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.

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 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.

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 abroad 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.

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 reissued 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)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.

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 settler) 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 unit-holders, voting 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.

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 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 memorandum 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.

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 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.

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:

  • the names, addresses and other relevant particulars of directors, officers and principal service providers
  • its investment objectives and any investment limits and borrowing powers
  • its material risks, including, where applicable, a statement of any potential risks associated with the operation of segregated accounts
  • the principal rights and restrictions attaching to its units
  • 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
  • description of potential conflicts of interest
  • 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 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 we redesigned 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.

Exempted Funds

A new fund may apply to the Authority to be exempted from the IF Act. Funds that are exempted in this manner will be treated as 'out of scope' of the European Union Directive on Taxation of Savings Income (the "EU Directive") under Swiss home country rules. This means that exempted funds may conduct their business through Swiss paying agents without being subject to the disclosure or tax withholding requirements of the EU Directive.

A fund qualifies for exemption if:

  • it is only open to 'qualified participants' (as defined under "Regulation - Institutional Funds" above);
  • its fund administrator falls within a class of persons recognised by the Authority;
  • it has appointed an investment manager, registrar, custodian and/or prime broker, as well as an auditor; and
  • it has an officer, trustee or representative resident in Bermuda who has access to the books and records of the scheme.

To claim an exemption, a qualifying fund must make an application to the Authority setting out the pertinent information and enclosing the prescribed fee. Once exempted, the fund is required to file an annual notice stating that it continues to qualify for exemption.

Notably, such funds would be registered by the Authority and may apply to be authorised.

If a fund qualifies for an exemption, it is exempted from the IF Act but must still meet the requirements of the Companies Act, as the Act pertains to all companies in Bermuda or the partnership legislation, as it pertains to all partnerships in Bermuda. In addition, the Authority will still scrutinize the proposed ultimate beneficial owners of the fund or its operator to determine their good standing.

Closed-ended Investment Funds

Investors in a closed-ended fund do not have the right to demand redemption of their units which are typically redeemed at net asset value at the end of the pre-determined investment period.

Closed-ended funds that are companies are incorporated by registration under the Companies Act as investment holding companies. Such companies are incorporated typically 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 trust 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.

An offer of shares to the public by a closed-ended investment company, 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).

Principal regulatory bodies

The principal regulatory bodies are the BMA and the registrar. The BMA has been given the responsibility, on behalf of the minister, to review and approve applications to incorporate companies and form partnerships and, under the Exchange Control Act 1972, to permit the issue of shares or units of a fund and to designate a fund as non-resident for exchange control purposes. The BMA is responsible for the vetting of applications and where a fund refuses to submit any information required by the BMA, the IFA provides certain information- gathering powers to the BMA, including powers to obtain information and require the production of documents, and rights of entry to obtain documents. The BMA also has investigative powers regarding the nature, conduct or state of an authorised fund or licensed administrator's business and the ownership or control of the operator of an authorised fund or licensed fund administrator, and powers to investigate suspected contraventions under the IFA.

Governmental requirements

If a unit trust or company is established as an open-ended fund, an application will need to be made to the BMA for it to be authorised as a standard, institutional or administered fund (or it may be exempted or excluded under the IFA).

Investment funds are prohibited from being operated in or from Bermuda unless they are authorised or exempted under the IFA. However, the requirement to be authorised or exempted does not apply to investment funds that are deemed to be private, that is, the number of participants in the fund is 20 or fewer and the promotion, communication and offer to participate in the investment fund is restricted and is not made to the general public.

Requirements for authorisation are that the fund prepares annual financial statements that will be audited; the fund has appointed, or will on authorisation appoint an investment manager, an auditor and a fund administrator; and the fund property has been or will on authorisation be entrusted to a custodian.

An investment fund may apply to the BMA for an exemption from authorisation if it is open only to 'qualified participants' (as defined in the IFA), it is administered by an administrator that is recognised by the BMA, it has appointed an investment manager, registrar, custodian or prime broker and an auditor and it has an officer, trustee or representative resident in Bermuda with access to its books and records.

