The Investment Funds Act 2006 - International Law Office

Introduction
Regulation of Investment Funds
Unit Trust Funds - Segregation of Accounts
Authorization and Exemption of Funds
Excluded Funds
Licensing and Regulation of Fund Administrators
Ongoing Requirements
Fund Rules and Fund Prospectus Rules
Appeals Procedure
Investigatory Powers

Introduction

The Investment Funds Act 2006, which received the assent of the governor general on December 28 2006, makes new provision for the regulation of investment funds (formerly known as collective investment schemes) in Bermuda. The act is the result of a collaborative consultation between the public and private sectors and is intended to clarify and codify the current regulation of funds, with the overall goal of strengthening Bermuda's position in the international funds market. In practice, the act will not result in significant changes for most funds.

The act creates a new category of authorized fund and provides for a new licensing regime for fund administrators which ensures that licensed fund administrators have proper personnel and operating systems in place. The act includes an appeals procedure and provisions which give the Bermuda Monetary Authority greater powers to gather information and conduct investigations. The act also restricts the use of confidential information, which bring the authority's powers into line with those found in other financial services legislation in Bermuda.

Regulation of Investment Funds

One of the aims of the act is to regulate investment funds in Bermuda. An 'investment fund' is defined as follows:

"Any arrangement with respect to property of any description, including money, the purpose 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 in the investment fund do not have ongoing control over the management of the property and are entitled to have their units redeemed in accordance with the constitutional documents of the investment fund. Accordingly, closed-ended investment funds are excluded from the scope of the act. The arrangement may take the form of a company, unit trust or - for the first time - a partnership, provided that the contributions made by the participants are pooled and/or the property is managed as a whole by or on behalf of the operator of the investment fund.

Unit Trust Funds - Segregation of Accounts

The act recognizes the possibility of the segregation or creation of distinct accounts or sub-trusts for unit trust funds where such activity is permitted by the trust deed constituting the unit trust fund. These accounts may be linked to data, assets, rights, contributions, liabilities and obligations of the particular account, or an identified or identifiable pool of assets.

Authorization and Exemption of Funds

Investment funds are prohibited from being operated in or from Bermuda, unless the investment fund is authorized or exempted under the act. An investment fund may apply to the authority for an exemption from authorization where the following criteria are met:

• The fund is open only to qualified participants;
  
  
• It is administered by an administrator recognized by the authority;
  
  
• It has appointed an auditor; and
  
  
• It has an officer, trustee or representative resident in Bermuda with access to its books and records.

A 'qualified participant' is defined in the act as any of the following:

• 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 his or her 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;
  
  
• an individual whose net worth or joint net worth with his or her spouse in the year in which he or she purchases an investment exceeds US$1 million;
  
  
• an individual who has such knowledge of and experience in financial and business matters as would enable him or her properly to evaluate the merits and risks of a prospective purchase of investments;
  
  
• a body corporate which has total assets of no less than US$5 million held either solely by the body corporate or partly by the body corporate and partly by one or more members of the group of which it is a member;
  
  
• an unincorporated association, partnership or trust which has total assets of no less than US$5 million held either solely by such association, partnership or trust or partly by it and partly by one or more members of the group of which it is a member;
  
  
• a body corporate whose shareholders fall within one or more of these categories;
  
  
• a partnership whose members fall within one or more of these categories; and
  
  
• a trust whose beneficiaries fall within one or more of these categories.

An application for exemption must be made to the authority and be accompanied by such information as the authority may reasonably require to determine the merits of the application, together with the requisite fee.

The act creates three categories of authorized fund:

• Institutional funds - an institutional fund is open only to qualified participants or requires each participant to invest a minimum of US$100,000 in the investment fund.
  
  
• Administered funds - an administered fund must have an administrator licensed under the act and require that its participants invest a minimum of US$50,000 in the investment fund or be listed on a stock exchange recognized by the authority.
  
  
• Standard funds - any investment fund that does not qualify for classification under any other category of investment fund.

Applications for authorization must contain the information prescribed by the act and be accompanied by a fee. The authority may request further or additional information or give directions to an applicant by imposing certain requirements on the investment fund. Once the authority is satisfied that the applicant meets all requirements for authorization, it will grant the application for the investment fund to be authorized in the appropriate class. For an investment fund to be authorized, it must:

• prepare annual audited financial statements;
  
  
• appoint an investment manager, auditor and administrator;
  
  
• entrust its property to a custodian which (if incorporated in Bermuda) is licensed under the Banks and Deposit Companies Act 1999, the Trusts (Regulation of Trust Business) Act 2001 or the Investment Business Act 2003, or (if incorporated elsewhere) is subject to regulatory supervision equivalent to that imposed by the three aforementioned acts and is independent of the operator of the investment fund (although the Investment Funds Act provides for an exemption from the requirement to appoint a custodian, where alternative arrangements are in place to safeguard the property of the investment fund);
  
  
• have an operator and employ service providers which are fit and proper, and have the necessary experience and expertise to operate the investment fund; and
  
  
• comply with the fund rules and fund prospectus rules.

