Bermuda Investment Funds - Conyers Dill & Pearman 4 of 32 7. ONGOING REGULATION 7.1 Reports to...

Bermuda Investment Funds

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Preface

This publication has been prepared for the assistance of those who are considering the

formation of an investment fund in Bermuda. It deals in broad terms with the

requirements of Bermuda law for the establishment and operation of such entities. It

is not intended to be exhaustive but merely to provide brief details and information

which we hope will be of use to our clients. We recommend that our clients seek legal

advice in Bermuda on their specific proposals before taking steps to implement them.

Before proceeding with the incorporation, formation or establishment of an

investment fund in Bermuda, persons are advised to consult their tax, legal and other

professional advisers in their respective jurisdictions.

Copies of the Bermuda Investment Funds Act 2006 have been prepared and are

available on request.

Conyers Dill & Pearman

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TABLE OF CONTENTS

1. INTRODUCTION

2. STRUCTURE

2.1 Mutual Fund Companies

2.2 Unit Trusts

2.3 Limited Partnerships

3. REGULATION

3.1 Institutional Funds

3.2 Administered Funds

3.3 Standard Funds

3.4 Specified Jurisdiction Funds

3.5 Application Process

3.6 Requirements for Authorization

3.7 Fund Rules

3.8 Fund Prospectus Rules

3.9 Companies Act Prospectus Requirements

3.10 Constitutional Documents

4. FUNDS OUTSIDE REGULATION

4.1 Private Funds

4.2 Class A and Class B Exempt Funds

4.3 Closed‐ended Investment Funds

5. ESTABLISHMENT OF A REGULATED INVESTMENT FUND

6. OPERATION OF A REGULATED INVESTMENT FUND

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7. ONGOING REGULATION

7.1 Reports to Investors

7.2 Reports to the Administrator

7.3 Reports to the Authority

7.4 Information Gathering and Investigation Powers

8. REGULATION OF FUND ADMINISTRATORS

9. SEGREGATED ACCOUNTS COMPANIES

10. TAXATION

10.1 Taxation

10.2 Stamp Duty

10.3 Exchange Control

11. FEES

11.1 Government Fees

11.2 IF Act Fees

11.3 SAC Act Fees

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1. INTRODUCTION

Bermuda is a major centre in the international offshore investment fund industry with

over US$50 billion of fund assets domiciled there. There are over 1,500 investment

funds registered in and operating from Bermuda. There are also a significant number

of unregulated investment funds, being primarily closed‐end investment companies

and limited partnerships, in Bermuda. A number of the larger funds are quoted on

stock exchanges such as The London Stock Exchange and The Hong Kong Stock

Exchange. In addition, many funds, particularly those seeking European investors, are

listed on the Irish Stock Exchange or the Luxembourg Stock Exchange.

Bermuda remains committed to attracting quality funds by offering demonstrable

political and demographic stability, an abundance of professional service providers,

including excellent fund administration services, a sophisticated telecommunications

system and welcome regulation of the investment industry to provide more

transparency and disclosure.

The Bermuda Monetary Authority (the “Authority” or the “BMA”) is the principal

body responsible for the regulation of investment funds, including those listed on the

Bermuda Stock Exchange. The BMA insists that persons proposing to establish funds

in Bermuda are persons of sound business integrity and good financial standing in

addition to having high industry credentials. By maintaining such an approach,

Bermuda has become the jurisdiction of choice for discerning fund managers.

2. STRUCTURE

Investment funds may be structured and organised in several ways. A company

registered under the Companies Act 1981, as amended (the “Companies Act”) as an

exempted company and stated to be a ‘mutual fund’ is, with the exception of

investors from Japan, by far the most popular form of investment vehicle used for an

investment fund. These companies can be incorporated by registration and the

incorporation process should take no more than a few days once all necessary

information is received.

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An investment fund may also be structured and organised as (i) a unit trust scheme

(the preferred choice for investors from Japan), (ii) an investment company that is a

closed‐ended fund (that is, a company that is not a mutual fund company) or (iii) a

limited partnership.

From a statutory perspective, the Investment Funds Act 2006 (the “IF Act”) contains a

broad definition of “investment fund” which may include any arrangements with

respect to property of any description which enables participants to receive profits

from the management of that property. Such arrangements may take the form of a

company, a unit trust or a partnership although the IF Act will only apply to

arrangements whose participants are entitled to have their rights or interests

(however described) (“units”) in the fund redeemed in accordance with the fund’s

constitution and prospectus at a price determined in accordance with such

constitution and prospectus. The IF Act will therefore not apply to funds which do

not provide their investors with redemption or repurchase rights, i.e., closed‐end

funds. The IF Act only applies to investment funds which are mutual fund

companies, unit trusts and limited partnerships incorporated, formed and/or

established in Bermuda.

2.1 Mutual Fund Companies

A mutual fund is defined in the Companies Act as “a company limited by shares and

incorporated for the purpose of investing the moneys of its members for their mutual

benefit and 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.” Core to the concept of a mutual fund is that it can redeem its

participating shares out of realized or unrealized profits by reference to the net asset

value of such shares. Shares redeemed by a mutual fund may subsequently be re‐

issued to new subscribers or in respect of new subscriptions.

