The Japanese Attraction to Bermuda Funds

By Elizabeth Denman, Counsel, Conyers Dill & Pearman, Bermuda (01/08/2012)

Bermuda has led the way as an innovative jurisdiction, demonstrating its cutting edge and entrepreneurial heritage with the continued development of new investment fund products for use by its international clientele. This tradition continues with the introduction of regulatory rules specifically aimed at facilitating and attracting investment by Japanese retail investors into Bermuda domiciled funds.

On 18 December 2011, Bermuda’s Investment Funds Act, 2006 (the Act), the legislation which provides the regulatory framework for the creation and operation of investment funds in Bermuda, was amended to create a new class of investment fund to be known as the ‘Specified Jurisdiction Fund’. This new class was created to allow the Ministry of Business Development and Tourism, in conjunction with the Bermuda Monetary Authority (BMA) and industry, to develop and issue ‘orders’ which specifically recognize and complement the regulatory requirements of foreign financial markets in which securities of a Bermuda domiciled fund will be marketed. Through this co-operative approach, foreign promoters, distributors and fund sponsors who use Bermuda domiciled funds can specifically tailor their products to fit the specific regulatory requirements of their target markets in a highly effective way.

On 8 June 2012, the Ministry of Business Development and Tourism, acting on the advice of the BMA, issued its first order under the amended Act targeting the Japanese retail market. The order, entitled the ‘Investment Funds (Specified Jurisdiction Fund) (Japan) Order 2012’ (the Order) together with the ‘Investment Funds (Specified Jurisdiction Fund) Japan Rules 2012’ (the Rules) (made by the BMA) are designed to permit Bermuda domiciled funds established pursuant to the Order to be marketed to the Japanese public (each a Japan Fund).

Bermuda investment funds (and in particular, Bermuda unit trusts) have for many years been eligible for offer in Japan. However, under Article 15 of the Fair Business Practice Rule #4 (Regulations Concerning Foreign Securities Transactions) of the Japanese Securities Dealers Association (the ‘JSDA Regulations’) currently in force, Japanese investment dealers may only solicit customers (excluding Qualified Institutional Investors as defined in the JSDA Regulations) 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’. While the Japanese Securities Dealer Association (the JSDA) has never objected to the distribution of Bermuda domiciled funds in Japan, the rather vague standards for foreign regulatory regimes set out in the JSDA Regulations created some uncertainty in the industry and resulted in some distributors and promoters shying away from using funds organized in offshore jurisdictions.

The Order has been specifically crafted to ensure that the rules applicable to Japan Funds domiciled in Bermuda will meet the requirements of the JSDA Regulations. This will result in Japanese distributors and promoters having a greater degree of certainty and comfort in offering securities of a Japan Fund to retail clients in Japan thus making Bermuda an even more attractive jurisdiction to the Japanese retail market.

The Japan Fund will be regulated by the BMA. In addition to the requirements set out generally for investment funds authorized pursuant to the Act, the BMA will require additional information, governance and disclosure with respect to a Japan Fund. Key information includes:

1. Both the constitutional document and offering document of a Japan Fund must contain prescribed information including the terms upon which the securities of the Japan Fund are to be issued, the rights and restrictions attached to such securities, their method of valuation and full details on how dealing in the securities can be affected.

2. The Rules also specifically provide for the dissemination of information to investors concerning the Japan Fund including the publication of prices, net asset values and the delivery to investors of the Japan Fund’s annual reports and audited financial statements within a prescribed period. Additionally, regular activity reports concerning the Japan Fund and its operations are required to be filed with the BMA.

3. The specific duties, responsibilities and roles of each of the Japan Fund’s service providers are also clearly articulated and include a requirement that the Japan Fund appoint an administrator, custodian, auditor and investment manager approved by the BMA.

4. The manner in which both the custodian and investment manager deal with the assets of the Japan Fund are also prescribed and include a requirement that the investment manager deposit with or to the order of the Japan Fund’s custodian all certificates and documents of title to investments. The investment manager must also establish and monitor the custodian’s procedures for dealing with the Japan Fund’s investments. Certain investment restrictions relating to a Japan Fund’s borrowing, selling of units short and acquisition of securities of other entities and other investment management functions are also prescribed.

5. The Japan Fund is also required to seek the BMA’s approval to material changes and its service providers are required to report to the BMA if they become aware that the assets of the Japan Fund have not been invested in accordance with the Japan Fund’s investment objectives and restrictions.

Through these clearly articulated rules, the JSDA and the Japanese market generally will continue to be confident that Bermuda offers a highly effective and nimble regulatory system for investment funds. This will no doubt result in significant growth and development in Bermuda’s investment funds industry.