The financial services industry in Bermuda has grown dramatically over the past 15 years. The island ...
A number of the larger funds are quoted on the London Stock Exchange as well as the Hong Kong Stock Exchange. In addition, many funds, particularly those seeking European investors, are listed on either the Dublin or Luxembourg stock exchanges. The Bermuda Stock Exchange, which has been in operation since 1971, has in the past three years rapidly developed as an international offshore market and now boasts a total of over 170 investment funds.
Perhaps the secret of the success of the financial services industry is the way the regulatory authorities and the private sector work together to tailor legislation that is relevant to the needs of the industry. Innovative legislation that is responsive to the needs of the financial services industry is an important feature of Bermuda's international business infrastructure.
In 1998, the Ministry of Finance, in consultation with mutual fund service providers, developed the Bermuda Monetary Authority (Collective Investment Scheme Classification) Regulations 1998. These provide a flexible framework for the Authority to regulate, supervise and inspect mutual funds and unit trusts. They require that all mutual funds and unit trusts (other than UK class schemes) be classified as Bermuda standard schemes, Bermuda institutional schemes or Bermuda recognised schemes. The purpose of the regulations is the protection of investors by imposing appropriate standards and criteria on those wanting to establish and operate mutual funds in this jurisdiction without the regulations being overly burdensome.
It is possible to establish an investment fund in Bermuda as a closed or open-ended company, partnership or trust so that the fund structure can be tailored to investor needs. The corporate form fund tends to be the most commonly used.
Most retail mutual funds will be classified as Bermuda standard schemes. Regulation provides a supervisory and regulatory environment for such schemes and mandates certain prospectus disclosure and financial reporting requirements. It also requires a standard scheme to appoint an investment advisor, an administrator, a Bermuda custodian, a registrar and an auditor, all of whom must be approved by the Authority.
Exemptions from the requirement to appoint a Bermuda custodian may be obtained if the proposed custodian is a large financial institution known to the Authority. The registrar must be resident in Bermuda although it may delegate the maintenance of the share register to service providers located elsewhere. Service providers for a Bermuda fund providing investment advice, fund management and auditor services may be located outside Bermuda.
These are less regulated than the Bermuda standard schemes as regulations governing them are designed for large institutional funds. If a mutual fund has a minimum investment per investor of $100,000 and also has a minimum initial offering size of $50m, it may be classified as an institutional scheme.
The same regulations apply as those governing standard schemes except that the custodian need not be a financial institution in Bermuda. One difference is that the administrator must be independent of the mutual fund and any other service provider (unless an exemption is granted by the Authority) and must have a physical presence in Bermuda. The prospectus must also specifically disclose the fact that the fund is less regulated than a standard scheme.
A Bermuda mutual fund company (although not a unit trust) that satisfies the relevant requirements may be certified by the Minister of Finance as a 'UK class scheme'. Such a mutual fund is then generally entitled to make its shares available within the UK. Certification requires compliance by the mutual fund, its manager and its custodian with a number of additional conditions. It is intended that UK class schemes will be re-designated as Bermuda regulated schemes, but the dates by which a UK class scheme must be reclassified has not yet been published.
The Authority must be satisfied as to the investment management experience and expertise of the promoters. Unless the administration is to be delegated to a recognised Bermuda service provider, the promoters must produce evidence of their experience as mutual fund operators, especially as to their administrative abilities. The Authority will also require evidence of the good standing and business integrity of the principals of the promoters.
The offer of shares by a mutual fund will be subject to the requirements to issue and file a prospectus or offering memorandum. The content provisions of the Act and the regulations require disclosure of certain matters relating to the mutual fund including the names of its officers, managers and principal service providers; its investment objective; the rights and restrictions attaching to its shares, including the calculation of net asset value; and a report of its auditors.
The use of trust structures is favoured by investors in certain jurisdictions. For most practical purposes, a unit trust will operate and be regulated in the same manner as a mutual fund company. Unit trusts are expressly made subject to the regulations.
The unit trust deed itself, as well as containing provisions for the constitution of a trust, will be similar to the by-laws of a mutual fund company, provide for the calculation of net asset value per unit and setting out the terms for issue and redemption of units. Furthermore, it is usual for the unit trust instrument to provide for the regulation of the affairs of the unit trust in a manner similar to that of a company.
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