One or more classes or series of shares may be created and offered separately by a

mutual fund. Typically, a mutual fund would be incorporated with two or more

classes or series of shares, that would include the manager’s shares (usually without

participation rights) comprising one class of shares (typically equivalent to US$1.00)

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that are issued to and held by the manager. The remaining shares would be

participating shares issued to investors, who would be entitled to request redemption

thereof at net asset value.

There is no minimum issued share capital requirement for a Bermuda mutual fund

company. Any offer of shares to the public by a mutual fund, like any exempted

company proposing to make an offer of its shares to the public, is subject to the

prospectus provisions of the Companies Act. The content provisions of the IF Act also

require disclosure of certain matters relating to a mutual fund. The bye‐laws of a

mutual fund provide for the regulation and operation of its affairs.

A company incorporated outside of Bermuda and carrying on mutual fund business

may obtain a permit to establish a place of business in Bermuda. In general, such a

company will be required to demonstrate that a Bermuda incorporated company

would suffer from some disadvantage to which the foreign company is not subject.

2.2 Unit Trusts

A unit trust is similar to a mutual fund company, but it is not a company or separate

entity. A unit trust is a contractual agreement embodied in a trust deed or

instrument. It is a declaration of trust that is either executed by the trustee only or

entered into by the trustee and the manager. The concept of a unit trust is that

investors contribute funds to the trustee to hold such funds in trust as trustee whilst

they are managed by the manager for their benefit. Each investor is effectively a

beneficial owner (and is possibly also a settlor) of a proportion of the assets held by

the trustee.

The unit trust deed, as well as containing provisions for the constitution of a trust,

will be similar to the bye‐laws of a mutual fund company, providing, among other

things, for the calculation of net asset value per unit and sets out the terms for issue

and redemption of units. Further, it is usual for the unit trust instrument to provide

for the regulation of the affairs of the unit trust in a manner similar to that of a

company. In this regard, provisions dealing with meetings of unitholders, voting

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rights, appointment of an auditor and distribution of financial statements are

common.

Investment funds structured as unit trusts are expressly made subject to the IF Act

and are required to be classified by the BMA thereunder. For most practical purposes,

a unit trust will operate in the same manner as a mutual fund company.

The trustee or the manager is treated as making the offer of units to investors.

Further, prior to the initial offer, the trustee or manager, of a company established in

Bermuda to which the Companies Act applies, must issue and file a prospectus with

the Registrar of Companies in Bermuda in accordance with the Companies Act

requirements unless the company’s shares are already listed on an appointed stock

exchange (which includes most of the world’s major exchanges) or accepted by a

competent regulatory authority (which includes the U.S. Securities and Exchange

Commission). These requirements are additional to those set out in the IF Act and the

related prospectus fund rules. Accordingly, a prospectus prepared by the trustee or

manager forms part of the application to the BMA to establish the unit trust.

2.3 Limited Partnerships

The partnership is a popular vehicle for international ventures primarily because it is

often regarded as fiscally transparent and because generally it is subject to a lesser

degree of regulation than a company.

An exempted or limited partnership may elect to assume a separate legal personality.

In the absence of such election, the partnership is not a legal entity with any degree of

legal personality, but merely a relationship between the partners.

Bermuda partnership legislation does not attempt to regulate the affairs of a

partnership to any great extent. The operation of a partnership is left to agreement

between the partners. However, an investment fund structured as a limited

partnership (whose limited partners are entitled to have their limited partnership

interests redeemed in accordance with the partnership agreement and prospectus) are

expressly made subject to the IF Act and are also required to be classified by the BMA

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thereunder. However, it is anticipated that the majority of limited partnerships

established in Bermuda, which are typically closed‐ended and formed as private

equity or venture capital funds, will not be subject to the IF Act. A publication

entitled “Bermuda Exempted and Overseas Partnerships”, which provides additional

details of Bermuda law relating to such partnerships and their formation and

administration, is available upon request.

A limited partnership must have at least one general partner. The limited partners are

not, subject to the satisfaction of certain requirements, liable for the debts of the

partnership beyond the amounts they have agreed to contribute to the partnership.

The position of a limited partner in a limited partnership is analogous to that of a

shareholder in a company.

The partnership agreement, as well as containing provisions for the formation of the

partnership, will be similar to the bye‐laws of a mutual fund company and a unit trust

instrument, will provide for the calculation of net asset value of the limited

partnership interests and set out terms for making capital contributions as well as

additions and withdrawals from such capital contributions. Further, it is usual for the

partnership agreement to provide for the regulations of the affairs of the partnership

in a manner similar to that of a company and unit trust. In this regard, provisions

dealing with meetings of limited partners, voting rights, appointment of an auditor

and distribution of financial statements are common.

Although any prospectus issued by a limited partnership is not subject to the

provisions of the Companies Act, the IF Act does apply to investment funds

structured as limited partnerships and the related fund prospectus rules apply to any

prospectus issued by a limited partnership.

3. REGULATION

The IF Act establishes standards and criteria applicable to the establishment and

operation of investment funds in Bermuda with a view to protecting the interests of

investors. The IF Act requires all investment funds to which the IF Act applies to be

authorized unless they are exempted from authorization. Authorized funds may be

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classified by the Authority as (i) Institutional funds; (ii) Administered funds; (iii)

Standard funds or (iv) Specified Jurisdiction funds. Details about each type of fund

are set out below.

3.1 Institutional Funds

A fund may be classified as an institutional fund if:

(a) pursuant to its constitution and prospectus –

(i) it is only open to qualified participants; or

(ii) it requires each participant to invest a minimum amount of $100,000 in

the fund; and

(b) it has an officer, trustee, or representative resident in Bermuda who has

access to the books and records of the investment fund.

