March 20 2007
Regulation of Investment Funds
Unit Trust Funds - Segregation of Accounts
Authorization and Exemption of Funds
Licensing and Regulation of Fund Administrators
Fund Rules and Fund Prospectus Rules
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.
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.
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.
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:
A 'qualified participant' is defined in the act as any of the following:
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:
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:
The authority is required to establish and maintain a register of all authorizations and exemptions.
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.
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.
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:
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.
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.
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:
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