Background

In December 2017, and as part of its ongoing commitment to assist the EU in combatting harmful tax practices Bermuda joined a group of international financial centres committed to implementing legislation for economic substance requirements.

Pursuant to its commitment, Bermuda has enacted the Economic Substance Act 2018 (the "EU Substance Act") and the Economic Substance Regulations 2018 (the "EU Substance Regulations") which are operative with effect from 1 January 2019.

The new legislation follows extensive consultation by the Bermuda Government with the OECD, the Financial Action Task Force ("FATF") and the EU Code of Conduct Group ("COCG") and is intended to meet the economic substance requirements outlined in the scoping paper issued by the COCG.

Consequential changes to Investment Funds Act

The EU Substance Act has introduced some consequential changes to Bermuda's Investment Funds Act 2006 (the "Investment Funds Act"), as set out below. In practice, the changes embody into legislation what most funds will have been doing as part of their day to day activities as regards the appointment of service providers and the collating and reporting of information. The major change is that the regime of "excluded" and "exempted" funds has been repealed and replaced with a new registration system.

This brief will highlight the changes brought about by the EU Substance Act as it relates to investment funds (as defined under the Investment Funds Act) and is not to be regarded as a complete overview of the requirements that relate to Private or Professional Funds.

Summary of changes

  • The definition of a service provider has been expanded to include "corporate service provider";
  • Existing excluded and exempted funds have been renamed as "Private Fund", "Professional Class A Fund" and "Professional Class B Fund"; and
  • These newly named funds are now subject to registration with the Bermuda Monetary Authority (the "Authority")

Private Funds

A private fund is a fund whose number of participants does not exceed 20 persons and does not promote itself by communicating an invitation or inducement to the public generally. The operator of a private fund is required to appoint a local service provider, who itself is authorised and regulated by the Authority, to provide services to the fund (such service provider can be an auditor, custodian, fund administrator, investment manager, registrar or a corporate service provider).

The operator of a private fund must appoint a custodian to ensure safekeeping of the fund's assets, however, this requirement may be waived if the Authority is satisfied that the fund meets certain criteria as published on the BMA website.

An operator of a private fund must apply to the Authority to confirm that the private fund qualifies for registration. Such online application is accompanied by a copy of the fund's offering document, details of the service providers and a registration fee. If the Authority is satisfied that the fund complies with the relevant requirements it will register the fund as a private fund.

There are annual requirements to be met by a private fund, as follows:

  • The operator must certify to the Authority annually that the fund satisfies the qualifying criteria and requirements for registration and will continue to satisfy them on an ongoing basis; and
  • Such certification must be accompanied by information on the net asset value of the fund and its underlying assets; a copy of the fund's management accounts or audited financial statements; and information on any material changes that took place during the course of the year.

Professional Class A Funds

A Professional Class A Fund is a fund that: (a) is open only to qualified participants; (b) has an appointed representative resident in Bermuda who has authority to access the books and records of the fund; (c) has an investment manager that is inter alia either licensed in Bermuda under the Investment Business Act or is authorised or licensed by a foreign regulator recognised by the Authority (for instance, the SEC); (d) has appointed a fund administrator, a registrar, an auditor and a custodian or prime broker; and (e) the financial statements of the fund are prepared in accordance with either IFRS or a recognised GAAP.

Previously Class A Exempt Funds were exempt from the requirement for authorisation and could certify to the Authority that they met the requirements for exemption. This regime is no longer in place. A Professional Class A Fund must on or before the date of commencement of the fund's business apply to the Authority for registration and must submit a copy of the fund's prospectus.

There are annual requirements for a Professional Class A Fund, as follows:

  • The operator must certify to the Authority annually on or before 30 June that the fund satisfies the requirements for registration and will continue to satisfy them; and
  • Such certification must be accompanied by a copy of the fund's audited financial statements for the preceding year and a statement of any material changes to the fund's prospectus.

Professional Class B Funds

A Professional Class B Fund is a fund that (a) is only open to qualified participants; (b) has an appointed representative resident in Bermuda who has authority to access the books and records of the fund; (c) has appointed an investment manager, a fund administrator, a registrar, an auditor and a custodian* or prime broker, being persons who, in the Authority's view, are fit and proper to perform the respective functions of their office; and (d) the financial statements of the fund are prepared in accordance with either IFRS or a recognised GAAP.

*The Authority may waive the requirement to appoint a custodian it if is satisfied that alternative arrangements have been made that would uphold safekeeping obligations

If a Professional Class B Fund no longer operates within the qualifying criteria set out for this type of fund then the operator must notify the Authority immediately.

A Professional Class B Fund must apply to the Authority for registration and must submit a copy of the fund's prospectus.

In addition to the annual requirements set out above for a Professional Class A Fund, which apply equally to a Professional Class B Fund, a Professional Class B Fund must on an annual basis file a schedule of any changes made to its directors and service providers.

Existing Excluded Funds, Class A Exempt Funds and Class B Exempt Funds existing on 31 December 2018, being the date of operation of section 17 of the Economic Substance Act, shall automatically become "registered funds". These funds will have a period of six months in which to transition to comply with the new provisions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.