Draft legislation has been produced that is intended to improve the quality of Bermuda's financial service providers and raise the level of protection for investors.

Once enacted the Collective Investment Schemes Act 2005 ("CISA 2005") will require that fund administrators with a physical presence in Bermuda be licensed unless exempted. This will not apply to those entities whose registered office is in Bermuda but which conduct business from a place outside Bermuda.

Under the legislation, the Bermuda Monetary Authority (BMA) may revoke the licence of a fund administrator if the BMA is satisfied that the minimum criteria has not been fulfilled, or may not have been fulfilled ? or if the licensed fund administrator has failed to comply with any obligations imposed on it.

The CISA 2005 will require fund administrators to conduct their business in a prudent manner by maintaining adequate accounting records, systems and controls and having adequate insurance coverage.

The application process is expected to be similar to that already required of investment managers doing business in Bermuda.

Administration services are currently a licensed activity under the Investment Business Act 2003 ("IBA"). A licence is required unless an exemption is available but only if the undertaking is providing both custodial and administration services. Most fund administrators do not provide both services and therefore do not require licensing under the IBA.

The new legislation will also produce a number of notable changes to the rules governing collective investment schemes, including the legal definition of such schemes.

Currently, a collective investment scheme is defined as a mutual fund or a unit trust scheme. Company legislation defines a mutual fund as a company incorporated for the purpose of investing the money of its members for their mutual benefit and having the power to redeem or purchase for cancellation its shares without reducing its authorised share capital.

A unit trust is an investment vehicle that allows participants to pool their funds and allows them to participate, as beneficiaries under a trust, in profits or income arising from the acquisition, holding, management or disposal of any property.

Under the proposed new legislation, a collective investment scheme is defined as any undertaking that may continuously issue securities that are redeemable at the option of investors. Further, such schemes shall have as their purpose or effect the pooling of investor funds with the aim of spreading investment risk and enabling investors to receive profits or gains from the acquisition, holding, management or disposal of, or any other form of dealing in, any property whatsoever.

This new definition means that partnerships will fall within the definition of collective investment schemes for the first time. The fuller definition also means that there will be no need to refer to other legislation in order to determine the definition of a collective investment scheme.

Under the CISA 2005, any company, partnership or unit trust carrying on business as a collective investment scheme must be registered - unless it is exempted from registration by order made under section 11 of the CISA 2005.

Anyone who carries on business without being registered, or being exempted from registration, may be found guilty of an offence liable on summary conviction to a maximum fine of $100,000 or imprisonment for a period of up to two years or both. If convicted on indictment, maximum penalties include an imprisonment term of five years or a fine of $250,000 or both.

The CISA 2005 is subject to industry comment and further change as the legislation progresses through the legislative process.

Jennifer S. Eve is an Associate in the Corporate and Commercial Practice Group at Appleby Spurling Hunter. A copy of Ms. Eve's column can be found on the Appleby Spurling Hunter website at www.applebyglobal.com .

This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.