Fast-track Investment Funds Launched in Bermuda

By Dawn Griffiths, Director, Conyers Dill & Pearman, Bermuda (01/09/2014)

In a new development that will be of keen interest to insurance-linked securities (ILS) investment managers, reinsurers looking to establish ILS fund platforms not to mention the hedge fund managers generally, Bermuda has launched two new fast track classes of investment funds.


In part due to recognition of the dominance of Bermuda as a domicile for these sophisticated ILS funds, the Bermuda Monetary Authority has just introduced amendments to Bermuda’s Investment Funds Act to provide for two categories of fast-track investment funds, the Class A and Class B Exempt Funds, which require no regulatory approvals to launch and commence operations.


The requirements for qualification as a Class A Exempt Fund are: (i) that it is open only to ‘qualified participants’ (that is, essentially, high income, high net worth or sophisticated investors) and (ii) that it appoints an investment manager that is authorised or licensed in Bermuda or by a federal regulator in the US or the European Union or which has assets under management (itself or on a consolidated group basis) of at least US$100 million. A Class B Exempt Fund will be a fund which is open only to qualified participants but which does not otherwise meet the Class A Exempt Fund qualification criteria.


A Class A Exempt Fund must appoint an officer, trustee or representative resident in Bermuda who has access to the fund’s books and records as well as the following service providers: a fund administrator; a registrar; an auditor; and a custodian or prime broker. To register as a Class A Exempt Fund, the fund must self-certify to the Bermuda Monetary Authority via the Authority’s online registration system that it meets the Class A Exempt Fund qualification criteria. Registration is thus instantaneous.


A Class B Exempt Fund must similarly appoint the various service providers listed above but, in this case, a formal application is made online to the Authority which the Authority must approve prior to commencement of business. The Authority will notify the applicant within 10 days of its decision. Failure by the Authority to notify the applicant will constitute approval of the application.


In terms of ongoing requirements, Class A Exempt Funds must on an annual basis, on or before 30 June, make a certification that it continues to meet the qualification criteria. A copy of the fund’s annual audited financial statements must also be filed together with, if applicable, a copy of any material changes to the fund’s offering document.


A Class B Exempt Fund must apply to the Authority for approval prior to appointing any director or service provider who must be ‘fit and proper’. Failure by the Authority to revert within 14 days of any application for approval will mean the Authority is deemed to have no objection to the proposed appointment. Class B Exempt Funds are otherwise subject to the same minimal ongoing annual filing requirements.


These amendments to Bermuda’s legislation will be welcomed by fund managers targeting institutional investors and, in particular, by ILS fund managers who will be attracted by the emphasis of the Bermuda regulators on facilitating speed to market. Bermuda is the third-largest reinsurance market in the world, the centre of international catastrophe reinsurance business and underwrites a third of global premiums. Exposure to catastrophe risk as an asset class is increasingly gaining institutional investor acceptance for its qualities as both a diversifying asset, which is uncorrelated to the broader credit and equity markets, as well as an asset class that has the potential to produce attractive risk adjusted returns. Bermuda has proven itself as the dominant jurisdiction for the setup of ILS fund platforms with its depth of market and service provider experience, a well-respected regulatory regime and an internationally recognised stock exchange.


In addition, Bermuda was one of the first jurisdictions to adopt segregated account/cell legislation such that funds also have the power and ability to legally segregate and profile investor classes, or strategies and transactions by registering the entities as segregated accounts companies (SAC) under the Segregated Accounts Companies Act 2000. This would enable an ILS segregated account fund to issue multiple classes of securities to investors with individual class risk profiles and investment mandates and strategies.


Reinsurers and ILS investment managers will find Bermuda’s regulatory environment provides them with the ability to launch new fund structures quickly and efficiently, offering them the advantage of a single domicile and single regulator for all of the fund and insurance entities within their ILS structures.


The Bermuda Government and the Bermuda Monetary Authority continue to work diligently in tandem with industry members to not only preserve Bermuda’s dominance in the fast-growing ILS sector but to also springboard off this ILS success to recapture more generally Bermuda’s global standing with hedge fund clients. The 2013 amendments to the Investment Funds Act have been broadly welcomed by industry participants and these early days are already showing increasing interest in Bermuda as a newly energised fund domicile.