The amendments to the investment fund regime were adopted under the Economic Substance Act 2018 (Substance Act) which became operational on 31 December 2018. The Act has a broader mandate to address concerns raised by the European Union with respect to perceived harmful tax practices across member states as well as third countries such as Bermuda.
Funds are not within scope of the Substance Act although a Bermuda incorporated fund manager may be subject to economic substance requirements and will need to assess whether the new requirements are applicable. In addition to these new economic substance requirements, the Substance Act also introduced legislative changes to the Investment Funds Act 2006 (IFA).
One of the key changes to the IFA is a change in nomenclature such that reference to “excluded funds” (i.e. a fund with fewer than 20 investors, which does not promote itself by communicating an invitation or inducement to the public generally) has been removed and has been replaced with the term “private fund.”
Additionally, exempted funds will now be known as professional funds. Exempted funds included Class A exempt funds and Class B exempt funds, which will now be known as Professional Class A funds and Professional Class B funds. Professional funds and private funds will collectively be known as registered funds.
Professional funds are funds which are open only to qualified participants and which, amongst other requirements, either (i) appoint an investment manager that is licensed in Bermuda or is authorised or licensed by a foreign regulator recognised by the BMA (for example the SEC) in order to qualify as a Professional Class A fund or (ii) which have appointed an investment manager, a fund administrator, a registrar, an auditor and a custodian or prime broker, being persons who, in the BMA’s view, are fit and proper to perform the respective functions of their office, in order to qualify as a Professional Class B fund.
In addition to a change in nomenclature, the IFA amendments have introduced an important change to the procedure for launching registered funds. Previously, a Class A exempt fund could take advantage of the self-certification process and would not need to obtain the prior approval of the BMA. Now, all registered funds must apply to the BMA for registration and approval before it can commence trading.
Under the new regime, private funds are now required to appoint a Bermuda-based service provider that is authorised and regulated by the BMA (for example a Bermuda licensed fund administrator). Helpfully, the definition of “service provider” under the IFA has also been expanded so that it now also includes corporate services providers (CSP). As most funds engage a CSP (to provide, among other things, registered office services), we anticipate the majority of funds will already meet this requirement.
New filing requirements have also been introduced in respect of private funds (the existing annual certification for professional funds will continue). A private fund will now be required to certify on an annual basis that it satisfies the qualifying criteria to be a private fund. In addition to confirming that it meets the requirements to remain registered as a private fund, it will also be required to file (i) information on its NAV, (ii) a copy of its management accounts or audited financial statements and (iii) details of any material changes that took place during the course of the relevant period.
An additional change to note is the requirement for a private fund to also file a copy of its offering document with the BMA. Private funds are also required to appoint a custodian to ensure safekeeping of the fund’s assets although the BMA may, in appropriate circumstances, waive this requirement.
The IFA amendments grant the BMA additional powers to make fund rules as to (i) prudential requirements applicable to registered funds and obligations of the fund operator with respect to its service providers; (ii) obligations with respect to depositary functions and safekeeping obligations; and (iii) additional requirements related to reports to the BMA, public disclosure and disclosure to investors.
What do funds need to do?
Funds which are currently excluded or a Class A exempt or Class B exempt fund have until 30 June to comply with any new requirements. While the majority of the affected funds are likely to already comply with the new requirements, it may be necessary to file additional information (such as details of the authorised and regulated service provider in Bermuda and filing of its offering document) with the BMA. We recommend that any Bermuda-based fund reach out to their legal counsel in Bermuda to confirm the applicable requirements.
