Several developments have been underway within the Bermuda investment fund sector, including a number of legislative innovations and lobbying activities.
The stated commitment of the Bermuda Government and industry partners to be responsive to market demand, innovative in product delivery and nimble in introducing legislative amendments is evidenced in the recent enhancements made to the Bermuda fund product.
In this edition, we feature an introduction to the Bermuda Limited Liability Companies Act, 2016, the Alternative Investment Fund Managers Directive and the new Contracts (Rights of Third Parties) Act, 2016, as well as requirements for Grandfathered Exempted Funds.
Government, business partners and legal professionals continue to promote the Bermuda investment funds sector through events both on and off the Island. This has included the Alternative Investment Summit and the Global Fund Forum, which took place in October. These efforts support the marketability of Bermuda fund vehicles on a global stage.
We look forward to bringing you key market updates and event highlights, through our Investment Funds Update.
Bermuda Limited Liability Companies
On 13 July 2016, the Bermuda Government enacted limited liability company (“LLC”) legislation modeled closely on the Delaware equivalent. LLCs, which originated and are widely used in the US, are an entirely new form of legal entity in Bermuda, best considered as a hybrid entity combining corporate and partnership characteristics.
LLCs have separate legal personality like traditional companies, and a capital structure familiar to sponsors of partnerships, with members contributing or agreeing to contribute capital rather than subscribing for shares.
While a few non-US jurisdictions have made provision for LLCs in their laws, such laws generally incorporate non-US terms and concepts which may be unfamiliar to US counsel. The Bermuda LLC legislation was drafted alongside US counsel with the stated aim of creating an offshore product that would be familiar in form and substance to onshore promoters and practitioners. Furthermore, sponsors will benefit from the ability to convert Bermuda companies and limited partnerships that have elected to have legal personality to and from a Bermuda LLC.
The core of the new Bermuda LLC legislation is based largely on corresponding provisions from the Limited Liability Company Act in Delaware. It is anticipated that this approach will be welcomed by US counsel, as Bermuda LLCs will be familiar to them in both form and substance, and will benefit from existing practice and jurisprudence in relation to the corresponding Delaware provisions.
An LLC is governed by its operating agreement, which provides freedom to the members of the LLC to agree on the most appropriate system of management and distribution of profits, and extends to the ability to vary, waive or eliminate members’ and managers’ fiduciary duties, except in cases of fraud or dishonesty. LLCs are therefore more flexible than traditional companies and have fewer formalities. This is the main benefit of an LLC over any other form of business entity giving maximum effect to the principle of freedom of contract.
It is anticipated that the Bermuda LLC, due to its flexibility and efficiency, will be useful for a variety of private equity funds, hedge funds, open-ended investment funds, joint ventures, asset-holdings and other purposes, in particular providing an offshore investment vehicle parallel to an onshore LLC, as well as providing an entity suitable to act as general partner of onshore or offshore limited partnerships.
Following closely behind enhancements to Bermuda’s investment fund and partnership legislation in recent years, the introduction of LLCs in Bermuda is a further indication of Bermuda’s responsiveness to the demands of the international fund industry.
The Alternative Investment Fund Managers Directive (“AIFMD”)
The European Securities and Markets Authority (“ESMA”) has continued to assess various countries, including Bermuda, with a view to extending the AIFMD passport to non-EU countries. Currently, Bermuda funds can only be marketed to professional investors in EU countries under national private placement regimes. If the AIFMD passport is extended to Bermuda, a Bermuda investment manager will be able to market its alternative investment funds (“AIFs”) freely across the European Economic Area (“EEA”) without the need to register the AIFs under the national private placement regimes in each EEA country.
Bermuda has already passed the enabling legislation necessary to implement the AIFMD regime once passport approval is given by the European Commission. Specifically, the Investment Business Act, 2003 has been amended to provide an opt-in framework for the licensing and regulation of alternative investment fund managers who wish to market their AIFs via the passport in accordance with the terms and conditions set out under the AIFMD.
This July, ESMA released the results of its latest round of third country assessments and stated that with respect to Bermuda, it had met three of the five assessment criteria in order to qualify for the passport extension. ESMA stated that there were no significant obstacles impeding the issue of an AIFMD passport to Bermuda in relation to standards on competition, market disruption and monitoring of system risk. ESMA was unable to give definitive advice with respect to the criteria on investor protection and effectiveness of enforcement, as Bermuda was in the process of implementing the new AIFM regulatory regime at the time. However, they did note that Bermuda’s draft legislation was “largely similar” to the requirements laid out in the Directive. Since the advice was issued, Bermuda has published its AIFM Rules, brought into force the Investment Business Amendment Act, 2015 and passed the Investment Funds Amendment Act, 2016. These pieces of legislation bolster the Bermuda Monetary Authority’s (“BMA”) enforcement powers and enhance investor protection. In addition, the Bermuda Monetary Authority has shared with ESMA other draft proposed regulatory instruments they expect to bring in as part of Bermuda’s AIFM regime such as the AIFM Code of Conduct. These were drafted to ensure compliance with EU requirements. As such, the BMA is hopeful that in the next review round, Bermuda will receive a positive review on all five assessment criteria.