A person is a ‘qualified participant’ if:

(i) he/she is an individual who has such knowledge of, and experience in,

financial and business matters as would enable him/her to properly

evaluate the merits and risks of a prospective purchase of shares in the

investment fund; or

(ii) he/she is an individual whose net worth or joint net worth with his/her

spouse in the year in which he/she purchases an investment exceeds

$1,000,000 (a ‘high net worth investor’); or

(iii) he/she is 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 his/her spouse of $300,000 in each of those years and has a

reasonable expectation of reaching the same income level in the year in

which he/she purchases an investment; or

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(iv) it is an entity in which all individual members, partners or beneficiaries

(as the case may be) fall into the classes set out in (i) to (iii) above; or

(v) it is a body corporate that has total assets of not less than $5,000,000, whether such assets are held solely by that body corporate or partly by

any other body corporate of which it is a subsidiary or holding company;

or

(vi) it is an unincorporated association or trust that has total assets of not less than $5,000,000.

3.2 Administered Funds

A fund will qualify for classification as an administered fund if its administrator is

licensed under the IF Act and:

(a) pursuant to its constitution and prospectus it requires participants to invest a minimum of $50,000 in the fund; or

(b) it is listed on a stock exchange recognized by the Authority for this purpose.

3.3 Standard Funds

A fund will qualify for classification as a standard fund if it does not fall within any

other class of fund.

The Minister of Finance has the power to amend the current qualifications for any

class of fund, and may add additional classes of funds.

3.4 Specified Jurisdiction Funds

The Investment Funds (Specified Jurisdiction Fund) (Japan) Order 2012 (the “Order”)

together with the Investment Funds (Specified Jurisdiction Fund) Japan Rules 2012

permit Bermuda domiciled funds established pursuant to the Order to be marketed to

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the Japanese public (“Japan Fund”). The Order has been specifically created to ensure

that the rules applicable to Japan Funds domiciled in Bermuda will meet the

requirements of the Japanese Securities Dealers Association Regulations which

provide that Japanese investment dealers may only solicit customers to subscribe to

securities of any foreign investment trust that is established in a jurisdiction, the laws

and regulations and disclosure system of which are “well‐provided”. Japan Funds

will be regulated by the BMA which will require additional information, governance

and disclosure with respect to Japan Funds.

3.5 Application Process

An application for the authorization of a fund is made on an IF Application Form that

is submitted to the BMA concurrently with or, if desired, subsequently to, a request

for permission to incorporate, form and/or establish the fund and blanket permission

for the issue and transfer of the fund’s units (See “Establishment of a Regulated

Investment Fund” below).

In cases where the operator seeks to have the fund incorporated or established in

advance of submission of the related authorization application, the Authority will

proceed immediately to complete the standard incorporation and related due

diligence process, including a review of the intended promoters, and take an early

decision on incorporation/establishment without prejudice to its eventual decision on

authorization or exemption. Where incorporation is approved, the promoters will

then be in a position to prepare quickly for the fund to begin operations by opening

necessary bank accounts etc, and taking other steps that are normal following

establishment. Clearly, however, the fund can not operate as such until it gains either

authorization or exemption.

It should be noted that in order to help expedite applications, the Authority has

established a direct email contact address that can be used to pre‐notify the Authority

of the names of intended promoters and service providers.

The authorisation application must be accompanied by: ‐

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(a) confirmation of the corporate name and registered or principal office of

each service provider of the fund;

(b) a certificate signed by the operator confirming that the fund complies, or

will on authorisation comply, with the requirements for authorization;

(c) such information as the Authority may reasonably require; and

(d) an application fee.

The Authority may grant the application for the fund to be authorized in the

appropriate class.

Application to the BMA for the authorization and classification of an investment fund

generally takes two to five business days to be processed.

3.6 Requirements for Authorization

In order to be authorized in the appropriate class:

(a) the fund must prepare annual financial statements which will be audited

(although the Authority may disapply the requirement that the financial

statements of a fund shall be audited in any particular year where the

Authority considers it appropriate to do so).

(b) the fund must appoint, or will on authorization appoint, an investment

manager, an auditor and an administrator;

(c) the fund property must be entrusted to a custodian who must be licensed

in Bermuda or, if incorporated elsewhere, must be subject to equivalent

regulatory supervision. The Authority may grant an exemption from this

requirement where it is satisfied that alternative arrangements are in place

for safeguarding fund property. This exemption may be granted in the

case of feeder funds and fund of funds where investment is solely in the

related master fund which appoints a custodian or approved prime broker

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and for fund of funds on the condition that assets held consist

predominantly of cash at a bank and registered shares in the underlying

funds. Exemptions may also be granted in the case of funds which invest

principally in infrastructure type assets;

(d) the custodian must also be independent of the operator (which is defined

in the IF Act to mean the trustee in relation to a unit trust, a general partner

in relation to a limited partnership and the company in relation to a

mutual fund company) and

(i) in the case of a mutual fund company, of the directors,

(ii) in the case of a partnership, of the partners;

the Authority may, on the application of the operator of a fund, disapply

the requirement that the custodian must be independent of the operator, of

the director of a mutual fund company, or of the partners of a partnership,

in any particular case, where the Authority determines that it is

appropriate to do so;

(e) the operator and its proposed service providers must be fit and proper

persons to act as such and the combination of their experience and

expertise must be appropriate for the purposes of the fund; and

(f) the fund must comply with the requirements of the fund rules and fund

prospectus rules.

