On 8 February 2022, the Central Bank published its Securities Markets Risk Outlook Report for 2022. This report outlines the Central Bank's supervisory priorities for securities markets in 2022 and also highlights conduct risks that the Central Bank has identified as key for securities markets. The report sets out these risks under the following eight headings: (i) misconduct risk; (ii) sustainable finance; (iii) governance; (iv) conflicts of interest; (v) financial innovation; (vi) data; (vii) cyber security; and (viii) market dynamics together with the Central Bank's expectations relating to the identification, mitigation and management of such risks by regulated financial service providers and market participants.

Our advisory focuses on the sections of the report of most relevance to funds and their service providers.

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The Companies Act 1981 of Bermuda (the “Companies Act”) permits a body corporate incorporated as a Cayman Islands exempted company (the “Cayman company”) to migrate to Bermuda by way of continuation as a Bermuda exempted company under the Companies Act (the “Registrant”).

Pre-conditions to registration

The Registrant must:

1. obtain all necessary authorisations, if any, required under the laws of the Cayman Islands in order to enable it to continue as an exempted company registered in Bermuda;
   
   
2. make an application to the Bermuda Monetary Authority (the “BMA”) accompanied by:
   
   (a) a statement of the proposed business of the exempted company;
   (b) information concerning the beneficial owners of the exempted company; and
   (c) a legal opinion of foreign counsel in the jurisdiction from which the Registrant is discontinuing, and
   
   
3. provide financial statements prepared for a period ending within twelve months of the proposed date of continuance.

The BMA will grant the relevant consent where these conditions are met. Walkers has agreed an expedited process with the BMA allowing for same day consent to be granted with respect to the migration of any Cayman CLO vehicle.

Process of continuation to Bermuda

On satisfaction of the pre-conditions to registration, the Registrant must make an application for registration accompanied by:

1. the original signed memorandum of continuance; and
   
   
2. the relevant government fee and filing fee to the Registrar of Companies in Bermuda (the “Registrar”).

The Registrant should forward a copy of the certificate of continuance to the competent authority in the Cayman Islands.

Effect of continuation in Bermuda

The registration of the continuance of a Cayman company will not be deemed to create a new legal entity or prejudice or affect the continuity of the body corporate which was formerly a Cayman company and has now become an exempted company continued in Bermuda. For example:

1. The property of the Cayman company continues to be the property of the continued company.
   
   
2. The continued company continues to be liable for its obligations predating its registration as a Bermuda exempted company.
   
   
3. Any existing cause of action, claim or liability to prosecution in respect of the Cayman company is unaffected; and any civil, criminal or
   administrative action or proceeding pending by or against the Cayman company may be continued by or against the continued company.
   
   
4. Any conviction against, or any ruling, order or judgment in favour of or against the Cayman company may be enforced by or against the
   continued company.

Whilst the continued company remains liable for its obligations when it was a Cayman company, the Companies Act is silent on the priority of any secured obligations of the continued company. It would be advisable for any secured party of the continued company to file an application with the Registrar to register any security created in the register of charges as maintained by the Registrar (the “Register of Charges”). Upon filing, that security will have priority over any other security interests which are subsequently registered in the Register of Charges and any unregistered charges in respect of that security.

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Following consultation with industry, the Economic Substance Regulations 2018 have been amended by the Economic Substance Amendment (No.2) Regulations 2021 ("Amendment Regulations") which amends the definition of the relevant activity of "fund management" in Bermuda. Certain consequential revisions have also been made to the Economic Substance Guidance Notes ("Revised Guidance Notes"). The Amendment Regulations and Revised Guidance Notes became operative with effect from 1 January 2022.

Consequently, with immediate effect, an entity (which includes a company to which the Bermuda Companies Act 1981 applies, a Bermuda LLC and a Bermuda partnership, but excludes an entity that is resident for tax purposes in a jurisdiction outside of Bermuda that is not on Annex 1 to the EU list of non-cooperative jurisdictions for tax purposes) will be carrying on the relevant activity of "fund management" if it manages investments for an 'investment fund' (as such term is defined in the Investment Funds Act 2006) and must comply with the Economic Substance Act 2018 ("ES Act") and related regulations. Prior to the amendment, only entities with physical presence in Bermuda were regarded as carrying on "fund management" business.

"Managing investments" is construed in accordance with the Investment Business Act 2003 ("IBA") and is defined as "managing or offering, or agreeing to manage, assets belonging to another person where those assets consist of or include investments".

Post amendment, for the avoidance of doubt, where an entity is managing investments for an investment fund, it will be carrying on the relevant activity of fund management for the purposes of the ES Act whether or not it is required to be licensed to conduct such activity in accordance with the IBA. This will therefore include all entities, even if they do not have a physical presence in Bermuda. 

For entities with a financial year end of 31 December, the first reporting period where entities will have to detail their compliance with the economic substance requirements will be 30 June 2023. However, steps need to be taken now to ensure compliance with the relevant 'CIGAs' (core income generating activities).

Walkers has a dedicated global Regulatory & Risk Advisory practice group that can offer legal advice and assistance in connection with all aspects of economic substance and all other regulatory compliance. The WPS team can assist with economic substance implementation and the submission of filings. For further assistance or to discuss the economic substance requirements in Bermuda and how they may impact your business, please speak with your usual Walkers contact or one of the contacts listed below.

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