Bermuda Enacts Investment Funds Amendment Act

by Phillip Morton, Investors Offshore.com

03 January 2011

Conyers Dill and Pearman have noted that the Investment Funds Amendment Act 2010 received the assent of the Governor General on December 22, 2010, amending the Investment Funds Act 2006, making new provisions for the regulation of investment funds in Bermuda.

The Amendment Act was introduced following consultation with the Bermuda International Business Association's IFA Review Sub-Committee, the Fund Administrators Committee of Business Bermuda, and after receiving comments from Bermuda's investment fund and fund administration industries in response to the Bermuda Monetary Authority's publication of its May 21, 2010, consultation paper.

Conyers Dill and Pearman said: “The changes implemented under the Amendment Act are designed to strike a balance between securing the appropriate degree of protection for investors in Bermuda funds, while not imposing an undue regulatory burden on the industry.”

The Amendment Act introduces a number of significant changes to the Act with a view to aligning “the regulatory framework for funds and fund administrators more closely with the requirements that exist in other regulatory legislation in Bermuda, while ensuring that the framework overall remains risk-based and recognises the unique nature of the funds industry [in Bermuda].”

According to Conyers Dill and Pearman, the law makes several changes to the previous Act, namely:

A change to the definition of service provider

The definition of “service provider” has been extended to include auditors appointed to a fund. The previous definition applied only to a fund's custodian, administrator, investment manager or registrar (and any person to whom a service provider delegated part or all of its function). As a result of the amendment to the definition of “service provider”, auditors are now required to comply with the “fit and proper” tests set out in sections 7 and 14 of the Act.

Service Provider Disclosure for Exempted Funds

Section 7(1)(b) of the Act requires that the operator of an exempted fund and its service providers are “fit and proper persons to act as such”. In addition, section 9 of the Act sets out the criteria for exemption of a fund and includes the requirement to have a recognized fund administrator, an auditor and a Bermuda resident officer or trustee or resident representative who has access to the books and records of the investment fund. To bring exempted funds into line with authorized funds, the Amendment Act introduces the additional requirements for exempted funds to appoint an investment manager, registrar, custodian and/or prime broker. All such additional service providers will be included in the vetting process per section 7(1) of the Act in the same way as authorized funds.

Changes in control for Fund Administrators

Fund administrators are now required to notify the Bermuda Monetary Authority in advance when there is a prospective change of control. The Authority now has power under section 45 of the Act to object to a change in control to prevent it happening or to object to existing controllers where, in the opinion of the Authority, they are no longer fit and proper to be controllers. These amendments mirror the provisions which already exist in Bermuda for other licensed entities such as banks and investment businesses.

Rights of Appeal

Section 55 of the Act has been amended to provide a right of appeal in circumstances where the Authority has exercised its power to object under section 45. The person who is the subject of the Authority's objection may appeal to a Tribunal constituted under section 56. This right of appeal provides that proper judicial review of the authority's exercise of its powers in accordance with section 45 is provided for under the Act.

The ‘Four-Eyes’ Criterion for Fund Administrators

The concept that business should be directed by at least two individuals is a standard regulatory requirement based on sound corporate governance standards. The amended Schedule to the Act titled “Minimum Criteria for Licensing” provides that fund administration business in Bermuda should be directed by at least two individuals to ensure that no one individual exercises excessive control over the management of a licensed entity. The question as to how the ‘four-eyes’ criterion is met will be for each fund administrator to assess in the light of its business. Although the Authority recognizes that the arrangements are unlikely to be the same for every company, all fund administrators will be expected to demonstrate how its arrangements satisfy the ‘four-eyes’ criterion.

Fund Officers to be “fit and proper”

Section 14(1) of the Act previously required only that a mutual fund notify the Authority of persons appointed as directors. This section has now been amended to provide that any officers of a fund should be “fit and proper” at the time of authorization to ensure that the business of the fund is being conducted in a prudent manner.

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