Every authorised fund must also appoint a registrar who is required to maintain in

Bermuda a register of the participants.

3.7 Fund Rules

The Fund Rules only apply to authorized investment funds classified as standard

funds and require the custodian of such funds to be licensed by the Authority, except

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where the administrator of that fund is carrying on fund administration business in

Bermuda.

These rules also require copies of the fund’s constitution to be made available for

inspection by participants and potential participants, require the preparation of a

financial report containing audited financial statements which must be prepared in

accordance with generally accepted accounting principles and must be audited in

accordance with generally accepted auditing standards.

3.8 Fund Prospectus Rules

The Fund Prospectus Rules apply to all authorized funds and require disclosure of

certain matters in the prospectus or offering memorandum including:

(a) the names, addresses and other relevant particulars of directors, officers

and principal service providers,

(b) its investment objectives and any investment limits and borrowing powers,

(c) its material risks, including, where applicable, a statement of any potential

risks associated with the operation of segregated accounts,

(d) the principal rights and restrictions attaching to its units,

(e) a description of the basis for the determination of the issue and redemption

prices and of the basis and frequency of valuation of the fund’s assets,

(f) description of potential conflicts of interest, and

(g) the date of the financial year end and the notice and frequency of financial reports to be distributed to participants.

The prospectus or offering memorandum is also required to include certain specified

disclaimers and any other material information which investors would reasonably

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require for the purpose of making an informed judgement about the merits of

investing in the fund.

The Authority has the power to modify or waive any of the Fund Rules or Fund

Prospectus Rules in respect of a particular fund if it is satisfied that compliance with

the rules as written would be unduly burdensome or not achieve the purpose for

which the rules were made. No waiver or modification will be given if the Authority

feels that it would result in an undue risk for those whose interest the rules were

designed to protect.

The Authority is generally prepared to grant a waiver to master funds from the

requirement of the Fund Prospectus Rules to publish a prospectus provided that the

only investors in the master funds are feeder funds of the same structure and that the

respective feeder funds prepare and issue a prospectus.

3.9 Companies Act Prospectus Requirements

An offer of shares to the public by a mutual fund (or Bermuda manager or trustee of a

unit trust), like any exempted company proposing to make an offer of its shares to the

public, is subject to the prospectus provision of the Companies Act 1981. The

prospectus provisions of the Companies Act 1981 do not apply to partnerships.

If a prospectus is required under the Companies Act, it must contain, among other

things:

(i) the names, descriptions and addresses of the manager and officers of

the fund;

(ii) the (proposed) business of the fund;

(iii) the minimum subscription which must be raised in order for the offer

to become effective;

(iv) any rights or restrictions on the shares being offered;

(v) all commissions payable on the sale of shares and the net amount

receivable by the fund;

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(vi) any shareholding in the fund of any of its offers;

(vii) financial statements and a report or statement of the fund’s auditors;

(viii) a report or statement by the auditor of the investment fund prepared in

such manner and containing such information as shall be required by

section 34 of the Companies Act; and

(ix) the date and time of the opening and closing of subscription lists.

In addition, the prospectus must not contain an untrue statement or an omission that

would make a statement in the prospectus untrue.

Save in the case of companies whose shares are listed on a recognised stock exchange,

the prospectus of a Bermuda company must be filed, together with the prescribed

filing fee, with the Registrar of Companies before, or as soon as reasonably practicable

after, its publication. Filing is effected by simply delivering the prospectus, which

must be signed by or on behalf of all the directors of the mutual fund (or of the

Bermuda manager or trustee of the unit trust), together with the consent of its

auditors and a certificate of compliance from an attorney, to the Registrar of

Companies.

Where a mutual fund (or Bermuda manager or trustee of a unit trust) continuously

offers its units to the public, if any particular in the prospectus issued by that entity

ceases to be accurate in any material respect, supplementary particulars disclosing the

material change must be published and filed with the Registrar of Companies as soon

as practicable thereafter.

Where the shares of a Bermuda company are listed on a recognised stock exchange,

there is no requirement to file the prospectus with the Registrar of Companies in

Bermuda.

A publication entitled “Prospectuses and Public Offers by Bermuda Companies”,

which considers this topic in greater detail, is available upon request.

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3.10 Constitutional Documents

The constitutional documents of an investment fund provide for the regulation and

operation of its affairs. In general, the IF Act requires that the constitutional

documents make provision for (a) the rights and restrictions attaching to the units, (b)

the terms for valuation of its assets and liabilities (c) the manner of calculation of the

net asset value per unit and the issue price and redemption price thereof, (d) the terms

of issue, transfer, conversion (if applicable) and redemption of units, (e) the

investment restrictions and borrowing limitations, if any. Accordingly, subscriptions

and redemptions are effected upon the terms set out in the constitutional documents

of the investment fund. The subscription price is payable by a subscriber and the

redemption price is payable to a unit holder and are calculated by reference to net

asset value calculations.

4. FUNDS OUTSIDE REGULATION

4.1 Private Funds

Investment funds that are private funds are specifically excluded from the scope of

the IF Act. A fund is a private fund if the number of participants in the fund is not

more than 20 and the fund does not promote itself to the public generally.

