5 Are there any legislative restrictions on transfers of investors' interests in Alternative Investment Funds?
There is no legislative approval required for the transfer of investors' interests (non-voting) in investment funds. Any transfer of interests in the fund with voting rights requires an application to the BMA unless the fund is closed-ended or authorised under the IFA and therefore benefits from a general permission pursuant to the Notice to the Public of June 2005 under the Exchange Control Act 1972 and the Regulations thereunder.
2.6 Are there any other limitations on a manager's ability to manage its funds (e.g. diversification requirements, asset stripping rules)?
Any limitations on a manager's ability to manage its funds would be imposed by the investment fund and provided for in its constitutional documents and offering document.
3.1 What legislation governs the production and use of marketing materials?
The Companies Act, the IFA and the Fund Rules govern the production and offering of marketing materials.
3.2 What are the key content requirements for marketing materials, whether due to legal requirements or customary practice?
The Fund Offering Document Rules provide that the offering document is required to disclose facts which would be considered material to a prospective investor, such as:
- the name of the fund and the address of its registered or principal office in Bermuda;
- a statement as to whether the fund is authorised or registered or has been given equivalent regulatory approval, as the case may be, or intends to be authorised or registered or given equivalent regulatory approval, in any jurisdiction or with any supervisory or regulatory authority, outside of Bermuda;
- the date of incorporation or establishment of the fund (indicating whether the duration is limited);
- where applicable, an indication of stock exchanges or markets where the securities are, or are to be, listed or dealt in;
- the names, address, and other relevant particulars of directors, officers, resident representatives, auditors, fund administrators, custodians, registrars, promoters, legal advisers, investment managers, and other persons having significant involvement in the affairs of the fund;
- a description of the fund's investment objectives, including its financial objectives, investment policy and any limitations on that investment policy and an indication of any techniques and instruments, and any borrowing power;
- a description of the investment fund's material risks including, in relation to a mutual fund company registered under section 6 of the Segregated Accounts Companies Act 2000 or a unit trust fund operating segregated accounts, a statement on any potential risks associated with the operation of segregated accounts;
- details of the capital of the fund including, where applicable, any existing initial or founder capital;
- details of the principal rights and restrictions attaching to the units, including with respect to currency, voting rights, circumstances of winding up or dissolution, certificates, entry in registers and other similar details;
- a description of the intentions with respect to the declaration of dividends or distribution of profits;
- the procedures and conditions for the redemption and sale of interests and the circumstances in which such redemption may be suspended;
- the procedures and conditions for the issue of units;
- a description of the bases for the determination of the issue and redemption prices (including the frequency of dealings) and an indication of the places where information as to the prices may be obtained;
- a description of the basis and frequency of valuation of the fund's assets;
- particulars of any material provisions of any contract engaging the services of any and all directors, trustees, partners, service providers, and any other third parties receiving or likely to receive fees from the fund;
- a description of the potential conflicts of interest between the fund, its directors, trustees, partners, and its service providers;
- the date of the financial year end of the fund;
- information on the nature and frequency of financial reports to be distributed to participants;
- a statement of the place where copies of the constitution and any annual or periodic report may be inspected and obtained;
- particulars relating to the main business activity of the custodian and any co-custodian;
- in the case of a Professional Closed Fund or a Private Fund which is a closed-ended fund, the name of the designate responsible for segregation and safekeeping functions related to the investment fund property and the relevant provisions that set out the segregation and safekeeping arrangements; and
- particulars of the experience of investment managers.
The Fund Offering Document Rules also contain prescribed disclaimers to be included in the offering document.
The Companies Act provides that companies that are offering shares to the public are required to publish and file an offering document with the Registrar (unless they fall within any of the circumstances where it is not necessary to publish and file an offering document under the Companies Act). The offering document should contain information showing:
- the names, descriptions and addresses of the promoters, officers or proposed officers;
- the business or proposed business of the company;
- the minimum subscription which, in the opinion of the promoters, directors or provisional directors, must be raised;
- any rights or restrictions on the shares that are being offered;
- all commissions payable on the sale of the shares referred to in the offering document and the net amount receivable by the company in respect of the sale;
- the name and address of any person who owns 5% or more of the shares of the company, provided that this paragraph shall not apply to an exempted company or a permit company;
- any shareholding in the company of an officer of the company;
- financial statements of the company prepared in such manner and containing such information as may be required by rules made under the Companies Act;
- a report or statement by the auditor of the company prepared in such manner and containing such information as shall be required by rules made under the Companies Act; and
- the date and time of the opening and closing of subscriptions lists.
