Recent Legislative and Regulatory Changes Affecting Bermuda’s Funds, Insurance and Trusts Sectors

The success and international prominence of Bermuda’s funds, insurance, and trusts sectors have attracted the attention of a plethora of international standard-setters and watchdog agencies over the years. Bermudian regulators and supervisors play critical roles in a number of these bodies, and there is a desire for Bermuda to be seen to be at least keeping pace with, if not leading the way in, the emergence of global standards for prudent and sensible industry regulation and supervision.

The Investment Funds Act, 2006 (IFA) came into operation on 7 March, 2007. The IFA makes new provisions for the regulation of investment funds. While the IFA tweaks and refines Bermuda’s already well-regarded regulatory regime, it also introduces a few new concepts. The legislation creates a new category of authorised fund, and also provides a new licensing regime for fund administrators, which ensures that licensed fund administrators have proper personnel and operating systems in place. The new legislation includes an appeals procedure, and provisions which give the Bermuda  Monetary Authority (BMA) greater powers for gathering information and making investigations. It provides restrictions on the use of confidential information, which bring the BMA’s powers in line with those found under other financial services legislation in Bermuda.

The IFA is intended to clarify and codify the current regulation of funds with the overall goal of strengthening Bermuda’s position in the international funds market. Investment funds are prohibited from operating in or from Bermuda unless they are either authorised or exempted under the IFA. Funds may apply to the BMA for an exemption from authorisation if they meet the following criteria:

• Open only to qualified participants (as defined in the IFA);
• Administered by an administrator which is recognised by the BMA;
• Has appointed an auditor; and
• Has an officer, trustee, or representative resident in Bermuda with access to its books and records.

The IFA creates three categories of authorised fund:

Institutional Funds: which are only open to qualified participants or require each participant to invest a minimum of US$100,000 in the investment fund;

Administered Funds: which must have an administrator that is licensed under the IFA and requires its participants to invest a minimum of US$50,000 in the investment fund, or be listed on a stock exchange which is recognised by the BMA; and

Standard Funds: which are any investment funds which do not qualify to be classified under any other category. For an investment fund to be authorised, it must:

• Prepare annual audited financial statements;
• Appoint an investment manager, an auditor, and an administrator;
• Entrust its property to a custodian which (if incorporated in Bermuda) is licensed under the Banks and Deposit Companies Act, 1999, the Trusts (Regulation of Trust Business) Act, 2001, or the Investment Business Act, 2003, (the “IBA” and together, the “Finance Acts”), or (if incorporated elsewhere) be subject to regulatory supervision equivalent to that imposed by the Finance Acts and be independent of the operator
• of the investment fund (although the IFA provides an exemption from the requirement to appoint a custodian provided that alternative arrangements are in place for safeguarding the property of the investment fund);
• Have an operator and employ service providers who are fit and proper persons
• with the necessary experience and expertise to operate the investment fund; and
• Comply with the fund rules in the case of a standard fund and fund prospectus rules in the case of all authorised funds.

Unit Trust Funds

The IFA has also recognised the possibility of the segregation or creation of distinct accounts or sub-trusts for unit trust funds if 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.

Excluded Funds

The requirement to be authorised or exempted does not apply to investment funds which are deemed to be private, which is defined as having 20 or fewer participants and if the promotions, communications, and offers to participate in the investment fund are restricted and not made to the general public. An operator of an investment fund falling into this category must serve to the BMA a written notice of the fact that the investment fund qualifies for this exclusion.

Licensing and Regulation of Fund Administrators

The IFA 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 that Act. An application for a licence is made to the BMA 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 BMA 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 IFA, which includes:

• a requirement that the controllers and officers be fit and proper persons; and
• a requirement 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 IBA and maintain minimum assets of US$50,000. A licensed fund administrator is prohibited from holding client money or assets. The BMA has the power to issue codes of conduct relating to the duties, requirements, and standards that are to be met by licensed fund administrators, and may also set out best practices and procedures for carrying on the business of fund administration.

Appeals Procedure

The IFA makes provision for an appeals tribunal which is without prejudice to judicial review of the BMA’s decision on any matter. Rights of appeal exist against decisions of the BMA revoking the authorisation 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 authorised investment fund or a licensed fund administrator.

