Bermuda Enacts Innovative Legislation
Bermuda is a leading jurisdiction for numerous international business sectors and is recognised for its adherence to international standards and regulatory framework. Bermuda continues to be a leading home to the insurance and reinsurance sectors and is experiencing an increase in FinTech licensed entities and Investment Business applications. The Government of Bermuda remains committed to enhancing the high regulatory standards and to facilitating its reputation as a leading centre for international business, cross-border investment and wealth planning.
Bermuda was able to successfully rise to the challenge presented by the COVID-19 pandemic in which the business community and courts quickly transitioned to working remotely to ensure continuation of business during the quarantine periods. After an initial lockdown, the Island quickly entered into a phased reopening and introduction of strict COVID-19 regulations for residents and visitors alike.
In this overview, we identify some of the key legislative amendments that have been enacted and provide an update of the judicial trends.
Corporate & Commercial
In collaboration with the FinTech industry, the Digital Asset Business Act 2018 was amended by the Digital Asset Business Amendment Act 2020. The principle amendments include the introduction of a new testing licence, which will have an initial duration of 12 months or less, (the Class T Licence) and clarifying the definitions of ‘Digital Asset Exchange’ and ‘Digital Asset Derivative Exchange’.
The purpose of the Class T Licence facilitates the testing and piloting of a business model, product or service in the FinTech space. By making provisions for the testing of a minimum viable product/service via beta testing or piloting, this licence class will allow Bermuda’s digital asset business regime to foster innovation in the ever evolving digital asset business sector. It is proposed that applicants must: (i) develop success criterion for the test; (ii) list their pre-identified or targeted customers or counterparties; (iii) hold a minimum capital of at least US$10,000; and (iv) ensure that appropriate risk disclosures for potential counterparties are in place.
In February 2020 the Bermuda Government passed the Digital Asset Issuance Act 2020 (the DAIA 2020) which effectively transferred the responsibility for the administration of offerings of digital assets to the public from the Registrar of Companies to the Bermuda Monetary Authority (the BMA). The DAIA 2020 makes provisions requiring the BMA to create rules in relation to certain matters that all authorised undertakings must comply with, amongst other things. In furtherance of this obligation and in continuance of its commitment to maintaining a safe environment for digital issuance to the public, the Authority has provided rules under the Digital Asset Issuance Rules 2020 (the DAIR 2020) that explicitly outline the requirements for the way in which digital asset issuances are to be conducted.
More specifically, DAIA 2020 sets out the minimum required information that must be made available to digital asset acquirers via the issuer’s issuance document, which includes details relating to the issuer and all of the persons involved in the issuance; a detailed description of the underlying project; the digital asset; and the terms and conditions of the digital asset issuance, amongst other things.
To further protect the interests of digital asset acquirers, DAIA 2020 requires that ongoing communications and disclosures be made by the issuer to the digital asset acquirers with updates on the progress achieved with respect to the milestones set out in the issuance document. Other important rules include the requirement for issuers to have adequate mitigating controls in place against market abuse; for issuers to implement and maintain a robust risk management framework and a robust cybersecurity programme; and to establish and maintain a data node in Bermuda where all information relevant to the digital asset issuance will be stored.
Incorporated Segregated Accounts Companies
The Incorporated Segregated Accounts Companies Act 2019 (the ISAC Act) came into force on 15 January 2020. It introduces a new corporate vehicle, the Incorporated Segregated Accounts Company (ISAC), which allows for the creation by a company of segregated accounts, or cells, with separate legal status. The ISAC Act operates under the provisions of the Segregated Accounts Companies Act 2000 (the SAC Act) to ring-fence the assets of each individual cell from the creditors of other cells and allow for the winding up of individual cells without affecting any of the other cells.
While an ISAC is similar to a Segregated Account Company (SAC) registered under the SAC Act, certain features of the ISAC Act distinguish the ISAC as a hybrid structure between a SAC structure and a traditional company structure. Each ISA can: hold assets in its own name; have legal personality in the Bermuda courts; engage in business with the ISAC and other ISAs within its group structure; be self-governed by its own board of directors; and have the ability to wind up without impacting the other ISAs and ISAC within the structure. In contrast, the segregated accounts of a SAC do not have separate legal personality and are not able to self-govern, sharing the same board of directors and legal identity as that of the SAC to which they are registered. The ISAC structure may be appealing to entities involved in Insurance Linked Securities (ILS) market.
