All collective investment schemes (which are defined to include mutual fund companies and unit trusts) in Bermuda must apply to be classified under The Bermuda Monetary Authority (Collective Investment Scheme Classification) Regulations 1998 (the “CIS Regulations”) as a Bermuda recognised scheme, Bermuda standard scheme or Bermuda institutional scheme, unless the scheme successfully applies for an exemption from classification.

The Bermuda Monetary Authority has general discretion to grant exemptions from any requirement of the CIS Regulations and, although it’s intended to introduce before the end of calendar year 2004 new legislation dealing with the regulation of collective investment schemes, together with amended CIS Regulations, in the interim, the BMA has issued guidance notes that sets out the Authority’s current policy approach in relation to exemptions from the requirements of the CIS Regulations, including in particular as regards the criteria for certain key service providers of standard and institutional schemes.

The BMA normally would be prepared to consider applications for full exemption from classification or from key elements of the requirements of the CIS Regulations in only very limited circumstances, including where mutual funds or unit trusts are clearly non-public in nature and marketed to fewer than 20 persons. Additionally, where the fund is dormant, e.g. during an initial period prior to a later launch, the fund also may be exempted from classification for a temporary period.

The CIS Regulations require certain key service providers to be regulated institutions or companies with a physical presence in Bermuda which provides important reassurance to the BMA that it will be able to intervene successfully in the event of problems being encountered with a Bermuda classified scheme. It is therefore necessary to ensure that key service providers have the requisite experience and expertise to carry out their responsibilities, while also ensuring that the BMA is satisfied that it can, in case of need, gain prompt and full access to the books and records of a fund. The BMA therefore expects classified schemes to maintain adequate nexus with Bermuda.

Against this background, the BMA is prepared to look sympathetically at applications for specific exemptions from the normal service provider requirements:

a)in the case of standard schemes (which are generally funds which have a minimum investment per investor of less than US$100,000), from the requirement that the custodian should normally be a financial institution in Bermuda or a subsidiary of such an institution but only provided that the custodian is based in an acceptable jurisdiction and subject to regulation which is equivalent to that applying in Bermuda. The fund also should appoint as administrator a local, exempted or overseas (permit) company or partnership which satisfies the BMA as to its experience and expertise and which has a physical presence in Bermuda at which the relevant records of the fund can be made available to the BMA;

b)in the case of institutional schemes (which are funds that have a minimum investment per investor of at least US$100,000 or it accepts investments exclusively from a specified investor class broadly equivalent to the U.S. accredited investor class), from the requirement that the administrator shall be a local, exempted or overseas (permit) company or partnership which has a physical presence in Bermuda, but only provided that the BMA can be satisfied that adequate nexus with Bermuda remains and, in particular, that satisfactory arrangements are in place to enable it to gain timely access in Bermuda to the relevant records of the fund (or copies thereof), in cases in which that may become necessary. In particular, if a fund wishes to appoint a non-Bermuda administrator, it will be required to appoint as a minimum, a Bermuda corporate service provider which maintains the relevant records in Bermuda;

c)in the case of both standard and institutional schemes, from the requirement to appoint a custodian where, because of the nature of the assets to be held, a fund appoints as prime broker an institution which is based in an acceptable jurisdiction and is subject to regulation which, in the view of the BMA, is the equivalent to that applying in Bermuda. Notwithstanding that prime brokers are not regulated in the United States, the BMA have approved a number of blue chip prime brokers in that jurisdiction and other similar entities for this purpose.

The relevant records include the prospectus, constitutional documents, subscription and redemption prices, board minutes, material contracts including custodian/prime broker agreement, administrator agreement etc. and valuations and related material.

The BMA also will normally grant an exemption to feeder funds and fund of funds from the requirement to appoint a custodian provided in the case of feeder funds that they only invest in the related master fund which appoints a custodian or approved prime broker and for fund of funds on the condition that assets held consist predominantly of cash at a bank and registered shares in underlying funds.

A subsequent article will summarize the proposed new legislation dealing with the regulation of collective investment schemes, which also is intended to regulate the business of fund administrators.

Conyers Dill & Pearman, the international offshore law firm, was established in Bermuda in 1928. The firm has more than 400 staff and is headquartered in Bermuda with operations in Anguilla, British Virgin Islands, Cayman Islands, Hong Kong, London and Singapore. The firm advises on the laws of Bermuda, the British Virgin Islands and the Cayman Islands.

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com.