Funds legislation amendments aimed at attracting new business to Bermuda

Funds legislation amendments aimed at attracting new business to Bermuda

The Investment Funds Amendment Act 2013 (the “Amendment”) (70 KB PDF) has recently been enacted to introduce changes to Bermuda’s Investment Funds Act 2006 (the “Act”), the legislation which provides the regulatory framework for the formation and management of investment funds in Bermuda. The Amendment’s objective is to increase the attractiveness of Bermuda fund formation to sophisticated investors and onshore funds lawyers and fund managers. The Amendment is evidence of the way in which the Bermuda Government, the Bermuda Monetary Authority (the independent regulator of the financial services industry in Bermuda) (the “BMA”), and the funds industry is working together to develop innovative products designed to re-energise this sector in the jurisdiction.

Qualified new and existing investment funds formed in Bermuda now have the option to register with the BMA in one of two new exempted fund categories:

1. Class A Exempt Funds; or
2. Class B Exempt Funds.

These new exempted funds will be exempted from the requirement to be authorised pursuant to the provisions of the Act, with the end result that they will be deemed to be registered as qualified funds, but not regulated by the BMA. These new classifications will give those forming Bermuda incorporated funds expeditious access to the market, as well as regulatory certainty, as Class A Exempt Funds need no regulatory approvals to launch and begin operations and Class B Exempt Funds need only minimal regulatory sign-off.

The Class A Exempt Funds evidence a major innovation in the Bermuda offshore funds arena as they can effectively be set up and launched within only one business day and require no prior regulatory approvals. Documentation is minimal, with the BMA’s regulatory approach being geared towards self-certification by the fund operator and the delivery of an offering memorandum.

In order to be registered as a Class A Exempt Fund, a fund must:

1. limit the offering of its securities to qualified participants (essentially the same category as accredited investors in the U.S. or sophisticated investors in the U.K.);
2. employ an investment manager that meets one of the following requirements:
   1. is licensed under the Investment Business Act 2003, as amended, of Bermuda;
   2. is authorised or licensed by a foreign regulator recognised by the BMA (such as the U.S. Securities and Exchange Commission or the U.K. Financial Conduct Authority); or
   3. has either individually or as part of an investment management group gross assets under management of US$100 million or more (or its equivalent on other currency);
3. appoint a fund administrator, a registrar, an auditor and a custodian or prime broker;
4. appoint a resident representative in Bermuda with access to the books and records of the fund; and
5. prepare and file with the BMA, on an annual basis, financial statements prepared in accordance with IFRS or GAAP, as deemed acceptable by the BMA.

Registration of a Class A Exempt Fund with the BMA can be completed in one business day by filing with the BMA a certificate in the prescribed form confirming that the fund complies with the requirements for exemption. This must be delivered together with a copy of the fund’s offering memorandum. Once these documents are provided to the BMA, the fund is deemed to be registered and can start operating straight away without further approvals or authorisations being needed. The initial filing fee to register a Class A Exempt Fund with the BMA is $1,500.

Ongoing reporting requirements for Class A Exempt Funds are not onerous and include the annual delivery of a certificate confirming that the fund continues to meet the criteria to qualify as a Class A Exempt Fund, accompanied by a copy of the fund’s audited financial statements for the preceding year and a statement of any material changes to its offering memorandum. In addition, the operator of a Class A Exempt Fund must notify the BMA if, at any time, it no longer meets the qualification requirements for Class A Exempt Funds. The annual registration fee is $1,500.

A second class of exempted funds has also been created pursuant to the Amendment, being the Class B Exempt Funds, which are aimed at fund operators who meet all of the eligibility requirements of the Class A Exempt Funds, save for the fact that their investment managers fail to meet the more stringent pre-qualification criteria. Funds which fall within the ambit of registration as Class B Exempt Funds have to apply to the BMA.

The BMA has a period of up to ten days following the date of submission of the application to either grant the Class B Exempt Fund exemption or to request additional information about the fund and/or its service providers. The initial filing fee to register as a Class B Exempt Fund is $1,000, whilst the ongoing regulatory obligations of Class B Exempt Funds are the same as those of Class A Exempt Funds, with the additional requirement that Class B Exempt Funds apply for the approval of the BMA to any change to the fund’s director or service providers. The annual registration fee is $1,000 for Class B Exempt Funds.

After a fund of either class is registered, it may switch the category of exemption applicable to it or seek to be more extensively regulated, as its developing fund operations may dictate. Funds which were previously deemed to be “exempted” under the Act prior to its amendment will be grandfathered for a period of three years following the Amendment coming into effect. Following such three year period, such funds will cease to qualify for continuing exemption unless they meet the requirements for either a Class A Exempt Fund or a Class B Exempt Fund.

The new classes of fund illustrate a welcome simplification of the procedure for setting up and operating institutional and sophisticated investor funds. This signals a move in Bermuda towards offering tailored products created to satisfy the needs of today’s sophisticated fund industry, to encourage them to use Bermuda much more. There are now classes of funds available in Bermuda that are user friendly, easy and quick to register, with low start up and ongoing costs, which will no doubt prove attractive when allied to the other benefits of doing business in Bermuda, to those who form and manage offshore investment funds.