Flexibility of Bermuda fund structures
First published in The Royal Gazette, Legally Speaking, March 2022
Investment managers that register their funds in Bermuda will find a flexible fund regime.
The Investment Funds Act governs funds in Bermuda. A fund is an arrangement which enables investors in the fund to participate and receive profits or income from the acquisition, holding, management or disposal of property of the fund.
Investors do not have day-to-day control over the management of the property although they may have the right to be consulted or to give directions.
To be considered a fund, either the contributions from participants and any income earned are pooled – or the property of the fund is managed as a whole by or on behalf of the operator of the fund.
Arrangements may be open-ended or closed-ended.
An open-ended fund entitles investors to redeem their units in accordance with the fund’s constitution and offering document at a price determined in such documents.
There is a great deal of flexibility in relation to open-ended funds, which can have daily, weekly, bimonthly, biannual, annual periods for subscriptions and redemptions. The terms of the offering are set out in the offering document.
A closed-ended fund does not entitle investors to redeem units at their election. The terms of offering specify when investors would be redeemed out of the fund. Investors may have the option to elect to stay in the fund rather than elect to redeem.
Bermuda funds may be formed as company funds – including mutual funds as defined in section 156A of the Companies Act 1981, SACs and ISACs – partnership funds, unit trust funds and limited liability company funds.
The most popular are mutual funds and partnership funds. A partnership fund may elect to have irrevocable separate legal personality.
The operator of the funds (i.e. board of directors, general partner, trustee, manager) and constitution of the funds (i.e. memorandum of association and byelaws, partnership agreement, unit trust deed, LLC Agreement) will vary depending on the legal format chosen.
Company funds may be organised as a segregated accounts company (SAC) and incorporated segregated accounts company (ISAC). Both types of structures allow assets of one segregated account (SA) or incorporated segregated account (ISA) to be ring-fenced from other SAs or ISAs, as applicable.
The difference between a SA and an ISA is that a SA is not a separate body corporate, while an ISA is. ISACs can also be hybrid vehicles which combine funds, insurance companies and digital asset business.
Funds set up in Bermuda must be registered or authorised under the Act prior to launch. Each fund classification has separate requirements in order to be authorised or registered under the Act.
Private funds, professional Class A funds, professional Class B funds and professional closed funds are registered under the Act and institutional funds, administered funds, specified jurisdiction funds and standard funds are authorised under the Act.
Private funds are suitable for small ILS funds, private equity funds and master funds. A fund is private if the number of investors does not exceed 20 persons and if the fund does not promote itself to the public generally.
Professional Class A funds must either have a fund manager licensed by the Bermuda Monetary Authority or a recognised foreign regulator like the US SEC or UK FCA – or have assets under management, or be a member of an investment management group, of an amount not less than $100 million.
Professional Class B funds must be open to qualified participants, appoint an officer, trustee or representative resident in Bermuda who has access to the books and records of the fund and in addition must appoint certain service providers to the fund. Qualified participants are high income, high net worth or sophisticated private investors or entities which have participants that fall within this category.
Professional closed funds must be a closed-ended investment fund, be open to qualified participants, and have a local service provider, officer, trustee or resident representative in Bermuda who has access to the books and records of the fund.
Institutional funds are open to qualified participants or each investor must invest a minimum of $100,000 and also must have an officer, trustee or representative who has access to the books and records of the fund.
Administered funds must have a fund administrator licensed in Bermuda by the BMA and a minimum investment amount of $50,000 or must be listed on a recognised stock exchange.
Specified jurisdiction funds are funds where the Minister of Finance recognises a jurisdiction outside Bermuda. Japan is the first jurisdiction recognised.
Standard funds are typically geared towards retail investors. They require either a custodian or a fund administrator licensed in Bermuda by the BMA. Such funds are the most regulated of the fund classifications.
Each type of fund has ongoing filing requirements, as well as requirements in relation to the appointment of service providers, and annual fees.
The requirements and frequency depend on the classification of fund.
Authorised funds, in particular the standard fund, tend to have more onerous filing requirements.