3.3 Do the marketing or legal documents need to be registered with or approved by the local regulator?
At the incorporation or formation stage of a fund, the legal documents which are required to be filed with the Registrar are:
- for companies – a memorandum of association, a notice of registered office, a register of directors and officers, certain extracts from the bye-laws, an annual declaration, and an economic substance reporting form; and
- for limited partnerships – a certificate of limited partnership, a certificate of exempted partnership and a notice of registered office.
Thereafter, companies that offer shares to the public are required to publish an offering document and file the same with the Registrar (unless they fall within any of the circumstances for which it is not necessary under the Companies Act).
Designated, registered and authorised funds must file their offering document with the BMA at registration or authorisation.
3.4 What restrictions are there on marketing Alternative Investment Funds?
No overseas investment fund can be promoted in or from within Bermuda unless designated by the BMA as an overseas fund (see question 1.3).
Any person marketing funds in Bermuda is also subject to the provisions of the Companies Act.
There is a general prohibition against exempted and overseas companies "carrying on business in Bermuda" under the provisions of the Companies Act and the IBA, which restricts the marketing of shares of a foreign fund in Bermuda by an exempted Bermuda company owned by non-Bermudians or an overseas company. However, there are limited means through which the marketing of a foreign fund in Bermuda can be achieved.
Where the shares are offered to Bermuda persons on a private basis by a foreign fund that does not have a place of business in Bermuda, that foreign fund is not required to obtain a licence under the Companies Act, provided the foreign fund does not market in or travel to Bermuda. Subject to being designated as an "overseas fund", the shares of a foreign fund could be marketed in Bermuda on a limited basis, in accordance with the "business visitor" policy as provided for in the Minister of Home Affairs Department of Immigration Work Permit Policy, which allows a business visitor representative to conduct pre-arranged meetings that are upon the invitation of a customer or potential customer. It is best practice that the representative have a letter of introduction from the Bermuda host and the visit should not exceed 21 consecutive calendar days. Such a visit must not give rise to an impression that the fund is operating from a place of business in Bermuda or making it known by way of advertisement or publication that a representative may be contacted at a particular address in Bermuda. There is also a "travelling salesman" exception pursuant to the Companies Act, which permits limited marketing in Bermuda provided the representative has been permitted to land in Bermuda pursuant to a periodic work permit.
Bermuda law does not restrict any overseas entity from approaching prospective Bermuda-based corporate clients for the purposes of marketing its investment products, provided that the approach is made from outside of Bermuda. In accordance with the IBA, no person shall in the course of or in consequence of an unsolicited call (personal visit or oral communication made without express invitation) made to an individual by way of business enter into an investment agreement with the person on whom the call is made or procure, or endeavour to procure, that person to enter into such an agreement. Any investment agreement which is entered into in the course of or in consequence of the unsolicited call shall not be enforceable against the person on whom the call was made.
Due to an exemption available under the Companies Act, a Bermuda fund is exempted from the prohibition on marketing its shares in Bermuda.
3.5 Is the concept of "pre-marketing" (or equivalent) recognised in your jurisdiction? If so, how has it been defined (by law and/or practice)?
No, it is not.
3.6 Can Alternative Investment Funds be marketed to retail investors?
Standard funds (as detailed above in question 1.3) can be marketed to retail investors.
3.7 What qualification requirements must be met in relation to prospective investors?
See question 1.3 above. Due diligence must also be carried out on prospective investors. This task is normally delegated to the fund administrator.
3.8 Are there additional restrictions on marketing to public bodies such as government pension funds?
There are no additional restrictions.
3.9 Are there any restrictions on the participation in Alternative Investments Funds by particular types of investors (whether as sponsors or investors)?
There have been no restrictions imposed.
3.10 Are there any restrictions on the use of intermediaries to assist in the fundraising process?
Except as discussed in question 3.4, there are no restrictions.
4.1 Are there any restrictions on the types of investment activities that can be performed by Alternative Investment Funds?
There are no restrictions on the types of activities that can be performed by investment funds, subject to the fund not engaging in an activity which is:
- prohibited under the Companies Act;
- not otherwise illegal or in breach of public policy;
- outside the powers of the fund's constitutional documents and offering document; and
- not compliant with the requirements of the IFA.
