This article is Part II of a series of articles relating to the mutual fund industry in Bermuda. These articles are sponsored by The Bank of N.T. Butterfield & Son Ltd., Bermuda's first bank, and will include contributions by various legal, audit, investment and banking professionals in Bermuda. The articles are written to inform the reader of Bermuda's mutual fund industry.

Bank of Butterfield provided administration to one of the first mutual funds in Bermuda in 1969. Since this time, mutual fund administration has become one of Bank of Butterfield's core services. Bank of Butterfield, whose roots can be traced to 1785, has formally operated as a bank since 1858. As a full service commercial bank, headquartered in Bermuda, the Bank has expanded into Hong Kong, London, Guernsey, the Cayman Islands and Singapore, to strategically position itself to enhance client services. Through its subsidiaries in each of these jurisdictions, the Bank provides administration to mutual funds, unit trusts and limited partnerships. These services include corporate administration, registration and transfer agency, accounting, valuation, and custody.


Bermuda, a tiny archipelago outcropping in the mid Atlantic, 590 miles east of North Carolina, is only a speck on the world map. On a global economic scale, however, Bermuda has long been recognized as a leading offshore financial centre. It was in 1935 that the first international company incorporated in Bermuda - a holding company for the Life Saver candy firm. From that small beginning, Bermuda's international business industry has developed. A core section of this financial anchor to Bermuda is the situs and administration of international mutual funds. Bermuda's mutual fund industry includes open ended and closed ended companies, limited partnerships, and unit trusts marketed worldwide.

The World Bank acclaims Bermuda as having one of the highest standards of living on the globe. It is also listed among the most stable of offshore centres, with very high banking and commercial standards. Few observers deny that Bermuda's financial services sector has landed some pretty big fish in recent years. A number of funds have received Standard & Poor's ratings including two of the Bank of Butterfield's Buttress Funds which are among an elite to receive the triple A rating.

Investment managers chose Bermuda for several reasons. Amongst them is the level of sophistication and depth of the professional infrastructure, less onerous regulations and service provision by the local custodial banks.

According to a recent Bermuda International Business Association survey, political stability is the number one reason for the investment manager's choice of Bermuda. From the level of "no" votes from the 14th August 1995 independence referendum, Bermuda seems set to remain a British Colony for the foreseeable future.

Bermuda's stability is also reflected in the integrity of the mutual fund company sponsors who chose Bermuda as their jurisdiction of choice. As at June 1995, the Bermuda Monetary Authority reported a total of 615 collective investment schemes in Bermuda, representing net assets of market value US $13.7 billion. This figure excludes the number of funds administered in Bermuda but incorporated elsewhere. This figure represents approximately a 20% increase of fund assets over the same period in 1994 and a 90% increase from June 1993.

A great majority of the collective investment schemes registered in Bermuda are sponsored and managed by American investment managers. In this regard the Bermuda fund administrators are cognisant of fund managers requirements to ensure that most administration of these funds occurs offshore. Accordingly, administration of substantially all of the following Ten Commandments are performed in Bermuda.

(1) Communicating with investors (including the furnishing of financial reports)

(2) Communicating with the general public.

(3) Soliciting sales of its own investment units.

(4) Accepting subscriptions of new investors.

(5) Maintaining its principal books and records of account.

(6) Auditing of the books of account.

(7) Payment of distributions, legal fees, accounting fees and staff salaries.

(8) Publishing or furnishing the offering and redemption price of the shares.

(9) Conducting the meetings of its investors and administrators.

(10) Making distributions of investor interests.

Recently the Bermuda Government passed legislation aimed at increasing international business on the islands. Under the Ministry of Finance is the quasi automonous non-government organizations, Bermuda Monetary Authority, the regulator, followed by the industry and committees such as The Bermuda International Business Association, comprising of industry members.

"Partnership" is the word used most widely to describe the relationship between The Bermuda Monetary Authority and the Bermuda financial services industry. It is this partnership that implements policies, codes and other effective strategies to ensure Bermuda's competitiveness, state of regulation, whilst maintaining its international integrity. Most recently the partnership affected the introduction of a Code of Conduct for Collective Investment Schemes.

The Bermuda Monetary Authority, in its authorization of mutual funds, primarily ensures at the formation stage that certain pre-conditions of the published policies are complied with.

Code of Conduct

The non statutory Code of Conduct was adopted in December 1994, which established minimum standards and guidelines for funds and service providers and codifies the existing supervisory and self regulatory approach.

The code guidelines govern the formation and operation of collective investment schemes. The preimminent qualification for investor protection is that the BMA needs to be satisfied as to the investment management experience of the promoters. The collective investment scheme may take the form of an open ended investment company (limited liability), unit trusts or limited partnerships. The open ended investment company or mutual fund company is specifically defined by Bermuda Statute and has the power to redeem its shares out of realized or unrealized profits, as long as the company remains able to pay its debts as they fall due.