Investigatory Powers of the BMA

The BMA has been given wider powers with legislative sanction to gather information and carry out investigations, which are similar to powers granted under other financial services and proceeds of crime legislation in Bermuda. The BMA may seek information from the operator of an authorised investment fund, its service providers or a licensed fund administrator. The BMA may enforce this right through demands for the production of documents and records of the authorised investment fund or its service providers and also has a right of entry to premises for the purposes of information gathering.

In order to provide the necessary balance to the powers which have been granted to the BMA, the IFA restricts the disclosure of confidential information to third parties to certain ’gateways’ in circumstances where it is necessary to facilitate the discharge of the BMA’s functions under the IFA, for the purposes of instituting criminal proceedings or to the Director of Public Prosecutions.

Ensuring that existing funds were ‘grandfathered’ in to the new regulatory regime made for an easier passing of the IFA.  Fund partnerships have to consider the need to be regulated, although many are likely to fall outside regulation as a result of being closed-ended or of a private nature. The regulation of fund partnerships brings Bermuda’s regulation in line with that of many other offshore jurisdictions, as does the licensing of administrators. Generally, however, the chief advantage of the IFA is perceived in Bermuda to be the clarity and certainty that it brings to the authorisation process and ongoing regulation, whilst allowing for the flexibility of its predecessor. It is for these reasons that it has been welcomed by the funds community, both within Bermuda and internationally. Bermuda continues to be seen as one of the jurisdictions of choice for fund formation.

Bermuda’s Insurance Sector

Bermuda is emerging as a vibrant business centre and key jurisdiction in the global insurance market. In 2006, by a comparative of almost 10:1, Bermuda outpaced London as the domicile of choice for new share capital entering the re-insurance market.

Two pieces of legislation, the Insurance Amendment Act, 2006, and the Insurance Amendment Act (No.2), 2006, will modify the regulatory landscape in Bermuda and for Bermudian insurers, going forward. This new legislation gives the BMA new powers to supervise and investigate persons in the insurance industry, including insurers and insurance managers. It also requires the BMA to publish a statement of principles setting out how it is going to exercise its powers under the new legislation.

If the BMA has reason to suspect that there has not been full disclosure, or if there are reasonable grounds to suspect that any notice of an investigation would not be complied with, the BMA may apply to the Court for a warrant allowing entry to those premises. However, the Amendment Act is not without recourse, and establishes an appeals tribunal process for an initial formal review where parties feel aggrieved by decisions of the BMA.

According to Appleby’s Insurance Group Team Leader Timothy Faries,

“The most significant area where improvement is needed comes in the area of regulatory independence. The perception of certain outsiders is that there is an over-dependency by the regulators on industry participation for certain key aspects of industry oversight.”

In the past, Bermuda insurers relied heavily on various ad hoc or established committees consisting of industry leaders who discharged regulatory or supervisory functions. In the current global environment, such a mode of oversight of an industry as large as the one found in Bermuda does not find favour. Thus, a move away from any hint of self-regulation would go a long way to improving the standing of the Bermudian regulatory process in the international community.

Assessment and Licensing Committee

On 25 May, 2007, the Assessment and Licensing Committee (AL C) of the BMA commenced operations. The role of the AL C is to act as the internal licensing body of the BMA, and to consider applications made under the Insurance Act, the Bank Deposit Companies Act, the Trusts (Regulation of Trust Business) Act, the Investment Business Act, and the Investment Funds Act. The AL C replaces the Insurance Admissions Committee, which consisted of senior industry participants. The creation of this body is the second and final phase of the internalisation of the incorporation and licensing process for insurance companies. The process of formation, deadlines for submission of application materials, and the timescale for a response from the BMA have not changed in any material way under the new system.

The ALC will have at its disposal the technical expertise of the individuals from the industry under the heading of the Technical Advisory Group (TAG ). When required, TAG will act primarily in an advisory role, leaving the decisions on applications exclusively with the ALC.

Overall, this move by the BMA is a natural progression in Bermuda’s regulatory approach and is expected to achieve better results, whilst maintaining the very competitive timeliness for company formations that Bermuda enjoyed under the outgoing regime.

Bermuda’s reputation continues to rest on sound regulation. Throughout the years, Bermuda has gained international recognition for regulation of its offshore sector due to the strong regulatory framework and due diligence practices. The selection of an appropriate offshore domicile for companies will often hold the key to successfully accomplishing their goals.

Bermuda has consistently made it clear that it remains committed to developing and maintaining conditions which are conducive to attracting international business.