The Funds Act was amended by the Economic Substance Act 2018 and the Investment Funds Amendment Act 2018. The Substance Act became operative on December 31 and I expect that the Amendment Act will become operative during the first quarter of this year.
The Funds Act is the primary regulation for open-ended investment funds, which were previously divided into Authorised Funds, Exempted Funds and Excluded Funds.
Authorised Funds were split into four categories: Institutional Funds, Administered Funds, Specified Jurisdiction Funds and Standard Funds, while Exempted Funds were split into two categories: Class A Exempt Funds and Class B Exempt Funds. There was only one category of Excluded Funds, being Private Funds, and often these terms were used interchangeably.
The recent legislative changes impact Exempted Funds and the Excluded/Private Funds.
Exempted Funds will now be known as Professional Funds to reflect a shift away from the self-certification process to launch in relation to Class A Exempt Funds and the application for exemption for Class B Exempt Funds. The term Excluded Funds will be dropped from the Funds Act. This makes sense given that Private Funds will no longer file notification to the Bermuda Monetary Authority that they qualify for exclusion from the requirements of the Funds Act.
Going forward, Professional Funds and Private Funds will collectively be known as Registered Funds. These funds now must apply to the BMA for registration and approval before commencing trading. Professional Funds will continue to have two categories like the existing Exempted Funds, but they have been renamed as Professional Class A Funds and Professional Class B Funds.
Professional Class A Funds must meet the same requirements as Class A Exempt Funds to be registered under that category. This includes being open only to qualified participants, appointing a licensed investment manager or having gross assets under management of $100 million, or being part of a group that does, appointing an officer, trustee or representative resident in Bermuda, appointing certain service providers and preparing financial statements in accordance with IFRS or GAAP.
The main difference will be in the application process, which will entail an application and satisfaction by the BMA that it meets the criteria before it is registered as a Professional Class A Fund.
Professional Class B Funds must meet the same requirements as Class B Exempt Funds to be registered under that category. This includes a similar requirement to the Professional Class A Fund except that there is no licensing and gross asset requirement in relation to the investment manager. Instead, service providers must be fit and proper to perform the relevant functions.
In relation to Professional Class B Funds, the BMA must notify the applicant in writing of its decision within ten days from the date of application and if not, the BMA shall be considered to have granted registration. This is similar to the previous exemption requirement.
Both Professional Class A Funds and Professional Class B Funds must appoint a custodian. This requirement may be waived in relation to a Professional Class B Fund if it satisfies the BMA that alternative arrangements have been made. The Amendment Act once operative will also allow this for Professional Class A Funds.
Private Funds, instead of filing notification that they qualify for exclusion, now must register under the Funds Act. In addition, they must appoint a local service provider authorised and regulated by the BMA. The definition of “service provider” includes corporate service providers and as such, most funds will meet the local service provider requirement through the engagement of a Bermuda corporate service provider.
Private Funds are also required to appoint a custodian however this requirement may be waived if the fund meets certain requirements set by the BMA. This is useful for certain funds, including ILS funds that invest in an underlying reinsurance company.
Private Funds also have additional annual filing requirements. The operators of a Private Fund must certify annually that it continues to satisfy the qualifying criteria. Additional information that must be filed annually includes information on the net asset value and its underlying assets, a copy of the fund’s management account or audited financial statements and information on any material changes that took place during the year.
The Substance Act has also given the BMA greater powers of supervision and enforcement over Registered Funds and the power to make rules concerning investor disclosures and related matters.
Funds existing at December 31 have six months to comply with applicable provisions of the Funds Act. Therefore, any operators of Class A Exempt Funds, Class B Exempt Funds and Private/Excluded Funds should take steps to ensure that they comply.
The implementation of an application for registration brought about by the Substance Act strikes a good balance between regulatory oversight and the commercial needs of flexible investment vehicles. We anticipate that these vehicles will continue to be popular with those looking to set up funds in Bermuda.
This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer