INVESTMENT FUNDS UPDATE DECEMBER 2016 BERMUDA INVESTMENT FUNDS UPDATE DECEMBER 2016

Several developments have been underway within the Bermuda sector, including a number of legislative innovations and lobbying activities. The stated commitment of the Bermuda Government and industry partners to be responsive to market demand, innovative in product delivery and nimble in introducing legislative amendments is evidenced in the recent enhancements made to the Bermuda fund product. In this edition, we feature an introduction to the Bermuda Limited Liability Companies Act, 2016, the Alternative Investment Fund Managers Directive and the new Contracts (Rights of Third Parties) Act, 2016, as well as requirements for Grandfathered Exempted Funds. Government, business partners and legal professionals continue to promote the Bermuda investment funds sector through events both on and off the Island. This has included the Alternative Investment Summit and the Global Fund Forum, which took place in October. These efforts support the marketability of Bermuda fund vehicles on a global stage. We look forward to bringing you key market updates and event highlights, through our Investment Funds Update.

Bermuda Limited Liability Companies On 13 July 2016, the Bermuda Government enacted limited liability company (“LLC”) legislation modeled closely on the Delaware equivalent. LLCs, which originated and are widely used in the US, are an entirely new form of legal entity in Bermuda, best considered as a hybrid entity combining corporate and partnership characteristics.

LLCs have separate legal personality like traditional companies, and a An LLC is governed by its operating agreement, which provides capital structure familiar to sponsors of partnerships, with members freedom to the members of the LLC to agree on the most appropriate contributing or agreeing to contribute capital rather than subscribing system of management and distribution of profits, and extends to the for shares. ability to vary, waive or eliminate members’ and managers’ fiduciary duties, except in cases of fraud or dishonesty. LLCs are therefore While a few non-US jurisdictions have made provision for LLCs in more flexible than traditional companies and have fewer formalities. their laws, such laws generally incorporate non-US terms and This is the main benefit of an LLC over any other form of business concepts which may be unfamiliar to US counsel. The Bermuda LLC entity giving maximum effect to the principle of freedom of contract. legislation was drafted alongside US counsel with the stated aim of creating an offshore product that would be familiar in form and It is anticipated that the Bermuda LLC, due to its flexibility and substance to onshore promoters and practitioners. Furthermore, efficiency, will be useful for a variety of private equity funds, hedge sponsors will benefit from the ability to convert Bermuda companies funds, open-ended investment funds, joint ventures, asset-holdings and limited partnerships that have elected to have legal personality and other purposes, in particular providing an offshore investment to and from a Bermuda LLC. vehicle parallel to an onshore LLC, as well as providing an entity suitable to act as general partner of onshore or offshore limited partnerships. The core of the new Bermuda LLC legislation is based largely on corresponding provisions from the Limited Liability Company Act in Following closely behind enhancements to Bermuda’s investment Delaware. It is anticipated that this approach will be welcomed by US fund and partnership legislation in recent years, the introduction of counsel, as Bermuda LLCs will be familiar to them in both form and LLCs in Bermuda is a further indication of Bermuda’s responsiveness substance, and will benefit from existing practice and jurisprudence in to the demands of the international fund industry. relation to the corresponding Delaware provisions.

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LEGAL UPDATES The Alternative Investment Fund Managers Directive (“AIFMD”)