A closed-ended mutual fund company does not fall under the IFA. As mentioned above, a partnership may come under the IFA if it falls within the definition of an 'investment fund' and is not excluded under any other IFA provision. The IFA provides an appeals procedure for operators of a fund that are aggrieved by certain decisions made by the BMA. Fund administrators are required to obtain a licence under the IFA to carry on the business of a fund administrator in or from Bermuda.

Registration of investment adviser

The IBA requires that any person who provides investment services from a place of business maintained by such a person in Bermuda must either be licensed or exempted.

Investment services are very broadly defined and include dealing in investments, arranging deals in investments, managing investments, providing investment advice and safeguarding and administering investments.

Whether a fund would be required to register as an investment adviser depends on whether the fund has a physical presence in Bermuda. Most mutual fund companies would be able to apply for an Exemption.

Exchange listing

The Bermuda Stock Exchange (BSX) is a full member of the World Federation of Exchanges and an affiliate member of IOSCO. In addition, the BSX is recognised by the US Securities & Exchange Commission as a Designated Offshore Securities Market under Regulation S and by the UK's Financial Services Authority and HMRC. The BSX is the world's leading fully electronic offshore securities market.

Where a private equity fund is established according to Bermuda's IFA it may list under the BSX Listing Regulations, which define 'collective investment vehicle' as a 'collective investment vehicle whether structured as a company, a unit trust, limited partnership or other legal entity that engages in the investment of capital'. It is therefore possible to list securities of almost any type of collective investment vehicle, including open-ended and closed-ended fund structures. In conjunction with the Bermuda Business Products Committee (the Committee), there is an arrangement in place with the BMA and the BSX whereby upon the establishment of a mutual fund there can be a simultaneous listing of that fund on the BSX. The Committee reached an understanding with the BMA and BSX that such vehicles would be approved on a fast track basis. These vehicles are referred to as 'launch and list funds'.

The principal ongoing requirements for listing are that a fund must:

  • be incorporated or otherwise established in Bermuda or in a recognised jurisdiction, and it must also have at least 25 per cent of its listed securities held by the public at all times (although this does not apply if using qualified investor rules). Recognised jurisdictions are the British Virgin Islands (for funds registered as public funds), Canada, France, Germany, Guernsey, Hong Kong, Ireland, the Isle of Man, Japan, Jersey, Luxembourg, Mauritius, Switzerland, the United Kingdom and the United States;
  • may be incorporated in a jurisdiction other than those noted above on the basis that the fund restricts investments in it or the acceptable listed securities to a qualified investor, which is defined under section I of the Listing Regulations, which lists multiple tests that may be applied to confirm an individual, corporation or institutional investor as being suitable under the qualified investor rules;
  • or the fund must have a primary listing on another stock exchange that is recognised for this purpose by the BSX. If the fund's listed securities are restricted as noted above, then shares may not be dealt on the BSX where the initial value of the trade is less than US$100,000.

The BSX lists institutional funds under a 'commercially sensible' regulatory environment that meets international standards. The BSX does not impose minimum capital requirements or investment restrictions and allows flexibility for hedge funds and the use of prime brokers.

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. 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.

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.

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.

Taxation

At the date of this memorandum, 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 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.

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.

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 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.

Annual fee

The annual government fee is based on the company's 'assessable capital'. For most companies, the assessable capital is the amount of the company's authorised share capital plus its share premium account (if any). For mutual fund companies, the assessable capital is the amount of the company's authorised share capital only. Different or additional fees are payable in respect of certain types of businesses (eg, foreign sales corporations and management of unit trusts) or in certain other situations.

The appropriate fee payable is determined in accordance with the following table:

0–12,000 6,275
12,001–120,000 1,995
120,001–1,200,000 4,070
1,200,001–12 million 8,360
12,000,001–100 million 10,455
100,000,001–500 million 18,670
500,000,001 or more 31,120

If the company is incorporated on or after 1 September, half of the relevant fee is payable for the balance of the year.

Partnership

The annual government fee is US$2,235, which is payable upon registration of the partnership; however, if the partnership is registered

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.