7.4 Issues and recommendations
7.4.1 Introduction
Bermuda has in place many necessary components for
a well regulated-collective investment scheme sector, particularly
in relation to UK Class schemes. There are, however, a number
of enhancements which need to be made. These particularly relate
to the regulation and supervision of standard schemes. This is
of importance as standard schemes make up the majority of collective
investment schemes in Bermuda.
The areas in need of development are considered below.
7.4.2 Public/non-public schemes
Our evaluation draws a distinction between public
and non-public schemes. For the purposes of Bermuda we consider
that Institutional schemes are non-public. Therefore, whilst Bermuda's
regulation of them is not technically to IOSCO standards (as IOSCO
does not distinguish between public and non-public schemes), the
approach taken by Bermuda is similar to that taken to non-public
schemes by many other jurisdictions including the United States.
Indeed a number of jurisdictions exercise no regulatory control
over certain non-public schemes.
In general, we consider that, non-public schemes
should be subject to initial vetting and that enforcement and
supervisory powers should exist. However, in line with general
international practice, there need be no specific requirements
along the lines envisaged by IOSCO Principles 18, 19 and 20 because
of the nature of the investors involved. In the case of Bermuda
there is adequate vetting but the enforcement powers require improvement.
7.4.3 Ongoing supervision
7.4.3.1 Off-site supervision
With the exception of UK Class schemes, there is
currently limited off-site supervision, with focus primarily being
on variations to a scheme's performance and review of self-certification
compliance certificates.
We consider that off-site monitoring should be designed
to enable the BMA to assess the activities of a fund and to identify
potential risk areas which may be evidence of a regulatory breach
or increase the likelihood of such a breach in the future. This
should be achieved through a formal documented review programme.
Such a programme should include the receipt and monitoring
of the annual audited accounts of schemes. There should also be
a requirement for breaches of the regulations or the fund's constitutional
documents to be notified to the BMA.
The details of fund composition should be compared
against the fund's constitutional documents to ensure that the
composition is in accordance with the fund's objectives and asset
holding policies.
In the case of public funds we agree with the BMA
that the introduction of an enhanced off-site monitoring programme
must, therefore, now be a priority. Until such a programme is
instituted Bermuda will not be in full compliance with IOSCO Principle
10.
IOSCO Principle 19 requires that supervision
should ensure that the stated investment policy or trading strategy
of the scheme has been followed and any restriction on the type
or level of investment complied with. This is not, at present,
occurring and therefore should be introduced for Standard class
schemes.
7.4.4 On-site supervision
We consider that the present restriction on the ability
of the BMA to conduct on-site inspections in respect of Standard
schemes results in a failure to comply with IOSCO Principles 8
and 10.
We also consider that there is not currently compliance
with IOSCO Principle 20 in respect of Standard class schemes.
This Principle requires the regulator to seek to ensure that all
the property of a scheme is fairly and accurately valued and that
the net asset value of the scheme is correctly calculated. This
assessment is best achieved during an on-site inspection.
In order to meet this Principle we believe that the
restriction should be removed and that the BMA should have the
right to conduct on-site inspections without the pre-condition
of a failure by the scheme to provide information. Such a power
of inspection should cover access to all functionaries for the
purpose of ascertaining compliance with the appropriate regulations.
7.4.5 Enforcement powers
Whilst the BMA's enforcement powers cover many of
the requirements of IOSCO Principle 9, we consider that some enhancements
would assist in achieving full compliance.
We consider that the BMA should have formal powers
to "police the perimeter" thereby allowing it to investigate
potential unlicensed scheme activity.
Additionally, whilst the Registrar of Companies has
the power to apply to wind-up a company operating as a scheme,
we consider that the BMA should also have powers to apply to the
court to wind-up such companies and furthermore to take similar
action in respect of unit trusts and, when regulated, limited
partnerships.
The BMA should be able to:
- require the substitution of any service provider
to the scheme;
- apply to the court to appoint a custodian to
manage the assets of a scheme;
- fine a scheme for breaches of the law or any
regulations; and
7.4.6 Regulations
There are no specific regulatory requirements for
Standard Schemes for the following:
- segregation of client assets; and
- disclosure of the basis of asset valuation and
pricing and the issue and redemption of units/shares.
However, we are advised by the BMA that this is achieved
through the BMA's review of the schemes constitutional documents.
The BMA state that they will not approve documents which do not
contain the necessary disclosures.
Nevertheless, we consider a more formalised regulatory
structure would be preferable and would better comply with IOSCO
Principles 3 and 18. In particular, how segregation of assets
will occur needs to be formally regulated.
We therefore recommend that formal requirements are
included in the revised regulations to be introduced for Standard
Schemes.
7.4.7 Regulatory scope
The lack of a single definition of collective investment
schemes has resulted in limited partnerships not being covered
within the regulatory scope. This has left schemes in the form
of limited partnerships unregulated. We consider that it is important
that these are brought within the regulations. We also consider
that the opportunity should be taken to create a single definition
of schemes rather than rely on the different definitions contained
in the Companies Act and Stamp Duty Act.
We are advised by the BMA that this can be achieved
by an amendment to the BMA Act.
7.4.8 Designated territory status
The length of time since the last UK Treasury review
means that we consider that a further evaluation of Bermuda should
be undertaken by the UK Treasury as soon as possible, to confirm
whether the regulatory requirements for UK Class Schemes/ Recognised
schemes remain equivalent to UK regulatory requirements.
7.4.9 Foreign schemes
The BMA currently proposes to pass the vetting of
foreign incorporated schemes to scheme administrators. This approach
is not out of line with IOSCO Principles. Nevertheless, we consider
that the BMA, in order to help guard against the reputational
damage of a fraudulent scheme to a Bermudian administrator, may
wish to continue to vet these schemes at the point of entry as
the BMA's access to external information is greater than the administrators.