Written notice of the fact that the private fund qualifies for such exclusion must be

provided to the Authority by the operator as soon as practicable after establishment.

4.2 Class A and Class B Exempt Funds

Certain investment funds are eligible to register for an exemption under the IF Act.

There are two categories of exempt funds: Class A Exempt Funds and Class B Exempt

Funds. Once registered, such funds have minimal reporting obligations to the BMA.

A fund will qualify to be a Class A Exempt Fund if its investment manager meets

certain qualification standards and if its securities are offered to “qualified

purchasers” (as defined below). Eligible investment managers include: (i) those

licensed under the Investment Business Act, (ii) those authorised or licensed by a

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foreign regulator recognised by the BMA; or (iii) those carrying on business in a BMA

recognised jurisdiction and who have gross assets under management of not less than

$100 million (either individually or as part of a group).

In addition, a Class A Exempt Fund must have an officer, trustee or representative in

Bermuda who has access to the books and records of the investment fund; the

investment fund must appoint a fund administrator, a registrar, an auditor and a

custodian or prime broker; and the financial statements of the fund must be prepared

in accordance with International Financial Reporting Standards (“IFRS”) or Generally

Accepted Accounting Principles (“GAAP”) or such other standards deemed

appropriate by the BMA.

Registration as a Class A Exempt Fund is immediate upon filing electronically a self

certification form attesting to the requirements noted above, together with a copy of

the investment fund’s offering memorandum. No further regulatory approvals are

required.

Funds which do not meet the investment manager qualifications for Class A Exempt

Funds may elect to be designated as Class B Exempt Funds if they offer their

securities to qualified purchasers. Class B Exempt Funds also require that the

investment fund has an officer, trustee or representative in Bermuda who has access

to the books and records of the investment fund; the investment fund has appointed

an investment manager, a fund administrator, a registrar, an auditor and a custodian

or prime broker; and the financial statements of the fund are prepared in accordance

with International Financial Reporting Standards (“IFRS”) or Generally Accepted

Accounting Principles (“GAAP”) or such other standards deemed appropriate by the

BMA.

Funds desiring to be registered as Class B Funds are required to apply to the BMA.

The BMA then has a period of up to ten (10) calendar days following the date of

submission of the application to either grant the Class B Fund exemption or to require

additional information about the fund and/or its service providers.

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Ongoing requirements are straightforward. After initial registration, on an annual

basis, both Class A Exempt Funds and Class B Exempt Funds must certify that they

continue to qualify for exemption and must provide a copy of their annual audited

accounts. Class A Exempt Funds are also required annually to advise the BMA of any

material changes to the terms of their offering document. Class B Exempt Funds must

notify and seek the BMA’s prior approval to any change to the directors or service

providers of the fund.

Both classes of exempt funds will be treated as ‘out of scope’ of the European Union

Directive on Taxation of Savings Income (the “EU Savings Directive”) under Swiss

home country rules. This means that exempt funds may conduct their business

through Swiss paying agents without being subject to the disclosure or tax

withholding requirements of the EU Savings Directive.

It is important to note that where a fund qualifies for an exemption, it is generally

exempted from the provisions of the IF Act but must still meet the requirements of the

Companies Act as the same pertain to all companies in Bermuda.

4.3 Closed-ended Investment Funds

Investors in closed‐ended funds do not have the right to demand redemption of their

units. Rather investors’ units are typically redeemed at net asset value at the end of a

pre‐determined investment period.

Closed‐ended funds are companies incorporated by registration under the Companies

Act as investment holding companies. Such companies are typically incorporated

with powers authorizing the company itself (and not the shareholders) to effect

redemptions or purchases of shares in certain circumstances. Such powers are used

for the purposes of ensuring compliance with investor qualification restrictions and

for returning capital to investors at appropriate times. Since such companies, and

indeed unit trusts and partnerships which are similarly structured, do not fall within

the definition of “investment funds” as set out in the IF Act, they are generally not

subject to the provisions of the IF Act.

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An offer of shares to the public by a closed‐ended investment fund, like any exempted

company proposing to make an offer of its shares to the public, is subject to the

prospectus provisions of the Companies Act (see “Companies Act Prospectus

Requirements” above).

5. ESTABLISHMENT OF A REGULATED INVESTMENT FUND

If a fund does not qualify for an exemption from the IF Act, an application for the

authorization of an investment fund is submitted to the Authority (see “Regulations –

Application Process” above) and, in addition to the related fund documentation, must

be submitted concurrently with or subsequently to:

(i) evidence of the promoter’s expertise and experience in the

management of investments;

(ii) evidence of the good financial standing of the ultimate beneficial

owners of the promoter;

(iii) a draft, complete with all pertinent details, of a prospectus or offering

memorandum; and

(iv) an application for classification as an Institutional fund, Administered

fund or Standard fund.

The Authority must be satisfied as to the investment management experience and

expertise of the promoters. Unless the administration is to be delegated to a

recognised Bermuda service provider, the promoters must produce evidence of their

experience as mutual fund operators, especially as to their administrative abilities. As

mentioned above, the Authority must also approve the administrator, custodian,

registrar and auditor.

In addition, the Authority must be satisfied as to the good standing and business

integrity of the principals of the promoters. In general, a personal declaration signed

by each of the individuals who are the ultimate beneficial owners (holding 10% or

more) thereof must be provided. By the declaration, each such beneficial owner

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attests to his or her good standing (a) in any other Bermuda operation and generally,

and (b) with respect to any investment regulatory body elsewhere.

