Mello Jones & Martin · Barristers and Attorneys

Exclusions and Exemptions from the Investment Funds Act 2006

· March 7th, 2007

Background

The Investment Funds Act 2006 (the “Act”) was enacted and came into effect on 7 March 2007. The Act applies to certain mutual fund companies, partnerships and unit trusts which satisfy the definition of “investment fund” pursuant to section 3 thereof.

The Act does not apply to “private funds”, which are defined as those investment funds (i) with twenty or fewer participants, and (ii) which do not promote themselves by communicating an invitation or inducement to the public generally to subscribe for their securities. Such funds have been deemed to be “excluded” for the purposes of the Act. Private funds, however, are not automatically granted “free transferability” of their securities by the BMA.

Funds which are not “excluded” pursuant to the foregoing, may apply to the Bermuda Monetary Authority (the “BMA”) in order to obtain an exemption from the Act provided that certain criteria are satisfied. Should such an exemption be granted, the fund will be deemed to be exempted from the Act and its requirements but will nevertheless be registered with the BMA.

A further advantage is that exempted funds are able to freely issue and transfer their securities without the need for prior Bermuda Exchange Control approval – a time consuming exercise that many fund operators find untenable given the quasi public nature of the disclosure.

European Union’s Savings Directive

The availability of the exemption was initially driven as a response to concerns raised by stakeholders over the impact of the European Union’s Savings Directive (“EUSD”) on Bermuda funds, particularly with respect to their Swiss investors.

While Bermuda funds are not subject to the EUSD, funds which employ a European Union resident paying agent (such as an administrator or shareholder nominee) may find themselves inadvertently caught by the EUSD as a result of the nationality of such paying agents and the general applicability of the EUSD to such agents activities in the EU.

After extensive discussion with the Swiss tax and regulatory authorities, the BMA has received confirmation that any Bermuda fund which is exempted from the provisions of the Act will be viewed as not falling under the scope of the EUSD in Switzerland regardless of the location of the particular fund’s paying agent. This will come as welcome news to many Bermuda funds with Swiss investors.

Grant of Exemption

In order to qualify for an exemption from the Act, a fund must meet certain requirements including:

  1. be open only to “qualified participants” (as defined below);
  2. the administrator of the fund must fall within a class of persons recognised by the BMA;
  3. the fund must appoint an auditor; and
  4. the fund must have an officer, trustee or representative resident in Bermuda who shall be a person who has access to the books and records of the fund.

The BMA must also be satisfied that the operator of the fund and its service providers are fit and proper persons to act as such.

For the purposes of the foregoing, the BMA has defined “qualified participants” as any of the following (which can be seen as essentially equivalent to U.S. “accredited investors” or U.K “sophisticated investors”):

  1. high income private investors;
  2. high net worth private investors;
  3. sophisticated private investors;
  4. bodies corporate, each of which has total assets of not less than five million dollars, where such assets are held solely by the body corporate or held partly by the body corporate and partly by one or more members of a group of which it is a member;
  5. unincorporated associations, partnerships or trusts, each of which has total assets of not less than five million dollars, where such assets are held solely by such association, partnership or trust or held partly by it and partly by one or more members of a group of which it is a member;
  6. bodies corporate, all of whose shareholders fall within one or more of the paragraphs of the section;
  7. partnerships, all of whose members fall within one or more of the paragraphs of the section; or
  8. trusts, all of whose beneficiaries fall within one or more of the paragraphs of the section.

The relevant definitions for the above are set out below:

“high income private investor” means an individual who has had a personal income in excess of $200,000 in each of the two years preceding the current year or has had a joint income with that person's spouse in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year; and “current year” means the year in which he purchases an investment;

“high net worth private investor” means an individual whose net worth or joint net worth with that person's spouse in the year in which he purchases an investment exceeds $1,000,000; and “net worth” means the excess of total assets at fair market value over total liabilities;

“sophisticated private investor” means an individual who has such knowledge of, and experience in, financial and business matters as would enable him to properly evaluate the merits and risks of a prospective purchase of investments.

Provided the above noted criteria are met, a fund may apply to the BMA to be exempted from the Act. Once the exemption is granted, the fund must continue to meet the above noted requirements and on an annual basis, by 30 April of each year, file with the BMA a notice stating that it continues to qualify for the exemption granted. Exempted funds are also subject to an annual fee of $500 also payable by 30 April of each year.