Registration under the ISAC Act provides a unique ability to have one structure operating in both investment funds and insurance/reinsurance. An ISA registered or authorised under the Investment Funds Act 2006 (IFA Act) has the ability to raise funds through the offering of securities which can then be used to collateralise (re)insurance written by the other ISAs licensed to conduct insurance business. Currently, to achieve this result, we see group company structures engaged in the ILS market utilising investment funds vehicles and reinsurance vehicles incorporated as separate entities. With the introduction of the ISAC Act, the same can be achieved within one ISAC structure while still maintaining independent governance and legal personality previously unattainable through the SAC structure. The introduction of the ISAC Act will serve as a mechanism for group structures, particularly those engaging in insurance business and investment fund business, to streamline incorporation and administration costs. However, when considering the costs benefit of this particular structure, consideration should be given to the fact that any ISAC who operates an ISA that is engaged in insurance business must also obtain a separate insurance licence, in addition to the licence of the ISA. While there are noted discounts offered to ISACs and ISAs, respective to each class of insurance licence required, those entities that engage in insurance business which require complex licensing at the high end of the cost scale should weigh the reduced incorporation fees against the potential for increased licensing fees, due to the double licensing requirement, carefully. In contrast to the above, the separate legal personality of the ISAs could make the ISAC structure more attractive to companies wishing to establish one ISAC operating multiple ISAs who are each writing insurance business. The ability to segregate each ISA and allow them to operate under their own independent insurance licence could allow each ISA to benefit from separate and different onshore tax elections, creating a cost benefit from a tax perspective.
The first ISAC and ISA were incorporated in the latter half of 2020 and were registered as Special Purpose Insurers. It is anticipated that the ISAC structure will be advantageous to a number of industry sectors, such as insurance, reinsurance, rent-a-captives, life insurance, ILS, fund structures and family office structures, as each cell will be able to function independently within the same ISAC, obtaining separate tax elections or credit ratings while minimising operating costs.
Bermuda’s commitment to revolutionising and streamlining its international business sector is reflected by the passing of The Companies and Partnerships Electronic Registry Amendment Act 2020 (the Electronic Registry Act), which mandates that all documentation required to be filed with, or issued by, the Registrar of Companies is to be filed or issued by means of an electronic record.
Another significant change brought about by the Electronic Registry Act is the insertion of a new subsection to cause Part III of the Companies Act 1981, providing for prospectuses and public offers not to apply to exempted companies. As such, exempted companies offering shares to the public will no longer have to file a prospectus with the Registrar of Companies.
The new electronic registration system will also make company information filed at the Registrar of Companies available online to members of the public.
Investment Funds Amendment Act 2021
The Investment Funds Act 2006 (the IFA) has been amended by the Investment Funds Amendment Act 2021 (IFA Amendment Act 2021), which became operative on 27 January 2021 (Operative Date).
The IFA Amendment Act 2021 introduces, amongst other things, requirements for registered funds to ensure consistency across the different classes of funds. Notably there are: provisions targeted at Private Funds; a requirement to appoint a local registrar for registered funds; amendments to filing requirements for all registered funds and overseas funds; and a widening of the definition of “company fund” to include incorporated segregated accounts and incorporated segregated accounts companies. All existing funds are required within six months of the Operative Date to comply with the applicable provisions brought about by the Amendment Act 2021. Operators of all existing funds should use the transition period to assess whether the changes to the IFA are applicable to them.
The IFA Amendment Act 2021 introduces additional requirements for Private Funds by way of amending section 6 of the IFA to include a requirement for an operator of a Private Fund to ensure that an officer, trustee or representative resident in Bermuda is appointed who has authority to access the books and records of the fund. Prior to this amendment, the only Bermuda specific requirement for Private Funds was requiring the operator of a Private Fund to appoint a local service provider authorized and regulated by the BMA.
Section 19 of the IFA has also been amended to impose on all registered funds, being Private Funds, Professional Class A Funds, Professional Class B Funds and Professional Closed Funds, the requirement to appoint a registrar in Bermuda to establish and maintain a register of the participants in the fund. The register must contain (a) the name and address of each participant; (b) the number of units (including fractions of a unit) of each type held by each participant; and (c) the date on which the participant was registered in the register in respect of the units standing in his name. However, the registrar shall not be obliged to register more than four persons as the joint participants of any units. In terms of ongoing obligations under the IFA, the registrar shall take all reasonable steps and exercise all due diligence to ensure that the information contained in the register is, at all times, accurate, complete and up to date. Such function may be performed by a corporate service provider, secretary or any other local service provider equipped to take on the role. Registered funds that currently have overseas fund administrators performing this function alongside their other duties will have a six-month transition period to appoint a local service provider to act as registrar and to update their offering document to demonstrate compliance with the requirement by way of a supplement, term sheet or such other form of update to the offering document.
The Amendment Act 2021 revises the filing requirements for all registered funds and overseas funds, amending the previous requirement to file annually on or before June 30th and now allowing for registered funds and overseas funds to make their annual filings within six months of its financial year end.
