A number of important changes to Bermuda’s Investment Funds Act, which were approved last year, are now in effect.
The changes are intended to further enhance Bermuda’s regulatory framework, primarily in relation to categories of investment funds that previously did not require any registration or regulation in Bermuda. In particular, the operators of closed-ended Bermuda investment funds and the operators of overseas (non-Bermuda) funds managed or carrying on promotion in or from within Bermuda will be most affected by the changes.
The changes, which took effect on December 24, 2019 and January 1 this year, came about through developments in relation to the Economic Substance Act 2018 and legislative changes to the Economic Substance Amendment (No. 2) Act 2019, the Economic Substance Amendment (No.3) Regulations 2019 and the Investment Funds Amendment Act 2019.
The changes will require certain action from the operators of closed-ended Bermuda investment funds and the operators of overseas (non-Bermuda) funds such as seeking to be designated or registered with the Bermuda Monetary Authority (BMA).
Closed-ended investment funds ‒ requirement to register
With the new changes closed-ended investment funds, which are popular investment schemes among Bermuda’s private equity clients are now brought within scope of the Investment Funds Amendment Act (IFA) 2019 for the first time. As a result they are now required to register as “Professional Closed Funds”.
The term “investment funds” means any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements to participate in or to receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.
A “closed-ended investment fund” means an arrangement in which the participants are not, at their election, entitled to have their units redeemed. Funds can include companies, partnerships or unit trusts. The new changes generally seek to increase BMA oversight of these entities, which previously were outside the scope of the IFA, and will bring them in line with the BMA’s oversight of authorised and registered open-ended funds currently caught by the IFA.
Going forward, all closed-ended investment funds will need to apply to the BMA for recognition and registration as Professional Closed Funds. All existing affected closed-ended funds will need to register under the new regime within the six month transition period expiring at the end of June 2020.
Overseas (non-Bermuda) investment funds – requirement to be designated
Overseas (non-Bermuda) investment funds are also brought within scope of the IFA for the first time with a requirement to be designated by the BMA as “Overseas Funds” before they can be managed or carry on promotion in or from within Bermuda.
Going forward, all operators of applicable overseas investment funds will need to notify the BMA prior to the overseas investment fund being managed or promoted in or from within Bermuda and such notification will be in such form and contain such information as the BMA may require. All existing affected overseas funds will need to notify the BMA under the new regime within the six month transition period expiring at the end of June 2020.
New requirements and ongoing obligations
In addition to the need for notification referred to above, there are some new requirements for designation and obligations such as Overseas Funds must comply with applicable rules and requirements of the overseas regulatory authority in the country or territory in which it is incorporated or established in addition to complying with the IFA provisions in section 5 relating to overseas funds and any conditions that may be imposed on it by the BMA.
All notification for designation by an Overseas Fund must be submitted before 30 June 2020 and should include (i) details of any regulatory approval given by, or notification given to, the overseas regulatory authority in the country or territory of incorporation or establishment; (ii) a copy of the offering document; (iii) the applicable notification fee.
Overseas Funds will have a new obligation to file with the BMA an annual certification on or before 30 June in every year that the fund continues to satisfy the relevant requirements for designation and which will include a statement of material changes to the fund’s terms of offering that may have taken place during the reporting period. This is in addition to a statement confirming compliance for the preceding year with the applicable rules and requirements of the overseas regulatory authority in the country or territory in which it is incorporated or established.
Finally, operators of overseas funds should note that they must, within 14 days of the winding up of the fund, notify the BMA in writing. Bermuda-based fund managers should examine their stable of funds to determine which of their overseas fund entities may be caught by this new requirement to be designated by the BMA and call to discuss with their usual Conyers lawyer.
It is an offence to operate a fund in contravention of the requirement under the IFA to be designated as an Overseas Fund. Penalties on conviction include fines of $50,000 to $200,000, imprisonment for two to five years, or both, depending on whether the conviction is summary or on indictment.