The European Securities and Markets Authority (“ESMA”) has implementing the new AIFM regulatory regime at the time. However, continued to assess various countries, including Bermuda, with a they did note that Bermuda’s draft legislation was “largely similar” view to extending the AIFMD passport to non-EU countries. Currently, to the requirements laid out in the Directive. Since the advice was Bermuda funds can only be marketed to professional investors in EU issued, Bermuda has published its AIFM Rules, brought into force countries under national private placement regimes. If the AIFMD the Investment Business Amendment Act, 2015 and passed the passport is extended to Bermuda, a Bermuda investment manager Investment Funds Amendment Act, 2016. These pieces of legislation will be able to market its alternative investment funds (“AIFs”) freely bolster the Bermuda Monetary Authority’s (“BMA”) enforcement across the European Economic Area (“EEA”) without the need to powers and enhance investor protection. In addition, the Bermuda register the AIFs under the national private placement regimes in Monetary Authority has shared with ESMA other draft proposed each EEA country. regulatory instruments they expect to bring in as part of Bermuda’s Bermuda has already passed the enabling legislation necessary to AIFM regime such as the AIFM Code of Conduct. These were drafted implement the AIFMD regime once passport approval is given by the to ensure compliance with EU requirements. As such, the BMA is hopeful that in the next review round, Bermuda will receive a European Commission. Specifically, the Investment Business Act, 2003 has been amended to provide an opt-in framework for the licensing positive review on all five assessment criteria. and regulation of alternative investment fund managers who wish to It should be noted, in considering the timing of implementation of market their AIFs via the passport in accordance with the terms and passporting for all third countries, ESMA is assessing a further 10 conditions set out under the AIFMD. additional non-EU countries. It is not yet clear whether ESMA will This July, ESMA released the results of its latest round of third make recommendations to the European Commission to extend the country assessments and stated that with respect to Bermuda, it passport to countries as they feel they become compliant or if had met three of the five assessment criteria in order to qualify for they will wait for the majority of countries to become compliant the passport extension. ESMA stated that there were no significant before recommending the extension of the passport to the group. obstacles impeding the issue of an AIFMD passport to Bermuda in To date, no third countries have been able to implement the relation to standards on competition, market disruption and passport regime. monitoring of system risk. ESMA was unable to give definitive Given the BMA’s strong international regulatory reputation and the advice with respect to the criteria on investor protection and results of the July ESMA assessment, Bermuda is optimistic that this effectiveness of enforcement, as Bermuda was in the process of will qualify for extension of the passport in the near term.

Grandfathered Exempted Funds Granted Extension to Reregister with the Bermuda Monetary Authority until 3 October 2017 On 3 October 2013, exemptions were created for qualifying investment funds in Bermuda. Class A and Class B Exempted Funds regimes were introduced, and prior exemption provisions were repealed. Investment funds that had originally obtained exemption under the repealed provisions of earlier legislation were grandfathered for three years.

Pursuant to the Investment Funds Amendment Act, 2016, grandfathered grandfathered funds must reregister as Class A or Class B Exempted funds have now been granted an additional year to reregister as Class A or Funds. Failure to reregister will result in such funds losing their exempted Class B Exempted Funds. As a result, on or before 3 October 2017, such status and falling out of compliance with Bermuda law.

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A Grandfathered Fund may register as a Class A Fund if it limits the Application procedures and ongoing regulatory obligations for Class B offering of its securities to qualified participants; employs a suitable Funds are similar to those for Class A Funds, with minor exceptions. investment manager; appoints a fund administrator, registrar, auditor All exempted funds are required to advise the BMA if, at any time, they and custodian or prime broker; appoints a resident representative in no longer qualify for the previously granted exemption, and must Bermuda and files suitable financial statements annually with the register as Non-Licensed Persons pursuant to Bermuda law. Bermuda Monetary Authority (“BMA”). In addition, all exempted funds, be they grandfathered or registered as Registration of a Class A Fund can be accomplished in a single Class A Funds or Class B Funds, must register as Non-Licensed Persons business day by delivering a certificate of compliance and a registration pursuant to the Proceeds of Crime (Anti- and fee of US$1,545 to the BMA. Ongoing requirements for Class A Funds Anti-Terrorist Financing Supervision and Enforcement) Act, 2008. are minimal. Please contact a member of our investment funds group to discuss the implications of the If the investment manager of an otherwise eligible grandfathered Class deadline or to make the required registration. A Fund does not meet the more stringent qualifications, the grandfathered fund must apply for registration as a Class B Fund, for which the registration fee is US$1,030.

