Establishing an Investment Management Company in Bermuda

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1 BERMUDA BRITISH VIRGIN ISLANDS CAYMAN ISLANDS DUBAI HONG KONG LONDON MAURITIUS SINGAPORE conyersdill.com May 2013 Establishing an Investment Management Company in Bermuda The process involved in establishing a Bermuda investment management company is best examined in two parts. First, the actual physical process of incorporating a management company in Bermuda, and next, the legislative environment a company will operate in. Two main pieces of Bermuda legislation need to be considered: the Investment Business Act, 2003 of Bermuda (the IBA ) and the Bermuda Immigration and Protection Act, 1956 as amended (the IPA ). No unique requirements are applicable to investment management company incorporations in Bermuda. Conyers Dill & Pearman Limited would make application to incorporate an exempted (i.e. foreign owned) Bermuda company. There is no minimum share capital required under Bermuda law. The objects of the Company would be unrestricted but would also specifically include the ability to provide investment management services to foreign (i.e. non Bermudian) interests. Any individual or corporate entity may be the shareholder of the company. The identity of the shareholder must be disclosed to the Bermuda Monetary Authority ( BMA ) and any transfer of shares of the company would need pre clearance by the BMA and disclosure of identity of the subsequent purchaser. If identities are known to the BMA, the incorporation is a quick process, usually no more than a few days. Incorporation costs approximately US$6,000 (including all costs and expenses relating to the incorporation plus payment of the first year s annual government fee). An annual government fee is payable on a sliding scale, however most companies may be structured to pay the minimum annual fee of US$1,995 per annum. Conyers Dill & Pearman Limited is affiliated with Codan Services Limited, which can make all the incorporation and administration arrangements including supplying a registered office and Bermuda resident secretary.

2 Legislative Environment The IBA The IBA is the Bermuda legislation that governs investment business which is conducted in or from Bermuda. The Minister of Finance, through the BMA, administers and has overall responsibility for enforcing the IBA. Whether a company will be viewed as conducting investment business in or from Bermuda is key in determining whether the IBA will be applicable to a company s operations. The IBA defines investment business as any activity involving the buying, selling, subscribing for, or underwriting of investments and securities, or agreeing to do so as principal or agent. Clearly, an investment management company s business falls within the parameters of this broad definition. Generally speaking, there are two scenarios with respect to the manner in which a company may operate. First, the company could be incorporated in Bermuda but have its physical presence and all operations outside of Bermuda. Alternatively, it may have a physical presence and conduct operations from Bermuda. According to section 4(1) of the IBA, an entity is deemed to be doing investment business in or from Bermuda only if it maintains a place of business in Bermuda. If scenario one is chosen, the IBA is not applicable to the company as it lacks the necessary nexus to Bermuda. Should it be deemed commercially necessary, it is also possible to voluntarily apply for licensing as an investment provider pursuant to the IBA. Details of the licensing requirements are available on request. However, where operations are actually conducted from physical premises in Bermuda, the necessary nexus to Bermuda is established and the company will need to either 1) satisfy one of the available categories of exemption to the IBA; or 2) be licensed as an investment provider pursuant to the IBA. Exemptions from the Provisions of the IBA Exemptions to the applicability of the IBA are outlined in The Investment Business (Exemptions) Order 2004 (the Order ). Entities (foreign or local) who are not market intermediaries and who provide investment services (including offering securities as agent) in or from within Bermuda to any of the following class of investor ( Sophisticated Purchasers ) are exempted from the provisions of the IBA. Sophisticated Purchaser can be considered equivalent to sophisticated investors under U.K. legislation and accredited investor under U.S. legislation. They include: Page 2 of 6

3 (a) high income private investors; (b) high net worth private investors; (c) sophisticated private investors; (d) investment funds which are authorized or exempted by the Authority under the Investment Funds Act 2006; (e) bodies corporate, each of which has total assets of not less than five million dollars, where such assets are held solely by the body corporate or held partly by the body corporate and partly by one or more members of a group of which it is a member. (f) unincorporated associations, partnerships or trusts, each of which has total assets of not less than five million dollars, where such assets are held solely by such association, partnerships or trust held partly by it and partly by one or more members of a group of which it is a member. (g) bodies corporate, all of whose shareholders fall within one or more of the subparagraphs of this paragraph, except sub paragraph (d); (h) partnerships, all of whose members fall within one or more of the sub paragraphs of this paragraph, except sub paragraph (d); (i) trusts, all of whose beneficiaries fall within one or more of the sub paragraphs of this paragraph, except sub paragraph (d). The relevant definitions for the above are set out below: investment fund, as defined in the Investment Funds Act 2006, means any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income; high income private investor means an individual with personal income in excess of $200,000 in each of the two years preceding the current year or a joint income with his/her spouse in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year. Current year is the year in which an investment is purchased; high net worth private investor means an individual whose net worth or joint net worth with his/her spouse in the year in an investment purchase exceeds $1,000,000. net worth means the excess of total assets at fair market value over total liabilities; Page 3 of 6