The offer of shares by a mutual fund and unit trust will be subject to the prospectus

provisions of the Act and, along with a limited partnership, the IF Act which require

the issue and filing of a prospectus or offering memorandum.

6. OPERATION OF A REGULATED INVESTMENT FUND

In general, the initial offer of units of an investment fund is made at a fixed price and

for such duration as the directors or operator determine. The Companies Act

provides, however, that if the minimum subscription (as the directors (or Bermuda

manager or trustee of a unit trust) determine must be raised in order for the mutual

fund (or unit trust) to commence business) is not raised within 120 days of the

commencement of the offer, the money received must be repaid to the investors.

Alternatively, the investment fund may be “funded” by an initial private placement of

units to an investor or group of investors.

Prior to the first offer of units being made to the public, a prospectus of a mutual fund

or unit trust offered by a Bermuda manager or trustee must be filed in Bermuda with

the Registrar of Companies. Filing is effected by simply delivering the prospectus,

which must be signed by or on behalf of all the directors of the mutual fund or

Bermuda manager or trustee of a unit trust, together with consent of the auditors and

certificate of compliance from the attorneys, to the Registrar.

After the initial offer, the subscription price for units is determined in accordance with

the constitutional documents by reference to the net asset value calculation. The

constitutional documents may provide for a commission or initial charge to be

payable to the manager. A mutual fund or unit trust may issue fractional units.

Redemptions are effected upon the terms and conditions set out in the constitutional

documents. The redemption price payable to the shareholder is calculated by

reference to the net asset value calculation. The issue and redemption prices must be

available on request from an office in Bermuda.

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Where, as is generally the case, an investment fund continuously offers units to the

public, supplementary particulars of the prospectus of a mutual fund or unit trust

offered by a Bermuda manager or trustee must be published and filed with the

Registrar of Companies in Bermuda as soon as practicable after the mutual fund or

Bermuda manager or trustee of a unit trust becomes aware that any of the particulars

in its prospectus ceases to be accurate in a material respect.

Where the investment fund intends to invest in income producing assets, the

constitutional documents may provide that such income will be reinvested by the

fund directly in the acquisition of further investments. However, the constitutional

documents may provide for the distribution of such income by way of dividend

together with, if desired, the option for the reinvestment of any dividend by the fund

on behalf of the participants in further units of the fund.

The offering of the units of an investment fund in jurisdictions outside Bermuda is, of

course, subject to the laws of those jurisdictions.

7. ONGOING REGULATION

The Act subjects an investment fund to various ongoing requirements. Such

requirements include, among others:

7.1 Reports to Investors

An investment fund must make provision for the preparation and distribution of an

annual report to investors including copies of its audited financial statements.

Financial statements and other financial information distributed to investors and

financial information used in the determination of net asset value must be prepared in

accordance with generally accepted accounting principles (GAAP) which may be

those of a jurisdiction other than Bermuda.

7.2 Reports to the Administrator

Service providers to an investment fund are required to report specific matters of

concern to the BMA. Where a service provider to an investment fund becomes aware

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that the assets of such investment fund have not been invested in accordance with the

constitution or that the general management of the investment fund is not materially

in accordance with the provisions of its constitution, such service provider must:

(i) immediately advise the BMA of the occurrence of any such event and

the circumstances applicable thereto; and

(ii) make a report in writing of such event to the investment fund’s

administrator.

Such report is required to be included in the investment fund’s next annual report

and, in addition, in its next periodic report if such next periodic report is to be

distributed before the next annual report.

7.3 Reports to the Authority

An authorised investment fund is required to submit to the BMA:

(i) within six months after its financial year end, a statement confirming

that such investment fund has at all times during the preceding

financial year been in compliance with the Act and fund and

prospectus rules applicable to it, or, in the circumstances where the

investment fund has not been in compliance, the statement shall

specify the particulars of such non‐compliance; and

(ii) when required, a report on such activities of such investment fund as

the BMA may reasonably require.

The BMA will generally grant an exemption to file a statement of compliance for

investment funds that have notified the BMA of their intention to liquidate at the

earliest practical date.

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7.4 Information Gathering and Investigation Powers

The Authority may revoke the authorization of an authorized fund in certain specified

circumstances. However, where the Authority is satisfied that the circumstances are

not such as to justify revocation, the Authority may give directions instead. The

Authority also has the power to present a petition to the Supreme Court for the

winding up of a fund in certain specified circumstances.

The IF Act also provides enhanced information, intervention, and enforcement

powers for the BMA. There are provisions for the launching of investigations by, or

on behalf of, the BMA. There are safeguards and protections, however, restricting the

disclosure of confidential information by the BMA although the Act does provide

certain “gateways” for its disclosure. Limits are placed on the scope of any such

disclosure obligations so that, for example, these powers cannot be used to conduct

“fishing expeditions”.

8. REGULATION OF FUND ADMINISTRATORS

The IF Act provides for the licensing of fund administrators who carry on such

business in or from Bermuda. For the purposes of the IF Act, fund administrator

means a person who provides any one or more of the following services to a fund,

namely (a) applying the subscription monies received by a fund in accordance with its

constitution and its prospectus, (b) processing the issue, conversion and redemption

of units, (c) applying the income of a fund in accordance with its constitution and its

prospectus, (d) calculating the net asset value of the units, and their issue, conversion

and redemption price, (e) maintaining the accounts of a fund, (f) distributing to the

participants of a fund all dividends or other distributions which may from time to

time be declared and paid by it on units in a fund. Only companies (whether

incorporated in Bermuda or elsewhere) may qualify for a license and applicants are

required to provide the BMA with a business plan and any other information that the

BMA may require.