Contracts (Rights of Third Parties) Act, 2016 The Contracts (Rights of Third Parties) Act, 2016 (the “Act”) permits parties to vary the common law doctrine of “privity of contract”, which provides that only parties to a contract may enjoy the benefits and enforce the provisions of that contract.

Rights may now be extended to third parties, reducing the burden of In sum, under this new Bermuda law, contracting parties may now entering into multiple agreements to achieve the same result. extend rights to third parties where desired, thus reducing the burden of entering into multiple agreements to effect the same The Act will be of significant interest to investment managers, result. The Act further enhances Bermuda’s commercial laws and, investment funds, third party service providers and delegates, who again, demonstrates the Island’s responsive legislative framework traditionally may not be parties to an agreement, but may be for business. affected by its terms and provisions. In addition, the Act should assist in the area of indemnification and exculpation provisions of agreements intended to benefit beneficiaries THIS ACT WILL BE OF SIGNIFICANT INTEREST beyond the contracting parties. TO THIRD PARTIES, SUCH AS: Bermuda’s industry will benefit from the Act, as it removes all doubt as to the legal enforceability and effectiveness of ‘cut-through’ clauses or endorsements in insurance and reinsurance contracts. Further, the Act is similar to third party rights legislation enacted in the UK and other common law jurisdictions. Contracting parties must “opt in” to the Act’s provisions. The Act generally applies to all contractual provisions, but certain contracts INVESTMENT INVESTMENT THIRD-PARTY are specifically excluded. FUNDS SERVICE MANAGERS PROVIDERS Where the Act’s requirements have been met, a third party can AND DELEGATES enforce the terms of the contract, but may not have any better rights or remedies than those available to the contracting parties. Once rights have been extended to a third party, the ability of contracting parties to vary such rights between themselves and the third party are restricted. Finally, the Act permits a third party to assign its third party rights under a contract to another person in the same way as a contracting party may assign its rights, unless the contract specifically provides otherwise or on a proper construction of the contract, the rights are personal to the third party.

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Memberships

THE ALTERNATIVE INVESTMENT 100 WOMEN IN HEDGE FUNDS MANAGEMENT ASSOCIATION Conyers is an active member of 100 Women in Hedge Funds ("100WHF"). Formed in 2001, 100WHF is Conyers is a member of The Alternative a global organisation that links more than 13,000 professional women in the alternative investment, Investment Management Association, the asset management, investor and broader financial services industry. global representative body for alternative The group offers networking, educational and philanthropic opportunities in more than 19 locations asset managers and its new volunteer network across three continents and has raised over US$36 million for philanthropic causes in the areas of in Bermuda. women’s health, education and mentoring.

Awards and Accolades

Sole Band 1 Firm 23 Bermuda Who’s Who Legal 10 Ranked in Bermuda, Lawyers Ranked Bermuda Firm of Corporate with 17 Top-Ranked Tier 1 Corporate and the Year every year Lawyers Lawyers Commercial since 2006

CHAMBERS GLOBAL LEGAL 500 IFLR 1000 WWL AWARDS

IFLR 1000

Key Contacts

DAWN C. GRIFFITHS JULIE E. MCLEAN ELIZABETH DENMAN director director director [email protected] [email protected] [email protected] +1 441 299 4970 +1 441 299 4925 +1 441 278 7842

NEIL HENDERSON PETER CH’NG director director [email protected] [email protected] +1 441 298 7846 +1 441 298 7869

Founded in 1928, Conyers Dill & Pearman is an international law firm advising on the laws of Bermuda, the British Virgin Islands, the Cayman Islands and Mauritius. With a global network that includes 130 lawyers spanning eight offices worldwide, Conyers provides responsive, sophisticated, solution-driven legal advice to clients seeking specialised expertise on corporate 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.

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