Unit Trusts and Mutual Funds
- Collective Investment Schemes in Bermuda
A
Collective Investment Scheme (CIS)
involves the pooling of cash from indi-
vidual investors for investment (for
example in equities, bonds, currency deposits,
commodities or futures) according to declared
investment objectives. 1]Advantages for the
investor include the creation of a pool of money
“The off-shore CIS large enough to facilitate diversification, a spread
of risk and the benefit of the on-going services of
may ... have as its
a professional fund manager.
target market Many developed countries have available a vari-
sophisticated ety of “onshore” or domestically-domiciled
investment schemes. Investors will principally be
expatriate or
nationals and residents (both individual and cor-
institutional and porate) of the country concerned. Such schemes
corporate are characterised by being subject to demanding
(and often costly) regulatory procedures. Further,
investors.” where such procedures are long drawn out, a mar-
ket may be missed, or a competitor gain an edge,
during the compliance process. Income and gains
will be taxable and there may be strictures which
prevent diversification into certain geographic
areas and/or classes of investment vehicle.
The off-shore CIS may, by contrast, have as its
target market sophisticated expatriate or institu-
tional and corporate investors. Such a scheme
may offer the opportunity to an investor
“ ... environmental in country A to invest in country B by b y R o b e r t M i l l e r* and Robin Todd
factors, and factors facilitating capital transfers from A - B
without tax or foreign exchange conse-
specific to the
quences in the domicile of the CIS.
promotion, International asset management requires an
When choosing an offshore domicile
administration and for the establishment of mutual funds
regulation of such and unit trusts, “environmental” factors,
and factors specific to the promotion,
schemes must be
administration and regulation of such
considered.” schemes, must be considered. The
“environmental” factors include politi-
cal and economic stability, an estab-
lished and effective infrastructure
(including first-class legal, accounting,
banking and custodian services), acces-
sibility and sophisticated communications facili-
ties. The specific factors, dealt with further below,
may be characterised as appropriate legislation
and sensible regulation.
SECURITY FOR INVESTORS
An appropriate level of investor protection should
“This whole question
apply to an offshore CIS. Where twenty-five years
of the nature, degree ago lack of regulation offshore was considered a
and effectiveness of virtue, the investor of today should demand rea-
sonable, effective and enforced regulation as a
regulation is
sine qua non.
fundamental”
Bermuda is a well established offshore mutual
fund domicile with some of the larger funds being
quoted (for example) on the London and Hong
Kong Stock Exchanges. Further, a fund registered
in Bermuda is acceptable for listing on the Dublin
TRUSTS & TRUSTEES and International Asset Management
and Luxembourg exchange. Such a listing gives
access to the vast European market.
In Bermuda the regulatory body is the Bermuda
Monetary Authority (“BMA”), a statutory author-
ity established by the Bermuda Monetary
Authority Act 1969. This Act provides (in part)
that the principal objects of the BMA shall
include the supervision, regulation and inspection
of any “financial institution” 2]which operates in
or from within Bermuda; the promotion of the
financial stability and soundness of financial insti-
tutions; the supervision, regulation or approval of
the issue of financial instruments by financial
Downloaded from http://tandt.oxfordjournals.org/ at University of North Dakota on June 4, 2015
institutions; and the fostering of close relations
between financial institutions themselves and
government.
This whole question of the nature, degree and
effectiveness of regulation is fundamental. A
responsible and responsive off-shore jurisdiction
will present a prestigious regulatory environment
providing protection for investors (thereby
enhancing credibility and the marketing benefits
which accompany this) without excessive compli-
ance costs or burdensome restriction. Bermuda
offers the off-shore CIS:
Richards, Francis & Francis, Bermuda
understanding of the nature and regulation
of Collective Investment Schemes: the
rules and practice of Bermuda illustrates
the principles
* Robert Miller - now of ZI Labuan Trust Company Sdn.
Bhd, Labuan, Malaysia
1. Nil liability under current legislation to
taxes or other financial imposts, permitting gross
growth within the CIS, and the opportunity for
tax-free distribution. Under the Exempted
Undertakings Tax Protection Act 1966 the
Minister of Finance can issue a letter confirming
tax-free status up to 2016.
2. A greater opportunity for investors to
achieve their investment goals, in particular diver-
sification and estate planning through an off-shore
private trust or corporate investment vehicle. For
example an investor whose citizenship/domicile
might preclude investment in an offshore CIS
directly (under the rules of the CIS itself) may be
able, quite legitimately, to invest for the benefit of
himself or his family through such an offshore
structure.
Page 7
 3. Reasonable costs and prompt dispatch of
the incorporation/settlement process and compli-
ance procedures, (and therefore enhanced gain
brought about by cost-saving).
4. The opportunity to operate free of
exchange controls.
5. First class infrastructure thoroughly famil-
iar with a wide range of offshore products.
“ This leaves room
UNIT TRUSTS
for the introduction A unit trust scheme is defined in the Stamp Duties
of some innovation, Act 1976 as meaning “any arrangements made for
in the trust deed ...” the purpose, or having the effect, of providing, for
persons having funds available for investment,
facilities for the participation by them as benefi-
ciaries under a trust, in profits or income arising
from the acquisition, holding, management or dis-
posal of any property whatsoever”, and “unit”
means, in relation to a unit trust scheme, a right or
interest (whether described as a unit, as a sub-unit,
or otherwise) or a beneficiary under the trust
instrument. Differences in tax treatment of returns
and greater freedom of procedures, including
those to redeem units can render the unit trust a
preferred vehicle over a mutual fund. While the
latter is strictly bound by Companies Act, there is
no legislative regime for unit trusts at present in
Bermuda. This leaves room for the introduction of
some innovation in the Trust Deed for both public
“A unit trust
and private or restricted applications.
requires that the
“three certainties”
... be satisfied” Unit Trusts
International Investors
(Beneficiaries)
Units
Unit Trust $ dors of property acquired by the trust receive units
Deed
Manager Trustee
owns
“Unlike, say, a
Assets
discretionary trust,
Managers
the manager of a unit
trust is not an agent
