Bermuda continued its brisk roll out of legislative and regulatory changes right up until the end of 2020 and we have included in this update an overview of the most significant changes which took place during the last quarter of 2020. These changes serve to highlight the pro-active nature of the regulator in seeking to improve its supervisory and regulatory functions as well as the adoption of legislation to introduce further business efficiencies and to allow Bermuda to retain its competitive advantage.
Digital Asset Business Amendment Act 2020 and Digital Asset Issuance Rules 2020
The Digital Asset Business Amendment Act 2020 (DABA Amendment 2020) became operative on 11 December 2020 and aims to give greater clarity to certain provisions, and improve the overall administration, of the Digital Asset Business Act 2018 (Act). In doing so, the DABA Amendment 2020 will establish a new testing licence, repeal and replace some definitions, extend the Bermuda Monetary Authority’s (Authority) ability to modify applicable fees, and introduce notification requirements for companies that seek an exemption order.
At present, a company investing in digital assets may be required to pay fees for both an investment business licence under the Investment Business Act 2003 and a digital asset business licence under the Act. In these particular cases, the Authority takes the view that a flexible fee structure may be appropriate. As such, the Authority is proposing to exempt a registered person from the requirement to pay any fee under section 16 of the Act, or to reduce any fee required to be paid, provided the Authority is satisfied that it is appropriate to do so having regard to the nature, scale and complexity of the business carried on by the registered person.
Perhaps one of the most significant proposed changes to the Act is the addition of the new class “T” licence. By making provisions for the testing of a minimum viable product/service via beta testing or piloting, this licence class will allow Bermuda’s digital asset business regime to support and foster all stages of innovation in the ever evolving digital asset business sector. It is proposed that applicants must: (i) develop success criterion for the test, (ii) list their pre-identified or targeted customers or counterparties, (iii) hold a minimum capital of at least $10,000, and (iv) ensure that appropriate risk disclosures for potential counterparties are in place.
The “T” licence will have an initial duration of 12 months or less and appropriate regulatory requirements based on proportionality, and if the DABA Amendment 2020 is approved as is, the licencing fee for the Class “T” licence will be limited to BD$1,000.
In February 2020 the Bermuda Government passed the Digital Asset Issuance Act 2020 (DAIA 2020) which effectively transferred the responsibility for the administration of offerings of digital assets to the public from the Registrar of Companies to the Authority. The DAIA 2020 makes provisions requiring the Authority to create rules in relation to certain matters that all authorised undertakings must comply with, amongst other things. In furtherance of this obligation and in continuance of its commitment to maintaining a safe environment for digital issuance to the public, the Authority has provided rules under the Digital Asset Issuance Rules 2020 (DAIR 2020) that explicitly outline the requirements for the way in which digital asset issuances are to be conducted.
These rules are particularly significant as they provide clarity to authorised undertakings of what is required by the Authority. More specifically, DAIA 2020 sets out the minimum required information that must be made available to digital asset acquirers via the issuer’s issuance document, which include details relating to the issuer and all of the persons involved in the issuance, a detailed description of the underlying project, the digital asset and the terms and conditions of the digital asset issuance, amongst other things.
To further protect the interests of digital asset acquirers, DAIA 2020 requires that ongoing communications and disclosures be made by the issuer to the digital asset acquirers with updates on the progress achieved with respect to the milestones set out in the issuance document. Other important rules include the requirement for issuers to have adequate mitigating controls in place against market abuse, for issuers to implement and maintain a robust risk management framework and a robust cybersecurity programme, and to establish and maintain a data node in Bermuda where all information relevant to the digital asset issuance will be stored.
Appleby Technology and Innovation Offshore Guide 2021
As the pace of technological change accelerates, so too does the legal and regulatory landscape. The Appleby 2021 Offshore Technology and Innovation Guide provides a detailed overview of the current legal and regulatory position across a number of different technology sectors in eight of the world’s largest offshore jurisdictions. With quick-linked answers to some of the most business critical issues, the guide also offers a “Tech Snapshot” to help you identify the most suitable offshore jurisdiction for your technology project. The full chapters then expand upon those responses to provide a single, comprehensive resource. Appleby’s market leading Technology and Innovation Group routinely advises clients on pan-jurisdiction technology projects and also works frequently with local government, regulators and industry bodies to develop responses to the challenges of globalisation and increased regulation.
To access a copy of the 2021 Guide, please click here.
Registrar of Companies (Supervision and Regulation) Act 2020
The Registrar of Companies (Supervision and Regulation) Act 2020 came into force on 1 November 2020 and provides that the supervisory and regulatory function, particularly as it relates to the supervision of dealers in high value goods, will transfer from the Financial Intelligence Agency to the Registrar of Companies. As such, this legislation will impact the supervision of jewellery dealers, car, boat and motorcycle dealers, precious metal and stone dealers, antique dealers and auctioneers, whether or not such dealers are registered with the Registrar. Applications for registration of a dealer in high value goods under the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing Supervision and Enforcement) Act 2008 must now be made to the Registrar.
Further, this legislation makes certain provisions relating to the dissemination of certain information. More specifically, a person, body or entity to which the Registrar supervises or exercises regulatory functions over, that receives information relating to the business or other affairs of any person must not disclose that information without the consent of the person to whom it relates. Where a person discloses information in contravention of this provision, he will be liable to a fine of $50,000 and to imprisonment for two years.
Incorporated Segregated Accounts Companies Act 2019 (ISAC Act)
Incorporated Segregated Accounts Companies Act 2019 (ISAC Act) and corresponding Guidance Notes (Guidance Notes) published December 2020.