Operationally the code stipulates that the collective investment scheme must publish a Prospectus of Offering Memorandum. A Bermuda licensed bank of bank subsidiary must, generally, be appointed custodian, although sub-custodians or, in the case of derivatives, a co-custodian be appointed. Additionally, there is the requirement to maintain the principal share register and certain accounting records in Bermuda. For mutual fund companies, there is a normal requirement for a Bermuda incorporated management company. This management company need not have a physical presence. A further requirement under Bermuda law is the appointment of two directors resident in Bermuda, unless the company is listed on one of the world recognized stock exchanges.

Legislative Changes

Since early July of this year, Bermuda passed new legislative amendments to the Companies Act, 1981 ("the Act") that affect certain aspects of a Bermuda based mutual fund. Additional legislative enhancements are amendments to the Limited Partnership Act and Exempted Partnership Act, and the introduction of the Overseas Partnership Act, 1995.

In short, these amendments positively impact the fund industry in Bermuda to strategically position Bermuda to be more competitive as an offshore centre. The Code of Conduct for Bermuda based Collective Investment Schemes do not mention limited partnerships and close ended companies. However these legal identities still require Bermuda Monetary Authority approved and much of the Code of Conduct will apply mutatis mutandis in practice. The establishment of a Limited Partnership as a fund vehicle is increasing in popularity and thus overview the changes affecting these structures as follows:

The new Partnership Act called The Overseas Partnerships Act 1995 (effective 28 July 1995) makes available the issuance of a permit to overseas partnerships who wish to do business in Bermuda. The rules and guidelines as they pertain to Partnerships are similar to the granting of permits and the activities of a permit company as defined in the Act. A basic requirement for issue of a permit to an overseas partnership is the appointment of a Bermuda resident representative. The primary duty of the representative is to ensure maintenance and compliance of the Overseas Partnership within the requirements of the Act, including notices of changes to the partnership and updated financial records to be provided to the Bermuda Registrar of Companies.

The Limited Partnership Amendment Act, 1995, and The Exempted Partnerships Amendment Act, 1995, are both effective 14 July 1995.

These amendments affect the Limited Partnership Act, 1883, and the Exempted Partnership Act, 1992, respectively. A significant amendment to both these Acts eliminates the need to provide notification and receive the Minister's consent on the change of a limited partner or a reduction of the Partnership capital.

The Companies Amendment Act, 1995, effective 7 July 1995, included a number of changes affecting mutual fund companies. Some of these changes, whilst affecting the general law, may have to be incorporated into individual company bye laws in order to make the amendments effective. These changes include:

a) The simplification of an auditor's report particularly as it relates to mutual fund companies newly incorporated which have not yet produced financials.

b) To provide directors with the right to receive notice of and to attend and be heard at General Meetings of shareholders and to give directors the right to inspect minutes of the Shareholders Meetings.

c) The giving of power to the Minister, after consultation with the Institute of Chartered Accountants, to appoint additional GAAP and audit standards.

d) The removal of the requirement for the register of members of mutual fund companies to be open for inspection. This will include shareholders in the mutual fund company as well as members of the public.

Further changes anticipated

Another initiative to be introduced shortly, will make it easier for institutional funds to domicile in Bermuda. It is proposed that the large institutional managers with an existing relationship with a well known custodian will be able to incorporate the fund in Bermuda without using the services of a local management company or a Bermuda bank custodian.

Bermuda Monetary Authority Statistics

Collective Investment Schemes in Bermuda

                          Mar '94     Jun '94     Mar '95     Jun '95

Mutual Funds              250         261         321         341
Umbrella Funds             32          42          50          53
Sub-Funds operating       143         149         158         181
under Umbrellas
Total Mutual Funds        393         410         479         522

Unit Trusts                63          53          67          67
Umbrella Trusts             3           3           4           4
Sub-Trusts operating        7           7           9           9
under Umbrellas

Total Unit Trusts          70          60          76          76

Partnerships               16          16          16          16
Feeder Trusts               1           1           1           1

Grand Total Collective    480 (1)     487         572         615
Investment Schemes
Total Net Asset      $11.3 B'n (1) $11.6 B'n $14.43 B'n $13.68 B'n
Value (N.A.V.)

(1)Certain of the 1993 figures have been restated due to subsequent amendments by reporting institutions.

Source: Bermuda Monetary Authority

Bank of Butterfield will continue to publish articles relevant to the current mutual fund industry in Bermuda. An example of future contributions will include:

  • Companies Act 1981
  • Regulations and the Code of Conduct
  • Mutual Fund Administration - keys to selecting an administrator
  • Limited Partnerships
  • Bermuda Stock Market - Listing for Funds.

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.