Investment Business (Client Money) Regulations 2004

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Investment Business (Client Money) Regulations 2004
INVESTMENT BUSINESS (CLIENT MONEY) REGULATIONS
2004

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BR 73/2004

INVESTMENT BUSINESS ACT 2003

1998 : 34

THE INVESTMENT BUSINESS (CLIENT MONEY) REGULATIONS
2004

ARRANGEMENT OF REGULATIONS

Part I
Introduction

1 Citation and
commencement

2 Interpretation
3 Application
4 General overview

Part II
General

5 Meaning of "client money"
6 Money of sophisticated

persons
7 Segregation of client

money
8 Client bank accounts
9 Payments into client bank

accounts

10 Discharge of fiduciary
duty

Part III
Default obligations

11 Purpose of this Part
12 Client purpose trust
13 Pooling events
14 Pooling
15 Pooling on default of

approved bank or
intermediary

Part IV
Interest and record keeping

16 Interest on client money
17 Accounting for and use of

client money
18 Reconciliation of accounts
19 Record keeping

INVESTMENT BUSINESS (CLIENT MONEY) REGULATIONS
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In exercise of the powers conferred upon the Minister by section
40 of the Investment Business Act 2003, the following regulations are
hereby made:

PART 1
INTRODUCTION

Citation and commencement
1. These Regulations may be cited as the Investment Business
(Client Money) Regulations 2004 and shall come into operation on 1st
March 2005.

Interpretation
2. In these Regulations —

“Act” means the Investment Business Act 2003;

“approved bank”, in relation to a client bank account, means —

(a) where the account is opened in Bermuda, an institution
licensed under the Banks and Deposit Companies Act
1999;

(b) where the account is opened elsewhere 

(i) a bank within the same group as an institution
in paragraph (a), licensed to conduct banking
business in that country or territory; or

(ii) a bank licensed to conduct banking business in
that country or territory which, in the opinion of
the Authority, is subject to supervision
equivalent to the supervision of banks licensed
in Bermuda;

“business day” means any day other than a Saturday, Sunday,
Christmas Day, Good Friday or a day appointed as a
Bermuda public holiday;

“client bank account” means an account at an approved bank
which —

(a) is a current or deposit account;

(b) is in the name of an investment provider; and

(c) includes the words 'client' or an appropriate description
to distinguish the account as an account containing

INVESTMENT BUSINESS (CLIENT MONEY) REGULATIONS
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client money, from an account containing money
belonging to the investment provider;

“client money” has the meaning given in regulation 5;

"collective investment schemes" has the same meaning as in the
Bermuda Monetary Authority (Collective Investment Scheme
Classification) Regulations 1998 or any provision of law
amending or replacing such Regulations, and includes
collective investment schemes established or registered
outside Bermuda;

“default” means the commencement of liquidation or any
insolvency proceedings in any jurisdiction;

"high income private investor" means an individual who has had
a personal income in excess of $200,000 in each of the two
years preceding the current year or has had a joint income
with that person's spouse in excess of $300,000 in each of
those years, and has a reasonable expectation of reaching the
same income level in the current year; and "current year"
means the year in which he purchases an investment;

"high net worth private investor" means an individual whose net
worth or joint net worth with that person's spouse in the year
in which he purchases an investment exceeds $1,000,000;
and "net worth" means the excess of total assets at fair
market value over total liabilities;

“intermediary” means a person —

(a) to whom any client money held by the investment
provider has been passed; or

(b) from whom any money is owed to the investment
provider which, once received by him, will be client
money;

in respect of the carrying out of transactions on behalf of clients
of the investment provider;

“investment agreement” means any agreement the making or
performing of which by either party constitutes an investment
activity;

"investment services" means investment activities undertaken in
the course of carrying on investment business;

"market intermediary" means a person who engages or holds
himself out as engaging in the business of dealing in

INVESTMENT BUSINESS (CLIENT MONEY) REGULATIONS
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investments as principal or agent on an investment
exchange;

“money” includes cheques and other payable orders in any
currency;

“pooling event” has the meaning given in regulation 13;

"sophisticated private investor" means

(a) an individual who has such knowledge of, and
experience in, financial and business matters as would
enable him to properly evaluate the merits and risks of a
prospective purchase of investments; and

(b) who, in respect of each investment transaction, deals in
amounts of not less than $100,000.