The BMA must also be satisfied that the applicant satisfies the minimum criteria for

licensing before granting the application. In particular, every controller or officer of

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the licensed fund administrator must be a fit and proper person to hold the particular

position and the licensed fund administrator must conduct its business in a prudent

manner. In that regard, a licensed fund administrator must, inter alia, maintain

minimum net assets of $50,000, must maintain adequate accounting and other records

of its business, adequate systems of control of its business and records and must have

effected a policy of insurance to cover risks inherent in the operation of its business.

The BMA may issue codes of conduct dealing with the duties, requirements and

standards that fund administrators should adhere to. Codes may also cover the

procedures – such as client identification and record‐keeping – and sound principles

that should be observed by fund administrators. Fund administrators will be

expected to comply with these codes of conduct and any failure to do so will be taken

into account by the Authority in assessing whether the business is indeed being

conducted in a prudent fashion.

An application fee is payable at the time of application for a fund administrator’s

license and an annual fee is payable thereafter.

Licensed fund administrators must notify the BMA of any change in its officers and

controllers and must comply with any codes of conduct on the duties, requirements

and standards to be complied with by the licensed fund administrators.

All licenses issued will be subject to the condition that the licensed fund

administrators must not hold client assets.

The BMA may give directions to a licensed fund administrator if it considers it

desirable for safeguarding the interest of the administrator’s clients or potential

clients. Like investment funds, the Act also provides for the BMA to present a

petition to the Supreme Court for the winding‐up of a fund administrator in certain

specified circumstances.

There is certain rights of appeal to a Tribunal for both investment funds and licensed

fund administrators who feel that they are aggrieved by certain decisions taken by the

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BMA, particularly with respect to the revocation of authorization or licensing and the

giving of any directions under the Act.

9. SEGREGATED ACCOUNTS COMPANIES

Bermuda mutual fund companies and other companies structured to pool investors’

investments are permitted to be registered as Segregated Accounts Companies

(“SACs”) pursuant to the Segregated Accounts Companies Act (“SACA”). However,

investment funds established as unit trusts or partnerships are currently not able to

take advantage of this legislation. A SAC is permitted to create segregated accounts

in order to segregate the assets and liabilities attributable to a particular class or series

of shares of the SAC from the assets and liabilities attributable to each other class or

series of shares of the SAC, and from the SAC’s general assets and liabilities. Any

asset or liability linked to a particular segregated account of an SAC is deemed to be

held as a separate fund which is not part of the other assets of the SAC and is held

exclusively for the benefit or burden of the account owners of that account and any

counterparty to a transaction linked to that segregated account. SACs can therefore

contract with a creditor or shareholder so that the assets injected by that person are

held by the SAC in a segregated account and insulated from any claims of the

creditors of other segregated accounts and of the general creditors of the company.

Except where agreed otherwise, segregated account assets are only intended to be

used to meet liabilities to creditors in respect of a particular segregated account and

are not intended to be available to meet liabilities to creditors in respect of other

segregated accounts or to general creditors of the SAC.

A segregated account is not a separate legal entity but a record or a collection of

records detailing transactions relating or linked to each other. The SACA therefore

enables a statutory segregation of accounts within a single company what could

otherwise only be achieved by incorporating subsidiaries or by private Act. Within

the funds industry, the ability to use a SAC is particularly useful for fund managers

wishing to establish master‐feeder fund structures, structures providing for multiple

classes of shares or any structure where the statutory segregation of assets is desired.

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An SAC is required to appoint a segregated account representative (“SAR”) approved

by the Minister of Finance. The administrator, or an appropriate person provided by

the administrator or the manager, would normally be acceptable. The purpose of the

SAR is to act like an internal watchdog, with the statutory duty to make a written

report to the Registrar of Companies (“ROC”) within thirty days after (a) the SAR

reaching the view that there is a reasonable likelihood of a segregated account or the

general account of the SAC becoming insolvent, or (b) it coming to the SAR’s

knowledge or his or her having reason to believe that certain failures to comply with

SACA have occurred or that the SAC has become involved in any criminal

proceedings in Bermuda or elsewhere.

In order to be registered as a SAC, a company is required to file a statutory notice

(“Form 1”) with the ROC. Form 1 must describe the nature of the business as well as

contain a statement that the company is able to comply with the accounting

procedures set out in section 16 of SACA. When making such statement, it is usually

sufficient for the company’s directors or other applicants to confirm that the

company’s accountant or administrator has been directed to account for segregated

accounts in the manner set out in SACA.

It should be noted that the application and documents which are submitted to the

ROC and the BMA do not form part of the public record on the company. The SAC

will, however, be included in the Register of Segregated Account Companies which is

maintained by the ROC and is available to public inspection.

Where an existing authorized or exempted mutual fund seeks to register as a SAC, the

Authority will need to be satisfied that adequate written notice has been given to

investors, enabling them to have an opportunity to sell or redeem their holdings in

advance of such constitutional change occurring. While authorization relates to the

SAC as a whole, the operator may choose to offer units relating to separate segregated

accounts by way of stand alone prospectuses. A SAC may appoint different service

providers (with the exception of the auditor) to the authorized fund in respect of

individual segregated accounts. The Authority’s approval must be sought for such

appointments in accordance with the provisions of the IF Act.

