Investment Funds in Bermuda: Winds of Change

There is no doubt that 2017 was a busy year for Bermuda – full of drama and excitement. It was also a year of significant change.

The America’s Cup sailing event came and went. Same-sex marriage rights came and went (as they were promptly replaced by Domestic Partnership legislation). A general election took place, resulting in a change of government. Bermuda welcomed its youngest Premier, David Burt, aged 38. The US changed its tax laws. The EU changed its blacklists.

The asset management, investment fund and insurance industries in Bermuda followed all of these events with interest, and to some extent with baited breath.

And then there were the ‘Paradise Papers’. After all the media hype, Bermudians breathed a collective sigh of relief, as it turned out that Bermuda had enacted, reasonably complied with, reasonably enforced, and in some respects positively exceeded, the regulatory standards that were expected and required of it (even if Bermuda continues to offer a competitive corporate tax environment for international business, in accordance with its sovereign rights and limited natural resources).

With the arrival of 2018, we can take a moment for reflection. Some things have stayed the same, at least. Donald Trump is still president of the United States. The United Kingdom is still in Europe. There will still be athletes representing Bermuda at the 2018 Winter Olympics.

Against this background, Bermuda’s investment fund landscape remains relatively stable, with some healthy signs of growth.

There are approximately 600 regulated investment funds in Bermuda, including recent fund launches. There continue to be a significant number of unregulated fund structures, such as closed-ended investment companies and limited partnerships. LLCs have been introduced as alternative forms of corporate vehicles and are starting to take off. There are still fund managers and fund administrators doing substantial business in and through Bermuda.

Bermuda continues to lead the way in insurance-linked securities (ILS), ILS funds, and insurance/reinsurance (both traditional and alternative). The Bermuda government is also exploring FinTech and InsurTech opportunities, as well as cryptocurrencies.

The banks are still here, doing business as usual, and Bermuda remains home to a diverse range of corporate, fiduciary, and professional service providers.

So, what’s new, in particular?

Growth in the Legal Profession

A number of international legal networks have expressed an interest in practicing Bermuda law and promoting the use of Bermuda as a financial centre internationally.

In addition to Conyers Dill & Pearman and Appleby, international legal networks such as Walkers, Harneys, Carey Olsen, Bennett Jones, and Kennedys have now established local presences in the Bermuda market.

Subject to local regulatory developments and the conclusion of a governmental consultation exercise on the topic, other international legal networks may follow soon. The asset management sector should, in turn, benefit from enhanced competition in Bermuda’s legal services sector (and, it is to be hoped, appropriate levels of cyber-security and data protection). 

The Bermuda Monetary Authority

In July 2017, the Bermuda Monetary Authority (BMA) published an update to its investment fund guidelines under the Investment Funds Act 2006.

In August 2017, the BMA successfully petitioned the Supreme Court of Bermuda to wind up Cumulus Eastern European Property Fund Limited, under the ‘public interest’ provisions of the Investment Funds Act 2006 and the Companies Act 1981, as a result of various breaches by the fund’s manager of the Investment Funds Act 2006 and the Fund Rules 2007. The BMA claimed that its actions, in this respect, were intended to protect the interests of investors and the reputation of Bermuda as a jurisdiction. This enforcement action was consistent with other steps being taken by the BMA to strengthen its powers of investigation and enforcement, in the public interest.  

In October 2017, the Bermuda Monetary Authority hosted the Financial Stability Board’s Regional Consultative Group of the Americas’ shadow banking workshop. This was followed, in December 2017, with a meeting of the Group of International Financial Centre Supervisors, and an event considering financial stability today, 10 years after the global financial crisis.

The Bermuda Courts

The Bermuda Courts continue to deal with fund-related litigation (over and above enforcement actions by the BMA, and governmental applications for disclosure of tax information under Tax Information Exchange Agreements). 

One long-running case has involved Capital Partners Securities Co Ltd v. Sturgeon Central Asia Balanced Fund Ltd, a dispute between the fund’s managers and certain investors as to what was allegedly promised on the one hand, and what was allegedly expected on the other.

Madoff-related litigation also continues, 10 years after his Ponzi scheme was revealed. It was recently reported that, pursuant to a Letter of Request from the US Bankruptcy Court in the context of proceedings brought by Irving Picard, as trustee of the Madoff estate, against Kingate Management Ltd. and others, the Supreme Court of Bermuda will examine a Bermuda-based witness in 2018 to find out what he knew and can still remember about the Madoff investment business, in his capacity as a director of two Bermuda-based ‘feeder funds’ over 10 years ago. Another Bermuda-based feeder fund, Alpha Prime, entered into a $77 million settlement with Irving Picard in February 2018, subject to the approval of the US Bankruptcy Court.

Insofar as the Bermuda courts are concerned, 2018 will be a year of change. Both Bermuda’s commercial court judges, Chief Justice Kawaley and Justice Hellman, will be moving on to pastures new in the summer of 2018. The appointments of new commercial court judges will be announced by the Governor in due course. It is to be expected, of course, that the new commercial court judges will be just as well qualified as the retiring judges when it comes to distinguish between real and fake net asset values. 

The Bermuda Government’s Outlook for 2018

At an AIMA Bermuda industry event in January 2018, the new Premier, David Burt described the Bermuda government’s outlook for 2018 as ‘challenging’. His statement recognised the current state of Bermuda’s public finances, and the challenges associated with Bermuda’s relationship with the US and the EU, and its upcoming assessment by the Caribbean Financial Action Task Force.

On a positive note, the Premier confirmed that the newly elected Bermuda government is fully committed to growing and diversifying Bermuda’s economy and incentivizing investment, while meeting the standards of international regulatory bodies. The new government’s first budget statement is expected to be announced in mid-February 2018, and it will be studied with interest by the business community.

Bermuda’s Business Development Agency continues to encourage and support business investment and professional training in Bermuda, as do the local branches of the Alternative Investment Management Association, the Institute of Directors, STEP, the Restructuring and Insolvency Specialists Association, and various other industry groups.

So, 2018 is likely to be a year of change and opportunity for Bermuda generally, and for the investment fund, asset management, insurance and legal sectors in particular.

Alex Potts QC
Partner. Alex Potts is Special Counsel at Sedgwick Chudleigh in Bermuda. He is admitted to the bars of England and Wales, the Cayman Islands, and Bermuda, and he has a wide-ranging commercial litigation, trusts litigation, and insurance practice.