Bermuda Funds Industry – Welcomes Japanese Retail Investors

Andrea Moniz-DeSouza

30 Aug 2012

The Government of Bermuda and the Investment funds industry of Bermuda have re-affirmed their commitment to enhancing the Islands competitiveness as an offshore fund jurisdiction by designing innovative strategies to attract investors to the Bermuda market, most recently targeting Japan.

The Investment Funds Amendment Act 2011 (the “Amendment Act”), which came into force on 18 December 2011 amends the Investment Funds Act 2006. The legislation provides the regulatory framework for the formation and operation of investment funds in Bermuda, and is another example of the Island’s continued innovative and global approach to investment fund products aimed at attracting foreign retail investment in Bermuda from jurisdictions around the world.

The Amendment Act has created a new class of investment fund, the ‘specified jurisdiction fund’ giving Bermuda the ability to re-establish a strong market presence in the retail investor market. By introducing additional criteria for this new class of fund, which may incorporate the laws of a specified jurisdiction, it in turn gives promoters of funds in other jurisdictions greater comfort with a Bermuda platform.

As of 4 June 2012, the Ministry of Business Development and Tourism, in collaboration with the Bermuda Monetary Authority (the “Authority”), issued its first order and rules pursuant to the Amendment Act: the Investment Funds (Specified Jurisdiction Fund) (Japan) Order 2012 (the “Order”), and the Investment Funds (Specified Jurisdiction Fund) (Japan) Rules 2012 (the “Rules” and collectively with the Order hereinafter referred to as the “Japan SJF Regulations”).

Broadly speaking, the Japan SJF Regulations allow a Bermuda incorporated fund (in particular a Bermuda unit trust) that is marketed to a Japanese retail audience (the “Japan Fund”) to satisfy’ the Japanese Securities Dealers Association (“JSDA”) that Bermuda has met certain qualification standards applying to bringing offshore funds in a public offering in Japan. In particular, the lapan SJF Regulations establish that Bermuda is equipped with an adequate legal infrastructure to comply with the requirements of Article 15 of the Fair Business Practice Rule 4 (Regulations Concerning Foreign Securities Transactions) of the JSDA. Further, in providing such regulatory framework Bermuda hopes to regain its prominence in this market.

The Rules
The Rules apply to a fund authorised and classified in accordance with paragraph 5 of the Order as a specified jurisdiction fund for Japan. A fund will not qualify for such classification unless its units, which have been or are intended to be offered by way of a public offering of securities, are compliant with the law of Japan. The law of Japan a) relating to units of a fund which have been or are intended to be offered to the public in Japan by way of a public offering of securities (referred to in Japan as “yukashoken-no-boshu”) and b) defined under the Financial Instruments and Exchange Law of Japan, is recognised as the applicable law for the purpose of the operations of a fund that qualifies as a specified jurisdiction fund for Japan under the Rules.

The Amendment Act and Japan SJF Regulations collectively provide the framework for the Japan Fund and set out the requirements which the Japan Fund is required to meet such as:

i) the constitution of the fund must provide for a)the terms upon which units are issued, including the terms and circumstances, if any, upon which the rights and restrictions attaching to the units may be changed; and b) for the appointment of an auditor and must be made available for inspection by a participant or prospective participant of the fund at the fund’s registered office or principal office, or if the fund has a service provider in Bermuda, at the office of the service provider;

ii) the fund must ensure that the issue and redemption or repurchase prices for its units at the most recent issue and redemption or repurchase date is made available on request without charge at the fund’s registered or principal office, or if the fund has a service provider in Bermuda, at the office of the service provider;

iii) the fund must within six months of the end of its financial year, or within such other period as may be specified in the fund’s prospectus, prepare and distribute, or cause to be prepared and distributed, an annual report to participants of the fund without charge, which shall include the audited financial statements of the fund;

iv) the operator of a fund must submit to the Authority a written report on the activities of the fund for the reporting period, no later than 20 business days from the last day of each month;

v) functions and responsibilities of the fund administrator, custodian, investment manager and auditor of the fund;

vi) standards and principals of financial reports and information for inclusion in financial statements relating to the fund; and

vii) audit standards.

Through this exciting improvement and the quality of investment products offered in Bermuda, the investment funds industry is confident that this innovative legislation will attract Japanese retail investment into Bermuda investment products.

Bermuda is one of the industry’s leading offshore financial centers, remaining committed to attracting quality funds by offering innovative products, demonstrable political stability, excellent fund administration services and prudent regulation of the investment industry.

This article was co-written by Sarah Demerling.

Published by Appleby – Finance – Offsure Summer 2012