For most practical purposes a unit trust will oper-
or employee of the
ate and be regulated in the same manner as a
trustee.” mutual fund. The matters later discussed relative
to mutual funds apply equally to the establishment
of a unit trust. There is an argument that the sub-
mission of a prospectus or explanatory memoran-
dum relating to a unit trust to the BMA is not
required. The better practice is to assume that
such a document (as appropriate to a public or pri-
vate offering) must in fact be filed.
Unit trusts are established by a Trust Deed made
with a Bermuda-resident trustee. The deed will
Page 8
provide for the calculation of net asset value per
unit and set out the terms for issue and redemption
of units. It will also provide for the administration
and management of the affairs of the unit trust,
including provisions for an annual meeting of
unit-holders, voting rights, audit and financial
statements. The Bermuda-resident trustee(s) acts
as custodian of the assets of the trust in addition to
exercising other fiduciary duties owed to the
unitholders.
While a unit trust attracts no annual registration
fee, the Bermuda management company associat-
ed with the unit trust is required to pay a fee of
BD$2,365 in respect of each unit trust scheme
managed by it.
General principles
A Unit Trust requires that the “three certainties”
(required of all trusts) of intention, object and
subject matter be satisfied. Further, the same
Downloaded from http://tandt.oxfordjournals.org/ at University of North Dakota on June 4, 2015
principles of fiduciary administration that apply to
any trust will also apply. Unlike, say, a discre-
tionary trust, the manager of a Unit Trust is not an
agent or employee of the trustee. Because the pro-
moter of a unit trust offers his management skills
to the public, the trustee cannot have the same
range of discretions a trustee would have under a
private trust.
The trustee and the manager each supply a mea-
sure of supervision of the other for the protection
of unitholders.
FEATURES OF A TYPICAL SIMPLE UNIT TRUST DEED
Parties to the deed
The manager and the trustee.
Constitution
The manager pays the trustee an initial subscrip-
tion for units to be issued to the manager. Further
units are created when subscribers application
monies are added to the trust fund or when ven-
in exchange therefore.
Declaration of trust
The trustee formally declares it holds the fund
upon trust for the unitholders.
Limitation of unitholders liability
A unitholder’s only liability is to pay the sub-
scription for each unit. Unitholders thereby gain
similar limited liability as that enjoyed by share-
holders of a limited company. The limitation,
however, arises out of the unitholders position
under the Trust Deed rather than statutory compa-
ny law.
Units
The units are declared to confer on unitholders an
interest in the trust fund as a whole, without any
interest in any separate part of the fund. Usually a
maximum number of units is stated. Where units
are listed on a stock exchange a restriction will be
imposed on the issue of new units other than to
existing unitholders in proportion to their existing
units or as sanctioned at a unitholders meeting.
The number of new units is arrived at by dividing
the addition to the trust fund by the issue price.
TRUSTS & TRUSTEES and International Asset Management
 Unitholders interest
The unitholders interest consists of (i) a fraction
of the beneficial ownership of all the trust assets
and (ii) rights compelling the manager to buy
units back.
Unitholders passive
Unitholders normally cannot interfere with, or
question, the actions of, the trustee or manager in
relation to the trust fund. Further, it is clear that
“The office of neither the trustee nor the manager is an agent of
the unitholders. Otherwise liabilities incurred by
trustee incorporates the trustee or the manager to third persons might
many equitable be sheeted home to the unitholders thus prejudic-
ing their limited liability.
duties.”
Trustees covenants
The office of trustee incorporates many equitable
duties. In the deed however, the trustee further
covenants to exercise all due diligence and vigi-
lance, including the supervision of the manager.
This duty might not (in the absence of such a
covenant) otherwise arise, since the manager is
not in general subordinate to the trustee.
Manager covenants
The manager covenants to discharge its business
in a proper and efficient manner. As promoter the
manager owes fiduciary duties generally equating
to the statutory duties of promoters of companies.
“The manager is Manager as buyer or redeemer of units
also removable by
Unitholders need a market for their units The deed
the trustee ...”
will contain a covenant binding the manager, on
request, to buy units from the holder at a price cal-
culated pursuant to the provisions of the deed.
Manager as administrator
Administration rests with the manager rather than
the trustee, and includes handling all investments,
borrowings and liabilities of the trust fund. The
trustee, as holder of trust property, must follow
the lawful directions of the manager. The manag-
er will also keep or cause to be kept a register of
unitholders, and will issue and administer unit
certificates.
Change of Manager
Retirement on notice is provided for, and a
“Investor-
unitholder meeting may cause removal. The man-
protection requires ager is also removable by the trustee, for example,
that the trust fund where the manager goes into liquidation, ceases to
carry on business or has, to the prejudice of
should be vested in unitholders, failed in its duty to unitholders. The
a trustee rather manager is in a fiduciary relationship with the
than the manager.” unitholders and thereby liable to the extent the
trust deed does not properly exonerate it.
Trustee as titleholder
Investor-protection requires that the trust fund
should be vested in a trustee rather than the man-
ager. This provides an independent check on the
conduct of the manager. The trust deed will nor-
mally give the trustee a range of powers over the
trust property, including power to appoint custo-
dians and sub-custodians. The manager will make
available its books to the trustee or a company
TRUSTS & TRUSTEES and International Asset Management
auditor. Where the trustee reasonably considers
that the manager has failed to carry out any of its
obligations to the prejudice of the unitholders the
trustee may appoint a receiver of the undertaking
of the manager.
Trustee liability
The deed will limit trustee liability (arising with-
out negligence or default) to the extent of the trust
property.
Amendment to the deed
Unit trust deeds commonly contain a provision
under which the deed may be altered; e.g. by the
trustee and the manager to satisfy the require-
ments of any new law. Other alterations are possi-
ble, and a common provision is that the trustee
may seek the approval of unitholders in a general
meeting to achieve any desirable alterations.
Winding up