4.2 Are there any limitations on the types of investments that can be included in an Alternative Investment Fund's portfolio, whether for diversification reasons or otherwise?
Any limitations would form part of the investment fund's constitutional documents and/or offering document.
4.3 Are there any local regulatory requirements which apply to investing in particular investments (e.g. derivatives or loans)?
There are no local regulatory requirements that apply to investing in particular investments.
4.4 Are there any restrictions on borrowing by the Alternative Investment Fund?
Any restrictions would form part of the investment fund's constitutional documents and/or offering document.
5. DISCLOSURE OF INFORMATION
5.1 What disclosure must the Alternative Investment Fund or its manager make to prospective investors, investors, regulators or other parties?
At the Registrar:
- the certificate of incorporation and memorandum of association/Certificate of Registration, as applicable;
- the address of the registered office;
- the register of directors;
- any offering document or offer document required to be filed pursuant to the Companies Act; and
- certain other filings required pursuant to the Companies Act, including prescribed bye-law excerpts.
At the Registered Office:
- details of directors and officers. The register of directors and officers is open for inspection during business hours; and
- in respect of companies, the register of members. The register of members for mutual fund companies is only open for inspection by a member in respect of its shareholding in the fund.
5.2 Are there any requirements to provide details of participants (whether owners, controllers or investors) in Alternative Investment Funds or managers established in your jurisdiction (including details of investors) to any local regulator or record-keeping agency, for example for the purposes of a public (or non-public) register of beneficial owners?
By 30 April 2019, Bermuda companies, limited liability companies and partnerships were required to update or verify beneficial ownership information, pursuant to the Companies and Limited Liability Company (Beneficial Ownership) Amendment Act 2017 and the Partnership, Exempted Partnerships and Limited Partnership (Beneficial Ownership) Amendment Act 2018. This information is stored on the BMA's "Integra portal", which is a central and secure online registration and filing system. At present this information is not publicly available and until public beneficial registers become the standard globally, there is no indication that the relevant Bermuda legislation will change.
With regard to individuals, the minimum information required for the Integra portal includes:
- Full name.
- Residential address.
- Date of birth.
- Nature and extent of interest in the company or partnership.
Investment funds as defined under the IFA and investment providers licensed under the IBA are exempted from the requirements of the beneficial ownership legislation.
In accordance with the ES Law, relevant entities that are conducting a "relevant activity" and entities that are claiming "non-resident entity" status under the ES Law, in each case, in respect of the financial period from 1 January 2019 to 31 December 2019, are obliged to file their economic substance declarations as required on or before 30 June 2020. The Registrar launched the online portal for filing the electronic economic substance declarations and claims for non-resident entity status under the ES Act on 1 May 2020 and entities or their authorised representatives are now able to submit their filings.
5.3 What are the reporting requirements to investors or regulators in relation to Alternative Investment Funds or their managers?
1. Designated Funds (annually on or before 30 June)
Overseas Funds – the filing must include a Statement of Compliance from the overseas regulatory authority, an annual declaration form, inclusive of any material changes to the offering document and confirmation of the overseas funds continued compliance with the IFA.
2. Registered Funds (annually on or before 30 June)
- Private Funds – the filing must include audited/unaudited financial statements and an annual certification form, confirming that the registration requirements continue to be met and disclosing any material changes to the fund, the net asset value, and the amount of shares subscribed and redeemed.
- Professional Class A Fund – the filing must include audited financial statements and an annual certification form, confirming that the registration requirements continue to be met and disclosing any material changes to the fund, the net asset value, and the amount of shares subscribed and redeemed.
- Professional Class B Fund – the filing must include audited financial statements and an annual certification form, confirming any material changes to the fund, changes to the fund's directors and service providers, the net asset value and the amount of shares subscribed or redeemed.
- Professional Closed Fund – the filing must include audited financial statements (unless waived) and an annual certification form, confirming any material changes to the fund, changes to the fund's directors and service providers, the net asset value and the amount of shares subscribed or redeemed.
3. Authorised Funds
- Institutional Funds, Administered Funds and Specified Jurisdiction Fund – must file the net asset value, and the amount of shares subscribed and redeemed on a quarterly basis within 20 business day after the end of each calendar quarter. Additionally, the funds must file on an annual basis a statement of compliance, due within six months of the fund's financial year end.