It should be noted, in considering the timing of implementation of passporting for all third countries, ESMA is assessing a further 10 additional non-EU countries. It is not yet clear whether ESMA will make recommendations to the European Commission to extend the passport to countries as they feel they become compliant or if they will wait for the majority of countries to become compliant before recommending the extension of the passport to the group. To date, no third countries have been able to implement the passport regime.
Given the BMA’s strong international regulatory reputation and the results of the July ESMA assessment, Bermuda is optimistic that this will qualify for extension of the passport in the near term.
Grandfathered Exempted Funds Granted Extension to Reregister with the Bermuda Monetary Authority until 3 October 2017
On 3 October 2013, exemptions were created for qualifying investment funds in Bermuda. Class A and Class B Exempted Funds regimes were introduced, and prior exemption provisions were repealed. Investment funds that had originally obtained exemption under the repealed provisions of earlier legislation were grandfathered for three years.
Pursuant to the Investment Funds Amendment Act, 2016, grandfathered funds have now been granted an additional year to reregister as Class A or Class B Exempted Funds. As a result, on or before 3 October 2017, such grandfathered funds must reregister as Class A or Class B Exempted Funds. Failure to reregister will result in such funds losing their exempted status and falling out of compliance with Bermuda law.
A Grandfathered Fund may register as a Class A Fund if it limits the offering of its securities to qualified participants; employs a suitable investment manager; appoints a fund administrator, registrar, auditor and custodian or prime broker; appoints a resident representative in Bermuda and files suitable financial statements annually with the Bermuda Monetary Authority (“BMA”).
Registration of a Class A Fund can be accomplished in a single business day by delivering a certificate of compliance and a registration fee of US$1,545 to the BMA. Ongoing requirements for Class A Funds are minimal.
If the investment manager of an otherwise eligible grandfathered Class A Fund does not meet the more stringent qualifications, the grandfathered fund must apply for registration as a Class B Fund, for which the registration fee is US$1,030.
Application procedures and ongoing regulatory obligations for Class B Funds are similar to those for Class A Funds, with minor exceptions. All exempted funds are required to advise the BMA if, at any time, they no longer qualify for the previously granted exemption, and must register as Non-Licensed Persons pursuant to Bermuda law.
In addition, all exempted funds, be they grandfathered or registered as Class A Funds or Class B Funds, must register as Non-Licensed Persons pursuant to the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing Supervision and Enforcement) Act, 2008.
Contracts (Rights of Third Parties) Act, 2016
The Contracts (Rights of Third Parties) Act, 2016 (the “Act”) permits parties to vary the common law doctrine of “privity of contract”, which provides that only parties to a contract may enjoy the benefits and enforce the provisions of that contract.
Rights may now be extended to third parties, reducing the burden of entering into multiple agreements to achieve the same result.
The Act will be of significant interest to investment managers, investment funds, third party service providers and delegates, who traditionally may not be parties to an agreement, but may be affected by its terms and provisions.
In addition, the Act should assist in the area of indemnification and exculpation provisions of agreements intended to benefit beneficiaries beyond the contracting parties.
Bermuda’s insurance industry will benefit from the Act, as it removes all doubt as to the legal enforceability and effectiveness of ‘cut-through’ clauses or endorsements in insurance and reinsurance contracts.
Further, the Act is similar to third party rights legislation enacted in the UK and other common law jurisdictions.
Contracting parties must “opt in” to the Act’s provisions. The Act generally applies to all contractual provisions, but certain contracts are specifically excluded.
Where the Act’s requirements have been met, a third party can enforce the terms of the contract, but may not have any better rights or remedies than those available to the contracting parties.
Once rights have been extended to a third party, the ability of contracting parties to vary such rights between themselves and the third party are restricted.
Finally, the Act permits a third party to assign its third party rights under a contract to another person in the same way as a contracting party may assign its rights, unless the contract specifically provides otherwise or on a proper construction of the contract, the rights are personal to the third party.
In sum, under this new Bermuda law, contracting parties may now extend rights to third parties where desired, thus reducing the burden of entering into multiple agreements to effect the same result. The Act further enhances Bermuda’s commercial laws and, again, demonstrates the Island’s responsive legislative framework for business.
THIS ACT WILL BE OF SIGNIFICANT INTEREST TO THIRD PARTIES, SUCH AS:
THE ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION
Conyers is a member of The Alternative Investment Management Association, the global representative body for alternative asset managers and its new volunteer network in Bermuda.
100 WOMEN IN HEDGE FUNDS
Conyers is an active member of 100 Women in Hedge Funds ("100WHF"). Formed in 2001, 100WHF is a global organisation that links more than 13,000 professional women in the alternative investment, asset management, investor and broader financial services industry.
The group offers networking, educational and philanthropic opportunities in more than 19 locations across three continents and has raised over US$36 million for philanthropic causes in the areas of women’s health, education and mentoring.
Awards and Accolades