The ISAC Act allows Bermuda companies that are either (a) engaged in insurance business and/or investment fund business or (b) who have obtained ministerial approval, to apply for registration as an Incorporated Segregated Accounts Company (ISAC). Once registered, an ISAC may establish Incorporated Segregated Accounts (ISA) which are distinct legal entities. Each ISA’s assets and liabilities are segregated from those of the other ISA’s and of the ISAC itself.
While an ISAC is similar to a Segregated Account Company (SAC) registered under the Segregated Accounts Companies Act 2000 (SAC Act), certain features of the ISAC Act distinguish the ISAC as a hybrid structure between a SAC structure and a traditional company structure. Each ISA can: hold assets in its own name; have legal personality in the Bermuda courts; engage in business with the ISAC and other ISAs within its group structure; be self governed by its own board of directors; and have the ability to wind up without impacting the other ISAs and ISAC within the structure. In contrast, the segregated accounts of a SAC do not have separate legal personality and are not able to self govern, sharing the same board of directors and legal identity as that of the SAC to which they are registered.
The ISAC structure may be appealing to entities involved in Insurance Linked Securities (ILS) market. Registration under the ISAC Act provides a unique ability to have one structure operating in both investment funds and insurance/reinsurance. An ISA registered or authorized under the Investment Funds Act 2006 (IFA Act) has the ability to raise funds through the offering of securities, which can then be used to collateralize (re)insurance written by the other ISA’s licensed to conduct insurance business. Currently, to achieve this result we see group company structures engaged in the ILS market utilizing investment funds vehicles and reinsurance vehicles incorporated as separate entities. With the introduction of the ISAC Act the same can be achieved within one ISAC structure while still maintaining independent governance and legal personality previously unattainable through the SAC structure.
The introduction of the ISAC Act will serve as a mechanism for group structures, particularly those engaging in insurance business and investment fund business, to streamline incorporation and administration costs. However, when considering the costs benefit of this particular structure consideration should be given to the fact that any ISAC who operates an ISA that is engaged in insurance business must also obtain a separate insurance licence, in addition to the licence of the ISA. While there are noted discounts offered to ISACs and ISAs, respective to each class of insurance licence required, those entities that engage in insurance business which require complex licensing at the high end of the cost scale should weigh the reduced incorporation fees against the potential for increased licensing fees, due to the double licensing requirement, carefully.
In contrast to the above, the separate legal personality of the ISAs could make the ISAC structure more attractive to companies wishing to establish one ISAC operating multiple ISAs who are each writing insurance business. The ability to segregate each ISA and allow them to operate under their own independent insurance licence could allow each ISA to benefit from separate and different onshore tax elections, creating a cost benefit from a tax perspective.
Covid-19 Update – 2021 Board of Directors Meetings
In light of the ongoing Covid-19 pandemic, the Bermuda Monetary Authority will take into account all the circumstances, including registrants’ inability to hold physical board meetings due to logistical and health difficulties resulting from Covid-19 in assessing compliance with the requirement to hold physical board of directors meetings in Bermuda. The Authority expects registrants to continue conducting regular board meetings by telephone, video conference or other virtual means, where it is not practical to meet physically during this period.
Companies/Partnerships Electronic Registry Amendment Act (Amendment Act)
The Amendment Act received royal assent on 21 December 2020 and principally amends the Companies Act 1981, the Limited Liability Company Act 2016, the Partnerships Act 1902, the Limited Partnerships Act 1883, the Exempted Partnerships Act 1992 and the Overseas Partnerships Act 1995 (collectively, Acts) to allow for the Minister of Finance to require that all documents filed with or issued by the Registrar of Companies (ROC) under those Acts be filed or issued electronically.
The Amendment Act comes during the ongoing Covid-19 pandemic and will provide some comfort to companies and partnerships that they will be able to continue conducting business through remote and electronic means during these uncertain times. The move to electronic records aligns with Bermuda’s ongoing commitment to modern business needs.
The Amendment Act has not yet come into operation and will commence on a date as published by the Minister of Finance.
Consultation Paper – Proposal for a Conduct of Business Regulatory Regime (Consultation Paper)
On 15 December 2020, the Bermuda Monetary Authority (BMA) released the Consultation Paper outlining a proposal to establish a conduct of business regulatory regime in order to enhance protection for customers of financial services businesses in Bermuda.
The BMA intends for the new regime to protect retail investors without being unduly burdensome on the financial services industry. In order to achieve this, the BMA proposes to implement a principles based approach to the regime based on the following six high-level principles:
- Ensuring fair and equitable treatment of customers;
- Requiring financial service businesses to adopt responsible business practices;
- Ensuring that there is sufficient disclosure and transparency when communicating with retail investors;
- Ensuring the protection of customers assets against loss, fraud and misuse;
- Requiring financial service businesses to adopt dispute resolution mechanisms that are timely and equitable; and
- Requiring financial services businesses to provide appropriate resources to educate retail investors and ensure that they are aware of their responsibilities as customers.
The BMA has requested comments on the Consultation Paper by 15 February 2021. Please reach out to your Appleby contact if you would like to discuss submitting comments to the BMA.
Appleby has an experienced, multi-disciplinary regulatory team which includes expert compliance professionals as well as a team of lawyers across the Corporate, Private Client & Trusts and Dispute Resolution practice areas. With expert advisors across a range of disciplines we can help you navigate regulated environments throughout the lifecycle of your business.
Please contact a member of the team below if you have any questions or would like any further information on any of the topics discussed above.
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