Bermuda: Alternative Investment Funds 2019

Last Updated: 20 August 2019
Article by Sarah Demerling and Nathalie West
Most Popular Article in Bermuda, September 2019

1 Regulatory Framework

1.1 What legislation governs the establishment and operation of Alternative Investment Funds?

The establishment and operation of investment funds in Bermuda ("investment funds" or "funds") is governed by:

  • the Companies Act 1981 (the "Companies Act");
  • the Investment Funds Act 2006 (the "IFA");
  • the Fund Prospectus Rules 2007 (the "Fund Prospectus Rules"); and
  • the Fund Rules 2007 (collectively with the Fund Prospectus Rules, the "Fund Rules").

The Bermuda Monetary Authority (the "BMA") is the principal body responsible for the regulation of investment funds, including those listed on the Bermuda Stock Exchange.

Investment funds in Bermuda may be structured and organised under Bermuda law in the following ways:

  1. a company registered under the Companies Act and stated to be a mutual fund ("mutual fund company");
  2. a mutual fund company that is a closed-ended fund ("ClosedEnded Fund");
  3. a unit trust scheme;
  4. a limited partnership; and
  5. a limited liability company ("LLC")

An investment fund is defined in the IFA to include any arrangements with respect to property of any description, including money, the purpose or effect 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 IFA only applies to those arrangements where investors are entitled to have their shares/units/interests redeemed in accordance with the fund's constitution and prospectus at a price determined in accordance with such constitution and prospectus. The IFA therefore does not currently apply to Closed-Ended Funds, being funds whose investors do not have the right to redeem at their own option.

Mutual fund companies, unit trust funds, partnerships funds and LLCs in Bermuda (collectively "Open-Ended Funds") are all governed by the IFA and, in the case of a "standard fund", the Fund Rules. The IFA and the Fund Rules are not currently applicable to Closed-Ended Funds.

1.2 Are managers or advisers to Alternative Investment Funds required to be licensed, authorised or regulated by a regulatory body?

The Investment Business Act 2003 (the "IBA") governs the regulation of "investment business" (described below) in Bermuda. Pursuant to the IBA, managers and advisors can be organised anywhere and act as managers and advisors to all forms of funds. There is no requirement for a manager or adviser to be licensed in Bermuda unless they have physical premises and employees in Bermuda. All managers and advisors of authorised, professional and private funds (as described below), however, will be required to act in accordance with the IFA in all dealings concerning the fund. The BMA will evaluate whether the manager is a fit and proper person and will take into account the manager's experience and expertise in relation to the fund.

The Economic Substance Act 2018, as amended (the "Economic Substance Act") which became operative on 31 December 2018 introduced economic substance requirements for any 'relevant entity' (being: a company incorporated or registered under the Companies Act, including a permit company and an overseas company; a Bermuda LLC and a Bermuda exempted partnership, exempted limited partnership or overseas partnership that has elected to have separate legal personality in accordance with section 4A of the Partnership Act, 1902) that is engaged in a "relevant activity" which includes "fund management". This does not apply to a "nonresident entity" which is resident for tax purposes in a jurisdiction outside Bermuda that is not on the EU "black list".

Assuming that a relevant entity is carrying out the business of "fund management", it must satisfy Bermuda economic substance requirements as set out in section 3 of the Economic Substance Act and regulation 3 of the Economic Substance Regulations 2018 (as amended).

At the time of writing, carrying on the business of a fund is not a relevant activity.

The Minister of Finance of Bermuda has issued guidance on general principles with respect to the economic substance requirements, including reporting requirements. Sector-specific guidance, including guidance in relation to the relevant activity of fund management is expected to be issued later in 2019.

Therefore, further clarification and interpretation of the Bermuda economic substance requirements may be contained in such guidance and in any further amendments to the legislation promulgated under the Bermuda Economic Substance Act.

For managers physically domiciled in Bermuda, there are exemptions available from the licensing regime if they fall within the scope of the Investment Business (Exemptions) Order 2004 (the "Exemption Order") further described below.

"Investment business" services are very broadly defined and include dealing in investments, arranging deals in investments, managing investments, providing investment advice and safeguarding and administering investments. To be deemed to be carrying on investment business "in or from" Bermuda, a person must carry on investment business from a place of business maintained by such person in Bermuda with employees. Therefore, unless the manager maintains an office in Bermuda with employees or has an arrangement that the Minister of Finance by order determines will constitute the carrying on of business in Bermuda, the IBA will not apply.

Under the Exemption Order, a person (not being a "market intermediary" (described below)) carrying on investment business shall be exempt from the requirement to obtain a licence under the IBA where such person provides investment business services exclusively to:

  1. a high-income private investor: an individual who has had a personal income in the last two years in excess of US$200,000 in each of the two years preceding the current year or has had a joint income with that person's spouse in excess of US$300,000 in each of those years, and has a reasonable expectation of reaching the same income in the current year; current year meaning the year in which he or she purchases an investment;
  2. a high-net-worth private investor: an individual whose net worth or joint net worth with that person's spouse in the year in which he or she purchases an investment exceeds US$1 million; "net worth" meaning the excess of total assets at fair market value over total liabilities;
  3. a sophisticated private investor: an individual who has such knowledge of, and experience in, financial and business matters as would enable him or her to properly evaluate the merits and risks of a prospective purchase of an investment, and who, in respect of each investment transaction, deals in amounts of not less than US$100,000;
  4. collective investment schemes approved by the BMA under the IFA (or any provision of law amending or replacing the IFA), and includes collective investment schemes established or registered outside Bermuda;
  5. bodies corporate, each of which has total assets of not less than US$5 million where such assets are held solely by the body corporate, or held partly by the body corporate and partly by one or more members of a group of which it is a member;
  6. unincorporated associations, partnerships or trusts, each of which has total assets of not less than US$5 million where such assets are held solely by such association, partnership or trust or held partly by it and partly by one or more members of a group of which it is a member;
  7. bodies corporate, all of whose shareholders fall within one or more of the categories of this list, except category (iv);
  8. partnerships, all of whose members fall within one or more of the categories of this list, except category (iv); or
  9. trusts, all of whose beneficiaries fall within one or more of the categories of this list, except category (iv).

A "market intermediary" is defined as "a person who engages or holds himself out as engaging in the business of dealing in investments as principal or agent on an investment exchange".

Persons who provide investment services to not more than 20 persons at any time, and do not provide investment services to the public are also exempt from the IBA licensing requirement.

Fund administrators are required to obtain a licence under the IFA to carry on the business of a fund administrator in or from Bermuda. It should be noted that only certain classes of authorised funds require a Bermuda licensed fund administrator (see question 1.3).

Incentives are currently being offered by the Bermuda Government to attract asset managers to domicile in Bermuda, such as:

  • new business work permits: new companies to Bermuda will receive up to five work permits for senior positions;
  • no term limits (that is, restrictions on the length of time an employee may stay in Bermuda);
  • reduced fees on the purchase of qualified property for expatriates;
  • key executive exemptions from work permit requirements and the opportunity for these individuals to eventually receive long-term residency for themselves, their spouse and their children; and
  • payroll tax holidays for employers who hire Bermudians to new positions.

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Originally Publish by ICLG

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