Bermuda is to tighten up its legislation dealing with the multi-billion dollar "hedge" fund industry.

Cheryl-Ann Lister, chief executive of the Bermuda Monetary Authority, told a seminar in New York last week that legislation was on the way to amend existing regulations and provide the "full array of regulatory and intervention powers" needed to protect investors.

"The new provisions, to be introduced in Parliament towards the end of 2003, will provide more effective intervention and enforcement powers for the regulators to use in those few cases in which concerns arise."

The seminar was organised by The Bermuda International Business Association and Forbes Magazine and was entitled: "Regulating Alternative Investments: How much is enough?"

Mrs. Lister revealed that the BMA, like other regulatory bodies, had given extensive consideration to the question of how much transparency and regulation of "hedge" funds was necessary, particularly in light of their growing attraction to retail investors.

While the Securities and Exchange Commission is continuing its assessment at roundtable meetings this week, Bermuda appears to have committed to a moderate approach which concentrates on regulating the service providers as opposed to regulating individual funds.

"The BMA conducts a thorough review of owners and senior personnel for fitness and integrity. In addition we review prospectuses rigorously and ensure that material changes are properly signalled. In the case of investment managers, we evaluate their track record, experience, skills and regulatory status."

Mrs. Lister said this was consistent with Bermuda's reputation as a quality jurisdiction which focused on the quality of those to whom it agreed to give access to the facilities of the Island. "Simply, we aim not to do marginal business; and we make no apologies for that."

Mrs. Lister said that the primary protections for investors remained disclosure requirements and what she called "market discipline".

According to Mrs. Lister, the Bermuda Companies Act contains disclosure requirements regarding prospectuses which combined with Common Law principles impose obligations on the promoters of any offerings of securities to the public to ensure that the contents of any offering document are truthful and not misleading.

In addition, financial institutions are required under their own compliance systems to apply rigorous criteria when extending credit to allow hedge funds to leverage their market plays.

In the future, however, this framework will be augmented by a licensing regime for fund administrators operating in or from within Bermuda.

Mrs. Lister said that fund administrators were already subject to the Proceeds of Crime (Money Laundering) Regulations 1998, but a formal licensing and supervisory process will facilitate checking of compliance with anti-money laundering obligations, will set out minimum prudence requirements and is also likely to involve the implementation of a Code of Practice they must comply with.

Mrs. Lister said the new provisions would further expand the definition of collective investment schemes to cover not only mutual funds and unit trusts, but also, other corporate and partnership vehicles that achieved the pooling of funds under management for investment purposes.

The regulations will be "graduated" with much more intensive supervision including onsite compliance testing provisions for funds which invite investment from the public at large.

"For the institutional end of the spectrum, however, regulation will remain much lighter unless and until specific concerns emerge.

"For this level of sophisticated investor, it is our intent to continue to place great reliance on the role of management, together with the checks and balances provided by the interlocking roles of the service providers.

"We have never taken a `one size fits all' approach to regulation and this basic philosophy continues to underpin our approach."