4 sophisticated private investor means an individual who has such knowledge of, and experience in, financial and business matters to enable proper evaluation of the merits and risks of a perspective purchase of investments. The above exemptions are not available to entities that act as market intermediaries. Market intermediaries are defined under the Order as being those persons who hold themselves out as engaging in the business of dealing in investments as principal or agent on an investment exchange. To be a market intermediary, the transaction involving the market intermediary has to be affected across the facilities of an investment exchange. In our view, a Bermuda management company would not normally be viewed as a market intermediary. A further basis for exemption is available where investment services are provided to not more than twenty persons at any one time and where the provider does not provide investment services to the public or solicit investment business from the public. An exemption notice must be filed with the Authority in order to qualify for an exemption pursuant to the Order. As Non Licenced Persons, anyone applying for an exemption will be required to be registered with the AML Unit of the BMA. This involves completing the required form and submitting this to the BMA, together with applicable Anti Money Laundering/Anti Terrorist Financing policies and procedures. Licensing under IBA Should an exemption from licensing be unavailable to the company, or in the event of voluntarily licensing, please contact us for further information regarding the requirements of the IBA. The IPA If a company will be operated from Bermuda, it is important to remember that Bermuda has very stringent immigration laws. Only individuals holding valid work permits or with Bermuda citizenship/status are permitted to engage in any kind of trade or gainful employment in Bermuda. The main criterion determining whether a work permit will be granted to a foreign worker is whether there is a suitably qualified Bermudian interested in the position. If, after having advertised locally, it can be established that no suitably qualified Page 4 of 6

5 Bermudian is interested, the Department of Immigration will normally grant work permits to a qualified foreign worker for periods ranging from one to five years. A ten year work permit may be issued for positions in job categories that are critical to the continued success of the company and to Bermuda. To qualify for a ten year work permit, the Minister will consider applications from companies that: Have significant presence in Bermuda; Have a staff of at least 20 staff of which 50% are Bermudian; Provide entry level positions to Bermudians; Where a Bermudian and non Bermudian are employed in the same job category, payment and/or benefits should be comparable or equivalent; Have programmes in place for developing and promoting Bermudians; Exercise employment practices which have not regularly required the intervention of the labour relations officers of the Department of Labour and Training or Human Rights Commission or both. Positions eligible for a long term work permit: The positions that are eligible for a ten year work permit should be responsible for making decisions that are critical to the continuity of the company in Bermuda and, where either the company s presence in Bermuda is contingent on that person remaining in Bermuda (e.g. Chief Executive Officer, Chief Operating Officer or Chief Financial Officer, Chief Risk Officer); or Where it can be demonstrated that the Bermudians are in short supply and historically, no Bermudians have applied for the position (e.g. Chief Actuary or Chief Underwriter); or similarly Key employees at the senior management team leader and/or heads of department level such as underwriting or catastrophe modeling management level. The Department of Immigration has traditionally taken the approach that founders and principals of exempted companies incorporated in Bermuda are key employees with the result that work permit limits are not normally imposed and there is no need to advertise locally for suitable Bermudians to fill these positions. This policy, however, is always subject to change as the Department has a wide discretion in applying its policies. Work permits range in price from US$800 for a one year permit to US$5,150 for a five year work permit and $15,000 for a ten year permit. Once a candidate is selected and Page 5 of 6

6 all applications are completed, a work permit is generally issued in four to eight weeks. Finally, it should be mentioned that it is unlikely that an exempted investment management company would be permitted to offer retail investment management services to the local Bermuda population. That being said, exempted (i.e. foreign owned) Bermuda companies, trusts and partnerships are permitted to deal with each other and anyone residing in Bermuda is permitted to invest in Bermuda organized collective investment schemes. Elizabeth Denman Director +1 (441) elizabeth.denman@conyersdill.com This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information. About Conyers Dill & Pearman Founded in 1928, Conyers Dill & Pearman is a world-class legal services firm advising on the laws of Bermuda, the British Virgin Islands, the Cayman Islands and Mauritius. With a global network that includes 140 lawyers spanning eight offices worldwide, Conyers provides responsive, sophisticated, solution-driven legal advice to clients seeking specialised expertise on corporate, company and commercial, litigation, restructuring and insolvency, and trust and private client matters. Conyers is affiliated with the Codan group of companies, which provide a range of trust, corporate, secretarial, accounting and management services. For further information please contact: Lauren Budnick +1 (416) lauren.budnick@codancanada.com Page 6 of 6