The Investment Funds Act 2006 (the "Investment Funds Act"), which received the assent of the Governor on 28 December 2006, makes provisions for the regulation of investment funds (formerly known as collective investment schemes) in Bermuda.

The legislation creates a new category of authorised fund and also provides a new licensing regime for fund administrators, which ensures that licensed fund administrators have proper personnel and operating systems in place.

Investment funds are prohibited from being operated in or from Bermuda unless they are authorised or exempted or qualify for exclusion under the Investment Funds Act. Investment funds are defined as any arrangement with respect to property of any description, the purpose of which is to enable persons taking part in the arrangement to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of profits or income.

The arrangement may take the form of a company, a unit trust or, for the first time, a partnership. Closed-ended investment funds are excluded from the scope of the Investment Funds Act.

An investment fund may apply to the Bermuda Monetary Authority (the "Authority") for an exemption from authorisation if (i) it is open only to qualified participants (who are high income, high net worth and sophisticated investors); (ii) it is administered by an administrator which is recognised by the Authority; (iii) it has appointed an auditor; and (iv) it has an officer, trustee or representative resident in Bermuda with access to its books and records.

Exempted investment funds are "out of scope" for the purposes of the European Union Savings Directive in Switzerland.

The Investment Funds Act creates three categories of authorised fund: Institutional Funds which are only open to qualified participants or require each participant to invest a minimum of $100,000 in the investment fund; Administered Funds which must have an administrator that is licensed under the Investment Funds Act and requires its participants to invest a minimum of $50,000 in the investment fund or be listed on a stock exchange which is recognised by the Authority; and Standard Funds which are any investment funds which do not qualify to be classified under any other category.

For an investment fund to be authorised, it must:

prepare annual audited financial statements;

appoint an investment manager, an auditor and an administrator;

entrust its property to a custodian which (if incorporated in Bermuda) is licensed under the Banks and Deposit Companies Act 1999, the Trusts (Regulation of Trust Business) Act 2001 or the Investment Business Act 2003 (the "IBA" and together, the "Finance Acts") or (if incorporated elsewhere) be subject to regulatory supervision equivalent to that imposed by the Finance Acts and be independent of the operator of the investment fund (although the Investment Funds Act provides an exemption from the requirement to appoint a custodian provided that alternative arrangements are in place for safeguarding the property of the investment fund);

have an operator and employ service providers who are fit and proper persons with the necessary experience and expertise to operate the investment fund;

and, comply with the fund rules and fund prospectus rules.

The requirement to be authorised or exempted does not apply to an investment fund if the number of participants in the fund is 20 or less and if the promotions, communications and offers to participate in the investment fund are restricted and not made to the general public. An investment fund must serve written notice on the Authority advising that the fund is private and qualifies for exclusion under the Investment Funds Act.

The Investment Funds Act makes it an offence to carry on or purport to carry on the business of fund administration in or from Bermuda unless a person is licensed.

An application for a licence is made to the Authority and must include a business plan setting out the nature and scale of the business which is intended to be carried on by the applicant and such other information as the Authority may require for the purposes of considering the application, together with the prescribed fee.

An applicant must be a company incorporated in Bermuda or elsewhere and must meet the minimum criteria set out in the Schedule to the Investment Funds Act which include:

a requirement that the controllers and officers be fit and proper persons;

and, a requirement that the business of the administrator be conducted in a prudent manner.

In determining this issue, the fund administrator must comply with the provisions of the IBA and maintain minimum assets of $50,000.

A licensed fund administrator is prohibited from holding client money or assets. The Authority has the power to issue codes of conduct relating to the duties, requirements and standards that are to be met by licensed fund administrators and may also set out best practices and procedures for carrying on the business of fund administration.

Fund administrators will be granted a 12-month period from the passage of the Investment Funds Act within which to apply for a licence.

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Fiona Gores is an Attorney on the Funds and Investment Service team within the Corporate and Commercial Practice Group of Appleby Hunter Bailhache. Copies of Mrs. Gores' columns may be obtained from the Appleby Hunter Bailhache 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.