As more funds look to register as segregated accounts companies in Bermuda, regulatory steps are being taken to ensure the offshore financial centre remains a market leader
Bermuda fund regulation is flexible in nature and as a result makes the jurisdiction an ideal choice for innovative fund structures. For example, the use of mirror (or reference) funds in Bermuda typify this flexible approach.
A mirror fund is a fund designed to replicate the performance of another fund, typically involving the use of swap contracts, rather than attempting to replicate the investments of the onshore fund by means of direct investment. In addition, we are seeing a growing number of mutual fund clients seeking advice on the use of special purpose vehicles, which have the effect of collateralising existing interests in mutual funds (known as collateralised fund obligations or CFOs).
Registering an Sac
At the moment, a growing number of funds established in Bermuda are seeking advice on the process of applying to be registered as a segregated accounts company (SAC) under the Segregated Accounts Companies Act 2000 of Bermuda (the SAC Act). A few applications to use SAC structures have been made successfully, with a number of individual underlying segregated accounts now in operation. Until recently, all such funds (and the underlying accounts) were newly established, applying for registration as a SAC at the time of their establishment. We recently acted for a fund client in connection with what we believe to be the first conversion of an existing Bermuda fund into an SAC.
The responsibilities for a law firm are to be active and proactive in providing a first-class, legal service to them. Part and parcel of this is to be responsive to issues and concerns raised by clients and to assist in facilitating changes in the financial services legislation which might be of benefit to them, but which at the same time protects those same clients, and not only protects Bermuda's reputation but enhances it.
The supervision and regulation of the offshore financial sector, in Bermuda and elsewhere, are constantly under review and assessment by various offshore regulatory bodies, including the Organisation for Economic Co-operation and Development (OECD), the Financial Action Task Force (FATF) and the International Monetary Fund (IMF), and this presents challenges not only for the service professionals, but for the regulators and Bermuda as a whole. The recent poor economic conditions in international stock markets has also been a challenge of late. However, despite these challenges, Bermuda saw strong continuing growth in its fund industry.
The Bermuda regulators continue to work with us and other members of the private sector on finalising aspects of a detailed policy approach for the proposed new primary legislation on collective investment schemes, together with a major review of the current classification regulations.
These initiatives are now at an advanced stage and it is hoped a new Collective Investment Schemes Act will be introduced before the end of 2003. It is expected this new legislation will:
• Expand the definition of collective investment schemes to extend beyond mutual fund companies and unit trusts to include certain other corporate vehicles and limited partnerships used for investing funds on a pooled basis.
• Provide exemptions for schemes which are non-public in nature and for closed-end schemes listed on approved public stock exchanges.
• Introduce a licensing regime for fund administrators.
• Provide enhanced information, intervention and enforcement powers for the Bermuda regulators.
In addition, financial services legislation in general, to the extent it does not already do so, will require amendment or clarification with respect to the establishment of gateways for the cross-border sharing of client information and co-operation with foreign authorities. These legal provisions are already found in certain of Bermuda's financial services legislation. The regulators will also have an increasing ability to conduct on-site inspections of funds.
Bermuda has a well-developed legal framework in place to combat money laundering and the financing of terrorism. There is ongoing consultation between the public and private sectors on proposed changes to Bermuda's proceeds of crime legislation, regulations and guidance notes. This review process is being conducted in parallel with the review being conducted by the FATF, the international standard-setting body, of its 40 recommendations on combating money laundering. Work is also being carried out on proposed new primary legislation dealing with terrorism offences, which will enable Bermuda to complete its legal implementation of the FATF provisions designed to combat terrorist financing.
In the wake of the recent, well-publicised US corporate scandals, much as was the case in the wake of the Long Term Capital Management (LTCM) collapse, there has been greater demand onshore, primarily in the US and UK, for increased regulation of hedge funds. However, most hedge funds in the US are only lightly regulated on the basis that investors are usually wealthy and are accordingly treated as sophisticated and can protect themselves. At the moment, there is no co-ordinated effort by any international body to increase the disclosure requirements for hedge funds, although the US Securities and Exchange Commission (SEC) and the UK Financial Services Authority are conducting reviews. It is interesting to note that even the OECD has found the level of regulation in some offshore centres such as Bermuda exceeds levels in some onshore jurisdictions.
The push onshore to increase hedge fund regulation and disclosure requirements and the upcoming compliance burdens of the USA Patriot Act still pose a possible threat to the offshore fund industry, although taxation will likely be used as a primary weapon to counter the attractions of investing offshore. However, as with the push to obstruct corporate inversions offshore, there are powerful interests onshore working hard to ensure their freedom to invest in offshore funds is maintained.
While there are a number of developments, globally and locally, which cause concern, Bermuda is a jurisdiction with the experience and sophistication and flexibility to embrace these challenges while continuing to provide innovative structures and products to meet a more demanding and sophisticated, and growing, client base. As it has for generations past, this is likely to continue to give hope for generations of Bermudians, all of whom, in some way, contribute to and benefit from a fast- expanding financial services sector and a thriving and prosperous economy.
Bermuda has a well-developed legal framework in place to combat money laundering and the financing of terrorism.
The OECD has found the level of regulation in some offshore centres such as Bermuda exceeds levels in some onshore jurisdictions.
It is hoped a new Collective Investment Schemes Act will be introduced before the end of 2003.
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