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The opportunity has been taken in the IF Act to provide for the recognition of the

capacity of a unit trust to establish and maintain segregated accounts. A segregated

account for this purpose is defined to mean a separate and distinct account or sub‐

trust of a unit trust fund “relating to an identified or identifiable pool of assets and

liabilities of such unit trust fund which are segregated or distinguished from other

assets and liabilities of the unit trust fund.” These provisions will apply to a unit trust

which is permitted under the terms of its trust deed to operate segregated accounts

and is intended to leave no doubt that the trustee is only liable to creditors in respect

of a particular sub‐trust out of the asset of such sub‐trust effectively facilitating

segregation of the assets and liabilities of the different sub‐trust – similar to the

segregated accounts legislation available for corporate structures.

The SACA has only recently been considered by the Bermuda courts and, to the best

of our knowledge, there have been only five reported decisions on it at first instance.

These decisions indicate that the courts will protect the segregated accounts upon

insolvency and will ensure that the assets of an individual segregated account are

only available for the creditors and account owners of that particular segregated

account.

10. TAXATION

10.1 Taxation

At the date of this publication, there is no Bermuda income, corporation or profits tax,

withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax

payable by a mutual fund company, a closed‐end fund, a unit trust, a limited

partnership or their shareholders, unit holders or limited partners, other than

shareholders, or unit holders or limited partners ordinarily resident in Bermuda.

A mutual fund company may apply for and is likely to receive from the Minister of

Finance of Bermuda under the Exempted Undertakings Tax Protection Act, 1966 an

assurance that, in the event of there being enacted in Bermuda any legislation

imposing tax computed on profits or income, or computed on any capital assets, gain

or appreciation, or any tax in the nature of estate duty or inheritance tax, such tax

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shall not until 31st March, 2035 be applicable to such company or to any of its

operations or to the shares, debentures or other obligations of such company except in

so far as such tax applies to persons ordinarily resident in Bermuda and holding such

shares, debenture or other obligations of the company or to any land leased or let to

the company. A similar assurance may be obtained by a unit trust or a limited

partnership.

A mutual fund that does not qualify as an exempted fund under the IF Act, or one

which does qualify but employs a paying agent in a country that is a participant in the

EU Directive other than Switzerland, may be subject to tax withholding requirements.

The exact nature of these requirements will depend on the home rules of the country

in which the paying agent is situate, and the location of the person receiving

investment income from the fund.

10.2 Stamp Duty

No stamp duty or other similar duty is payable by a mutual fund company, closed‐

end fund company or unit trust on capital or on the issue, redemption or transfer of

shares or units.

10.3 Exchange Control

Bermuda is independent for the purposes of exchange control which is operated

under the Exchange Control Act 1972 and related regulations. A mutual fund

company, a closed‐end fund company and a unit trust will be classified as non‐

resident of Bermuda for exchange control purposes by the Authority. The Authority

will also grant permission for the issue and subsequent redemption or transfer of the

shares of a mutual fund company or a closed‐end fund company, or the units of a unit

trust, to or by persons regarded as resident or non‐resident of Bermuda for exchange

control purposes without specific consent under the Exchange Control Act 1972 and

regulations made thereunder.

The non‐resident designation allows mutual fund companies, closed‐end fund

companies and unit trusts to operate free of exchange control regulations and enables

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them to make payments of dividends and distributions, to distribute capital, to open

and maintain foreign bank accounts and to purchase securities etc without reference

to the exchange control authorities.

11. FEES

11.1 Government Fees

An exempted company is liable to pay an annual registration fee in Bermuda on a

sliding scale based upon its assessable capital. In the case of a mutual fund, assessable

capital is its authorized share capital. In the case of a closed‐end investment

company, assessable capital is the sum of its authorized share capital and share

premium account. For a full listing of government fees, please contact Conyers Dill

and Pearman.

A unit trust itself is not liable to pay an annual registration fee. However, its

manager, if a company to which the Companies Act applies, will be required to pay

an annual fee in respect of each unit trust managed by that management company.

An annual fee is payable by an exempted partnership registered as a limited

partnership.

11.2 IF Act Fees

The IF Act provides for the payment of various fees on the making of an application

for authorization or exemption, as the case may be, on the making of an application

for a change of classification and annually thereafter on or before 31 March.

11.3 SAC Act Fees

Apart from the SAC application fee and the filing fee, the only additional annual

government fee is an annual fee in respect of the operation of segregated accounts.

This represents a significant savings in terms of the costs of paying a separate fee in

respect of a separate company for each segregated account.

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This publication should not be construed as legal advice and is not intended to be relied upon

in relation to any specific matter. It deals in broad terms only and is intended merely to

provide a brief overview and give general information.

© Conyers Dill & Pearman, May 2014

About Conyers Dill & Pearman

Conyers Dill & Pearman is a leading international law firm advising on the laws of

Bermuda, the British Virgin Islands, the Cayman Islands and Mauritius. Conyers has

over 130 lawyers in eight offices worldwide and is affiliated with the Conyers Client

Services group of companies which provide corporate administration, secretarial,

trust and management services.

www.conyersdill.com

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