Downloaded from http://tandt.oxfordjournals.org/ at University of North Dakota on June 4, 2015
The deed will provide for winding up the trust.
Public unit trusts have a limited life. The trustee
and the manager frequently have power to wind
up the trust in the event that conditions arise in
which to continue the trust would be undesirable
from the unitholders’ viewpoint.
MUTUAL FUNDS
A mutual fund is defined as a company limited by
shares and incorporated for the purpose of invest-
ing the monies of its members for their mutual
benefit having the power to redeem or purchase
for cancellation its shares without reducing its
authorised share capital and stating in its memo-
randum that it is a mutual fund.
Mutual Fund
International Investors
Shareholders
Redeemable
Shares $ Subscribe
Registrar &
Transfer Agent
(Public
Fund) Promoter
Auditors Mutual Fund
Company Investment
Manager
Classes of Shares
Custodian Assets
Almost invariably, “exempted” companies,
(formed in Bermuda to carry on business outside
Bermuda) are employed. 3]Section 156C(2)(b) of
the Companies Act permits a mutual fund compa-
ny to redeem its shares out of realised or unre-
alised profits by reference to Net Asset Value.
Page 9
 Shares so redeemed by a mutual fund may subse-
quently be re-issued to new subscribers. It is now
some time since it was necessary to incorporate a
Bermuda mutual fund by Private Act. The
Companies Act 1981 (“the Act”) now facilitates
the formation and operation of mutual funds
through an incorporation process saving time and
costs. The Companies Act also permits the forma-
tion of a Limited Duration Company (terminating
on a specific event occurring or through lapse of a
specified period). This vehicle can provide tax
advantages on the “transparency” principle.
“a Mutual Fund
CAPITAL
Company (MFC)
The minimum issued share capital of any Bermuda
must normally have
company is US$12,000 or equivalent in another
associated with it currency. The power to redeem will be restricted
so that the aggregate value of outstanding shares
a management
will remain at least $12,000. An alternative is to
company incorpo-
employ two classes of shares, (i) 12,000 $1
rated in Bermuda.” Manager’s or Founders’ Shares (with or without
rights of participation) and (ii) investors’ shares.
MONETARY AUTHORITY GUIDELINES
Include the following:
1. a Mutual Fund Company (MFC) must nor-
mally have associated with it a management com-
pany incorporated in Bermuda. This is frequently
owned by the promoters. Management and admin-
istrative functions are delegated by the MFC to the
management company, which may further dele-
gate them;
2. while a local bank may be required to act as
“Detailed references custodian of the assets of the fund, suitable alter-
natives will be considered. Where a local bank is
and resumes will be required, a sub-custodian elsewhere may be
required.” appointed;
3. a local registrar and transfer agent will be
required;
4. the promoters must satisfy the authorities as
to their investment management expertise (and, in
the case of public funds, evidence of experience as
mutual fund operators, especially administrative
and advisory abilities). Detailed references and
resumes will be required. It must be stated whether
a stock exchange listing will be sought, and if so
where;
5. detailed business plan/draft prospectus/
explanatory memorandum will be required, and
“The acquisition and
6. annual audits are mandatory only in the case
disposal of invest-
of a signatory to the Collective Investment Scheme
ments is usually the Code of Conduct.
responsibility of the These requirements normally apply to any CIS
custodian.” including a unit trust, (mutatis mutandis). In the
case of commodity based funds, including those
dealing in financial and commodity futures, the
BMA may permit the appointment of co-custodi-
ans located outside Bermuda.
TAXATION
Under the current legislation there is no Bermuda
income, profits, withholding or other tax or finan-
cial impost.
EXCHANGE CONTROLS
There are none. Exempted mutual fund companies
are classified as non-resident for Foreign
Page 10
Exchange purposes and are free to acquire, hold
and sell any foreign currencies and securities with-
out restriction.
MANAGEMENT
The Board of Directors is responsible for the man-
agement of a mutual fund. Day-to-day administra-
tion is normally contracted to the management
company which, in turn, may subcontract.
The bye-laws of the MFC will provide for the cal-
culation of net asset value per share, and the terms
and conditions upon which issues and redemptions
will be effected. The initial subscription price is
usually set by directors. Section 35 of the Act pro-
vides that if the minimum subscription is not
achieved within 120 days, the funds received must
be repaid.
Where a fund continuously offers shares to the
public, a prospectus must be issued and filed with
the Registrar of Companies in Bermuda every 12
Downloaded from http://tandt.oxfordjournals.org/ at University of North Dakota on June 4, 2015
months. Such a prospectus must contain audited
financial statements as of a date not more than 120
days prior to the date of issue of the prospectus.
This requirement can be satisfied by attaching the
most recent annual report to the current prospectus
and issuing and filing the same within four months
of the financial year end.
INVESTMENT
A mutual fund or its manager may appoint an
investment adviser, which may be an affiliate of
the promoters. The acquisition and disposal of
investments is usually the responsibility of the cus-
todian. Where it is intended to invest in income
producing assets, the bye-laws may provide for
reinvestment in the acquisition of further invest-
ments, or for the distribution of such income by
way of dividend with an option for reinvestment or
in further shares of the mutual fund.
OTHER JURISDICTIONS
The offering of a Bermuda-domiciled mutual fund
outside Bermuda is subject to the laws of the target
jurisdiction(s). Many mutual funds marketed out-
side the USA place restrictions on the ability of
“US persons” to hold shares or units of the CIS.
Breach will trigger compulsory redemption under
the Bye-laws. It is however possible for a US citi-
zen (subject to the rules of any particular fund and
to applicable tax filings and compliance) to estab-
lish a trust which will be a permitted investor.
UNITED KINGDOM CLASS SCHEMES
Bermuda enjoys Designated Territory Status under
(UK) Financial Services Act 1986. An MFC which
complies with the requirement of the Companies
Act 1981 and the Companies (United Kingdom
Class Scheme Bye-laws) Regulations 1988, may
apply to the Minister of finance for Certification as
a UK Class Scheme. If so certified, the fund may
apply to the Securities and Investment Board in the
United Kingdom for authorisation to offer its
shares in the United Kingdom.
In addition to the regulatory requirements listed
above, MFCs wishing to apply for UK Class
Scheme Certification must comply with the fol-
lowing:
TRUSTS & TRUSTEES and International Asset Management