- Standard Fund – must file the net asset value, and the amount of shares subscribed and redeemed on a monthly basis within 20 business day month-end. Additionally, a standard fund must file on an annual basis a statement of compliance, due within six months of the fund's financial year end.
5.4 Is the use of side letters restricted?
There are no restrictions on the use of side letters but the ability for the investment fund to enter into side letters must be disclosed in its offering document. The terms of the side letters must not contravene any of the provisions in its bye-laws or offering document (where applicable).
6.1 What is the tax treatment of the principal forms of Alternative Investment Funds identified in question 2.1?
Bermuda is fiscally neutral. There are no corporation, profits, or capital gains taxes payable in Bermuda by an investment fund or its investors. After incorporation the investment fund may apply for, and is likely to receive, an undertaking from Government that in the event of any such taxes being imposed by Bermuda in the future, those taxes shall not apply to the fund until 31 March 2035 (the "Tax Assurance Certificate").
6.2 What is the tax treatment of the principal forms of investment manager/adviser identified in question 2.3?
See question 6.1.
6.3 Are there any establishment or transfer taxes levied in connection with an investor's participation in an Alternative Investment Fund or the transfer of the investor's interest?
There are no establishment or transfer taxes payable in Bermuda.
6.4 What is the local tax treatment of (a) resident, (b) non-resident, and (c) pension fund investors (or any other common investor type) in Alternative Investment Funds?
See question 6.1. There are no taxes payable in Bermuda in relation to such investors.
6.5 Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing an Alternative Investment Fund?
Upon the incorporation of an investment fund company as noted in question 6.1, an application should be submitted for a Tax Assurance Certificate to the Registrar. This certificate, once granted, confirms that in the event Bermuda enacts legislation imposing tax computed on profits, income, any capital assets, gain or appreciation, or any tax in the nature of estate duty or inheritance, such tax will not apply to such fund or any of its operations, securities, debentures, or other obligations until 31 March 2035.
6.6 What steps have been or are being taken to implement the US Foreign Account and Tax Compliance Act 2010 (FATCA) and other similar information reporting regimes such as the OECD's Common Reporting Standard?
Bermuda is committed to being an integral part of the global financial services sector and reacted quickly to FATCA. Bermuda negotiated a Model II Inter-Governmental Agreement ("IGA") with the US Government and also signed a similar Model II IGA with the United Kingdom. Bermuda also passed amendments to its legislation in July 2015 to adopt the OECD's Standard for Automatic Exchange of Financial Account Information (or Common Reporting Standard ("CRS")). CRS came into effect in Bermuda on 1 January 2016.
6.7 What steps are being taken to implement the OECD's Action Plan on Base Erosion and Profit-Shifting (BEPS), in particular Actions 2 (hybrids) (for example ATAD I and II), 6 (prevention of treaty abuse) (for example, the MLI), and 7 (permanent establishments), insofar as they affect Alternative Investment Funds' operations?
Bermuda continues to work on next steps for OECD standards for Base Erosion and Profit-Shifting ("BEPS") compliance. In 2016, Bermuda became an early signatory to the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports, which puts in place an automatic exchange framework for exchanging country-by-country reports. Bermuda's tax information reporting portal (automatic exchange of information portal) was opened for accepting CRS and country-by-country reporting ("CbCR") notifications and report filings returns in 2017.
6.8 Are there any tax-advantaged asset classes or structures available? How widely are they deployed?
See question 6.1. There are no corporation, profits, or capital gains taxes payable in Bermuda by an investment fund or its investors regardless of the asset class or structure.
6.9 Are there any other material tax issues for investors, managers, advisers or AIFs?
The stamp duties regime applies to Bermudian residents and local companies (owned and controlled by Bermudians 60/40). It does not apply to non-residents, exempted companies or exempted partnerships.
6.10 Are there any meaningful tax changes anticipated in the coming 12 months other than as set out at question 6.6 above?
No changes are anticipated.
7.1 What reforms (if any) in the Alternative Investment Funds space are proposed?
The Bermuda Government continues to consider various initiatives as it is committed to working closely with the private sector and the BMA to further develop Bermuda's fund industry. The aim is to create an environment which is favourable for the quick, cost-effective and efficient establishment of investment enterprises to strengthen Bermuda's position in the international funds market.
Originally published by International Comparative Legal Guide to Alternative Investment Funds Guide 2020, Global Legal Group.
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