Amendments To The Regulation Of Trust Business
The Trusts (Regulation of Trust Business) Amendment Act 2019 (the Trust Amendment Act) came into force on 31 December 2019 and enhances the regulatory framework for trust business in Bermuda. Under the Trust Amendment Act, trustees carrying on trust business in Bermuda must be regulated by the BMA, unless otherwise exempted, and must now abide by the trust business Code of Practice and the Statement of Principles issued pursuant to the Trusts (Regulation of Trust Business) Act 2001.
Key amendments to the Trusts (Special Provisions) Act 1989 (TSPA) serve to modernise its “firewall” provisions and ensure greater certainty that trust assets will be protected and utilised for the intended purposes. By specifying the circumstances under which any foreign law shall be excluded from application to a Bermuda trust, no foreign law shall apply to the determination of any question concerning the validity, construction, effects or administration of a Bermuda trust unless foreign land is concerned or if foreign law has been chosen to apply to any severable aspect of a Bermuda trust.
Additionally, the TSPA allows for illegitimate children to be excluded from the Specified Class of a trust where the Settlor expressly opts to exclude illegitimate children in the trust instrument. However, in the absence of such express language, the Children’s Act 1998 will continue to apply and the reference to children in a trust instrument shall be deemed to include both legitimate and illegitimate children.
Judicial Updates And Trends
Bermuda law is often a preferred choice of governing law for dispute resolution, specifically for trusts, commercial litigation and cross-border insolvencies.
Bermuda continues to experience a healthy volume of trust and estate litigation, particularly as settlors and senior family members pass away and newer generations seek to gain greater influence and wealth. In addition, the confidence in Bermuda’s trust legislation is seeing new Bermuda trusts being created or the restructuring of existing trusts to ensure flexibly for future generations.
There has also been a noticeable rise in insolvency and restructuring matters. There have been a number of Bermuda companies listed on the Hong Kong Exchange experiencing financial distress arising out of the political environment and economic conditions caused by the pandemic, often resulting in a “soft-touch” provisional liquidation for the purposes of safeguarding assets from the clutches of related parties and to facilitate restructuring from a “white knight”. Other Bermuda companies operating globally have utilised US Chapter 11, together with parallel Bermuda proceedings, as an efficient means to restructure. A number of Bermuda life insurance companies have entered provisional liquidation arising out of questionable investment of policyholders’ premiums, related party transactions, and asset values diminishing in economic uncertainty. Such collapses will test the strength of Bermuda’s specialist segregated account structures and the ability of regulators and liquidators to protect innocent policyholders and facilitate a return on their premiums.
The Bermuda courts have reacted to the pandemic facilitating the hearing of listed cases by fully electronic means both at first instance and appellate levels. The Supreme Court of Bermuda has welcomed a third full-time Commercial Court Judge which will enhance timely access to justice, particularly where the increasingly cross-border and complex circumstances often require timely Court intervention. In addition, Bermuda continues to be represented by an experienced Court of Appeal with a final appeal to the Judicial Committee of the Privy Council in London.
Bermuda stands ready amidst the global challenges to serve the international and local community with first class service and open arms – even if it’s six feet apart or by virtual means.
About the Authors
Senior Associate. Janice practices in all areas of corporate and commercial law, advising a wide range of international and local clients. Janice’s primary areas of expertise are with respect to asset financings, particularly aviation and shipping financing, shipping and aircraft registration in Bermuda, and banking and finance transactions. Janice also has extensive experience advising on mergers and acquisitions of both local and international companies, the migration of corporate entities and partnerships into and out of Bermuda, partnership structures, including global restructuring projects involving Bermuda entities, the incorporation and establishment of Bermuda special purpose vehicles and establishing private trust companies. Janice joined CHW in 2007 and was admitted to the Bermuda Bar in 2008. Janice is a member of the WISTA Bermuda Branch and the Society of Trust and Estate Practitioners, Bermuda Branch. Janice is ranked as a Rising Star by IFLR1000 and by The Legal 500 in both of the corporate & commercial and banking, finance & capital markets categories.
Kathleen practices in all areas of corporate and commercial law including IP migration, life sciences and bio-tech restructuring, securities and financings, as well as investment business and partnerships. Kathleen also has experience in a wide variety of international asset financing transactions, including debt and equity offerings, mergers and acquisitions and cross-border financings. Kathleen is proficient in Bermuda’s regulatory compliance regime, including data protection, anti-bribery and anti-money laundering. Prior to joining CHW in November 2018, Kathleen was a senior associate at a Tier 1 Bermuda law firm for 12 years. Kathleen joined CHW in 2018 and was admitted to the Bermuda Bar in 2007. Kathleen was ranked by the IFLR1000 as a Rising Star.
This article was originally published in the IFC Review on 9 June 2021 (IFC Review)