Application
3. These Regulations apply to all investment providers, other than
an investment provider which is also an institution licensed under the
Banks and Deposit Companies Act 1999, insofar as it holds money on
behalf of its clients in an account with itself.

General overview
4. (1) These Regulations apply to money held by an investment
provider—

(a) which is client money; and

(b) until the fiduciary duty imposed by these Regulations is
discharged.

(2) Where these Regulations apply, an investment provider —

(a) must keep client money separate from its own money in
accordance with regulation 7(2); and

(b) must hold client money as a fiduciary for the client in
accordance with the purpose trust established by Part
III; and

(c) must account for the money properly in accordance with
regulations 17 and 18.

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PART II
GENERAL

Meaning of “client money”
5. (1) Subject to this regulation, client money is money in any
currency which, in the course of carrying on investment business, an
investment provider holds (whether in Bermuda or elsewhere) in respect
of an investment agreement entered into, or to be entered into with or for
a client.

(2) Money is not client money if —

(a) it is immediately due and payable to the investment
provider for its own account 

(i) in respect of fees and commissions in a manner
which satisfies paragraph (3); or

(ii) otherwise, though not, in such a case, if the
obligation of the investment provider in respect
of which the money is so payable to the
investment provider has not yet been performed;
and

(b) it is not held in (or it is properly withdrawn from) a client
bank account.

(3) Money is not regarded for the purposes of paragraph (2) as
due and payable in respect of fees and commissions claimed to be
payable to the investment provider unless

(a) the fees or commissions have been accurately calculated
and are in accordance with a formula or on a basis
agreed to in writing by the client;

(b) 14 business days have elapsed since a statement
showing the amount of those fees or commissions has
been delivered to the client, and the client has not
questioned the sum specified; or

(c) the amount of the fees or commission has been agreed
in writing with the client, or has been finally determined
by a court or arbitration.

(4) Money is not client money if the investment provider holds
it on behalf of a client and the investment provider and the client have
agreed that the money (or money of that type) is to be held by the
investment provider for the intrinsic value of the metal which constitutes
the money.

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Money of sophisticated persons
6. (1) Subject to this regulation, money is not client money if

(a) an investment provider holds it on behalf of or receives it
from a sophisticated person; and

(b) the investment provider has given a clear warning to a
sophisticated person that 

(i) his money will not be subject to the protections
conferred by these Regulations;

(ii) as a consequence his money will not be
segregated from the money of the investment
provider, and may be used by the investment
provider in the course of its business; and

(iii) the sophisticated person has given his written
consent to the treatment of his money by the
investment provider outside the Regulations;
and

(iv) the Authority has consented to the money being
so treated.

(2) The Authority shall give its consent if, and shall withhold its
consent unless, it is satisfied that the investment provider has such
systems and controls in place as would ensure that monies held or
received on behalf of sophisticated persons by the investment provider
are identifiable at all times.

(3) Where a sophisticated person whose money has been
treated under paragraph (1) as money which is not client money
instructs the investment provider to treat that money and any money
which it may hold for him, as client money, the investment provider
must, within 10 business days of receipt of that person's instruction 

(a) treat all money held for that person as client money in
accordance with these Regulations, and confirm to him
that his money is being held as client money; or

(b) return the money which it holds for that person to him
and ensure that no further investment business is
carried on with or for that person which may give rise to
the investment provider holding client money on his
behalf.

(4) "sophisticated person" means a person falling within any of
the following classes of persons

(a) high income private investors;

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(b) high net worth private investors;

(c) sophisticated private investors;

(d) collective investment schemes approved by the Authority
under the Bermuda Monetary Authority (Collective
Investment Scheme Classification) Regulations 1998 or
any provision of law amending or replacing such
Regulations;

(e) bodies corporate, each of which has total assets of not
less than five million dollars, where such assets are held
solely by the body corporate or held partly by the body
corporate and partly by one or more members of a group
of which it is a member;

(f) unincorporated associations, partnerships or trusts,
each of which has total assets of not less than five
million dollars, where such assets are held solely by
such association, partnership or trust or held partly by
it and partly by one or more members of a group of
which it is a member;

(g) bodies corporate, all of whose shareholders fall within
one or more of the subparagraphs of this paragraph,
except subparagraph (d);

(h) partnerships, all of whose members fall within one or
more of the subparagraphs of this paragraph, except
subparagraph (d);

(i) trusts, all of whose beneficiaries fall within one or more
of the subparagraphs of this paragraph, except
subparagraph (d).