“ ... there is scope,
particularly in the
Unit Trust Area,
and that of the
Limited Duration
(a) the custodian must be a local bank;
(b) the manager must be a Bermuda-incorporated
company, separate and apart from the custodian
bank and, as such, the manager and custodian
must fulfil their respective duties at arms length;
(c) the mutual fund must adopt as its bye-laws those
provided for in the Companies Act (United
Kingdom Class Scheme Bye-laws) Regulations
1988;
(d) evidence must be supplied that the officers and
directors of the fund are of good standing and
repute, financially sound and sufficiently
qualified and experienced to fulfil properly their
respective roles;
(e) the custodian and manager of the company are,
or upon certification will be, participants in a
compensation agreement.
POST-APPROVAL MONITORING
Company, for planning and producing new off-
shore solutions to satisfy the investment and plan-
ning strategies.
FOOTNOTES:
1] See “Complex Fund Structures and Choice of
Jurisdiction” (Peter Marshall) TRUSTS & TRUSTEES
and International Asset Management Volume 1 No 2 page
17.
2] The definition of a “financial institution” includes
a “Collective Investment Scheme” which in turn is
defined as meaning a “mutual fund” within the meaning
of the Companies Act 1981 or a “unit trust scheme” in
terms of the Stamp Duties Act 1976 (there being at pre-
sent no specific statutory code dealing with unit trusts). In
practice similar guidelines will apply to Limited
Partnerships or Limited Duration Companies offering
units/shares/securities to outside investors.
3] “Exempted” signifies exemption from the manda-
tory requirement applicable to “local” companies of at