The authority is required to establish and maintain a register of all authorizations and exemptions.

Excluded Funds

The requirement to be authorized or exempted does not apply to investment funds which are deemed to be private. An investment fund is private if the number of participants is 20 or less and if the promotions, communications and offers to participate in the investment fund are restricted and not made to the general public. An investment fund must serve written notice on the authority advising that the fund is private and qualifies for exclusion under the act. Notice is made through the operator of the investment fund and must be made as soon as practicable after the establishment of the private investment fund.

Licensing and Regulation of Fund Administrators

The act makes it an offence to carry on or purport to carry on the business of fund administration in or from Bermuda unless a person is licensed under the act. Applications for licences are made to the authority and must include a business plan setting out the nature and scale of the business which is intended to be carried on by the applicant, and such other information as the authority may require for the purposes of considering the application, together with the prescribed fee.

An applicant must be a company incorporated in Bermuda or elsewhere and must meet the minimum criteria set out in the schedule to the act, which include the requirements that the controllers and officers be fit and proper, and that the business of the administrator be conducted in a prudent manner. In determining this issue the fund administrator must comply with the provisions of the Investment Business Act and maintain minimum assets of US$50,000.

A licensed fund administrator is prohibited from holding client money or assets. The authority has the power to issue codes of conduct relating to the duties, requirements and standards which are to be met by licensed fund administrators; it may also set out best practices and procedures for carrying on the business of fund administration. Existing fund administrators have been granted a 12-month period from the passage of the act within which to apply for a licence.

Ongoing Requirements

An exempted investment fund must pay annually on or before April 30 the fee prescribed under the Investment Funds Act. The operator of an exempted investment fund must also notify the authority annually in writing that the fund continues to qualify for exemption.

Authorized funds are required to pay such fee as may be prescribed for the particular class of investment fund annually on or before April 30. Authorized investment funds must also submit a report of activities and performance to the authority at such times or intervals as the authority may require. Within six months of its financial year end, an authorized investment fund must submit to the authority a statement confirming that the fund has complied with the provisions of the act during the preceding financial year or, if the investment fund has not been in compliance, the particulars of the breach. Service providers are also required to notify the authority of any breaches by an authorized investment fund.

Licensed fund administrators must have their licence on display at all times at the company's principal place of business. A fee is payable to the authority on or before April 30 of every year; moreover, within four months of the end of its financial year, a licensed fund administrator must submit to the authority a statement confirming that it has complied with the requirements of the act or, if it has failed to do so, a statement setting out the particulars of the breach.

The operator of an authorized investment fund must give written notice to the authority of any proposal to:

• make a material change to the investment fund's prospectus;
  
  
• replace a service provider;
  
  
• replace or appoint a trustee, director or general partner (as applicable);
  
  
• reconstruct or amalgamate the company (in the case of a mutual fund company); or
  
  
• wind up the affairs of the investment fund.

Fund Rules and Fund Prospectus Rules

The authority is given the power to make fund rules which are wide ranging in scope. These rules may govern (i) the constitution, management and operation of an authorized fund, and (ii) the powers, duties, rights and liabilities of the operator, any service provider or director of an authorized mutual fund company. The fund rules may also govern the procedure for the winding-up of an authorized investment fund and the rights of participants.

The fund prospectus rules are expected to stipulate that a copy of the prospectus must be submitted to the authority and published or made available to the public on request. For the purposes of the act, a 'fund prospectus' is deemed to mean a prospectus containing particulars in such form and containing such information about the fund as required by the rules, and complying with the requirements set out in the rules. No rules have yet been promulgated by the authority.

Appeals Procedure

The act makes provision for an appeals tribunal which is without prejudice to judicial review of authority decisions on any matter. Rights of appeal exist against decisions of the authority revoking the authorization of an investment fund or the licence of a fund administrator. A right of appeal also exists against directions given to the operator of an investment fund or a licensed fund administrator.

Investigatory Powers

The authority has been given wider powers to issue legislative penalties in order to gather information and carry out investigations, which are similar to powers granted under other financial services proceeds and crime legislation in Bermuda. The authority may seek information from the operator of an investment fund, its service providers or a licensed fund administrator. The authority may enforce this right through demands for the production of documents and records of the investment fund or its service providers. It is also given a right of entry to premises for information-gathering purposes.

In order to provide the necessary balance to the powers which have been granted to the authority, the act restricts the disclosure of confidential information to third parties:

• to certain 'gateways' where it is necessary to facilitate the discharge of the authority's functions under the act;
  
  
• to the institution of criminal proceedings; and
  
  
• to the director of public prosecutions.

For further information on this topic please contact James Keyes at Appleby Hunter Bailhache by telephone (+1 441 295 2244) or by fax (+1 441 292 8666) or by email (jkeyes@applebyglobal.com).