Segregation of client money
7. (1) An investment provider shall pay all client money which it
holds or receives into a client bank account.

(2) Client money and money belonging to the investment
provider must be kept separate from one another.

Client bank accounts
8. (1) Where an investment provider holds client money on behalf
of a client, it must ensure that the money is held in a client bank
account with an approved bank and that the title of the account
sufficiently distinguishes the account from any account containing
money that belongs to the investment provider.

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(2) Where an investment provider opens a client bank account,
the investment provider must give or have given notice to the approved
bank requiring the bank to acknowledge to it in writing —

(a) that all money standing to the credit of the account is
held by the investment provider as trustee;

(b) the bank is not entitled to combine the account with any
other account or to exercise any right of set-off or
counterclaim against money in that account in respect of
any sum owed to it on any other account of the
investment provider.

Payments into client bank accounts
9. (1) Where an investment provider holds client money it must
either —

(a) pay it as soon as possible (and in any event, not later
than the next business day after so beginning) into a
client bank account; or

(b) pay it out or pay it over in a manner which secures
under regulation 10 that it is no longer client money (for
example by endorsing a cheque).

(2) Where client money is received by the investment provider
in the form of an automated transfer, the investment provider must
ensure that —

(a) where possible, the money is transferred into a client
bank account; and

(b) in the event that the money is transferred into the
investment provider's own account, the money is paid
into a client bank account no later than the next
business day after the transfer.

(3) Where an investment provider receives a 'mixed remittance'
(that is an aggregate sum of money which is in part client money and in
part other money) it must pay the full sum into the relevant client bank
account, but must then ensure that, except to the extent that it
represents fees and commissions due to the investment provider, the
other money is paid out of the account within one business day of the
day on which the investment provider would normally expect the
remittance to be cleared.

Discharge of fiduciary duty
10. Money ceases to be client money if it is paid —

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(a) to the client;

(b) to a third party on the instruction of the client;

(c) into a bank account in the name of the client (not being
an account which is also in the name of the investment
provider); or

(d) to the investment provider itself, where it may properly
be so paid under these Regulations.

PART III
DEFAULT OBLIGATIONS

Purpose of this Part
11. (1) This Part applies to all client money held by an investment
provider so as to create —

(a) a fiduciary relationship between the investment provider
and the client, under which the client money is in the
legal ownership of the investment provider but in the
beneficial ownership of the client; and

(b) a system of pooling of the beneficial interests of different
clients once there has been a "pooling event".

(2) Regulation 12 applies whether or not there has been a
"pooling event" , and regulations 13 and 14 apply after there has been
such a pooling event.

Client purpose trust
12. (1) Whenever the circumstances are that client money is held
by an investment provider in the course of investment business carried
on in Bermuda, the client money is held in accordance with these
Regulations by the investment provider on trust —

(a) upon the terms and for the purposes set out in these
Regulations;

(b) subject to subparagraph (a), for the respective clients for
whom that client money is held, according to their
respective shares in it; and

(c) after all valid claims under subparagraph (b) have been
met, for the investment provider itself.

(2) The duties of an investment provider holding client money
under these Regulations pursuant to paragraph (1) shall take the place

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of the corresponding duties which would be owed by it as a trustee under
the general law.

Pooling events
13. (1) The power of an investment provider, in accordance with
Part II, to pay money into and out of the accounts in which client money
is held is interrupted by the occurrence of a pooling event specified in
paragraph (2).

(2) The pooling events are —

(a) the default of the investment provider;

(b) the default of an intermediary;

(c) the coming into force of a direction by the Authority in
respect of all client money held by the investment
provider; or

(d) the default of any approved bank with which any client
money held by the investment provider is deposited, in
which case regulation 15 applies,

(3) Notwithstanding paragraph (2), a pooling event will not
occur, and regulation 15 will not apply, if, on the default of an approved
bank or intermediary, the investment provider repays to its clients or
pays into a client bank account an amount equal to the amount of client
money held on their behalf with that bank or passed to that
intermediary.

(4) An investment provider shall inform the Authority and all
affected clients of any pooling event, as soon as practicable after its
occurrence.

Pooling
14. (1) Save as described in this regulation, where a pooling event
occurs, money held in all the investment provider's client bank accounts
is pooled, and must be made available to meet the claims of clients in
respect of whom client money is or should be held in those accounts on a
pari passu basis.

(2) Where, at the time when a pooling event occurs, client
money from a client bank account is in the hands of an intermediary, it
shall, on its return to the client bank account, be pooled in accordance
with paragraph (1).

(3) Where client money referred to in paragraph (2) cannot be
returned within one month after the pooling event, the investment
provider may make distributions from the account in advance of that

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date if he makes provision for the possibility of such money not being
returned.

(4) If any surplus remains in the pool created by the operation
of paragraph (1) after all the valid claims of clients to money in that pool
have been met, that surplus shall be distributed to the investment
provider.

(5) Where an investment provider receives money from a client
after a pooling event which, but for that event, would fall to be paid into
a client bank account, that money —

(a) shall be placed in a new client bank account duly
opened after the pooling event; and

(b) shall not be pooled with the money held in the
investment provider’s client bank accounts at the time of
the pooling event.

Pooling on default of approved bank or intermediary
15. (1) Where client money is held by an approved bank or an
intermediary which defaults or which, following a pooling event by an
investment provider, fails to recognize that the money is client money
held in accordance with these Regulations —

(a) the money shall —

(i) be pooled separately;

(ii) be made available to satisfy the separate claims
of the separate clients pari passu; and

(iii) after the claims described in subparagraph (a)(ii)
have been satisfied, be paid into the pool created
under Regulation 14 (1); and

(b) the pool created under that Regulation shall be
applied —

(i) to meet any claims of separate clients that are
not separate claims and the claims of other
clients (all ranking equally); and

(ii) after the claims described in subparagraph (b)(i)
have been satisfied, to meet any unsatisfied
separate claims of separate clients.

(2) In this Regulation —

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“separate claim” means the claim of a separate client to the
value of the money that was or should have been held
with the approved bank or intermediary; and

“separate client” means a client whose money was, or
should have been, held with the approved bank or
intermediary.

PART IV
INTEREST AND RECORD KEEPING

Interest on client money
16. An investment provider must clarify in writing with a client
whether or not interest is payable to the client in respect of client money,
and if so, on what terms.

Accounting for and use of client money
17. (1) An investment provider must account properly and
promptly for client money and, in particular, must ensure that —

(a) save as permitted by these Regulations, client money
and other money do not become mixed;

(b) individual transactions can be accurately identified and
traced;

(c) the credit standing to the account of each client is
calculated each business day; and

(d) money belonging to one client is not used for another
client.

(2) Wherever the daily calculation referred to in paragraph (1)(c)
reveals an overdraft or that one client’s money has been used for
another —

(a) the investment provider must pay in a sum of money
equivalent to the deficit; and

(b) money paid in by the investment provider under sub-
paragraph (a) shall be treated as client money and must
not be withdrawn by the investment provider until the
client responsible for the deficit has paid in a sum of
money equivalent to the deficit.

Reconciliation of accounts
18. (1) An investment provider shall, not less frequently than once
a month —

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(a) reconcile the balance on each client bank account, as
recorded by the investment provider, with the balance on
that account as set out in the statement issued by the
approved bank covering the period in respect of which
the reconciliation is made; and

(b) reconcile the total of the balances on each client account
with the total of the corresponding balances in respect of
each of its clients, (both totals as recorded by the
investment provider).

(2) The reconciliation referred to in paragraph (1) must be
performed within 10 business days of the date to which the
reconciliation relates, and any differences must be corrected forthwith
unless they arise as a result of differences in timing between the
accounting and settlement systems of the investment provider and the
approved bank.

Record keeping
19. An investment provider must retain accounting records in
relation to each client bank account for at least 5 years from the date of
the transaction to which it relates.

Made this 25th day of November, 2004

Minister of Finance

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