Downloaded from http://tandt.oxfordjournals.org/ at University of North Dakota on June 4, 2015

Company, for Consents for the issue of shares or units of a CIS least sixty percent ownership and control by Bermudians.
are given conditionally. The CIS must seek further
planing and consent before it makes any change in its opera- by Robert Miller* and Robin Todd
producing new tions, including changes of manager, custodian,
investment adviser(s), or any other relevant party Richards, Francis & Francis,
off-shore
and for any material changes to the offering docu- Bermuda
solutions ...” ment or prospectus. Further, each custodian
Barristers & Attorneys
reports monthly to the BMA, on, inter alia, details
of the net asset value of the fund, price per share, Cedar Trust Co Ltd
analysis of performance over the previous one, six 48 Cedar Avenue, P O Box HM 148
and twelve month periods and the amounts sub-
scribed and redeemed. Hamilton HM AX, Bermuda
LAST WORD
Tel: (809) 292 0567
Fax: (809) 292 0732
The CIS market is expanding rapidly, whatever
form the launch vehicle might take. This author *Now of ZI Labuan Trust Company Sdn. Bhd
believes that there is scope, particularly in the Labuan, Malaysia - Tel: +60 87 451 688, Fax:
Unit Trust Area, and that of the Limited Duration +60 87 453 688

SCHEDULE

DESCRIPTION 31 March 1993 31 August 1994 30 November 1994

“ ... there is scope

... for planning Mutual Funds 210 292 30.7
and producing Umbrella Funds 26 33 36
new offshore
Sub-Funds operating under Umbrellas 92 172 180
solutions ...”
Total Mutual Funds 302 464 487

Unit Trusts 49 52 55

Umbrella Trusts 2 2 4

Sub-Trusts operating under Umbrellas 4 7 9

Total Unit Trusts 53 59 64

Partnerships 2 15 16

Feeder Trusts - 1 1

Grand Total CIS 356 539 568

Total Net Asset Value (N.A.V.) US$6.8b US$12.5b US$12.1b

Source: Bermuda Monetary Authority

TRUSTS & TRUSTEES and International Asset Management Page 11