Guidance Notes - Islamic Collective Investment Schemes (April 2011)

Summary

This guidance note explains how the Bermuda Monetary Authority (BMA) applies the existing investment funds regulatory framework to Islamic Collective Investment Schemes. It confirms that such schemes are authorised under the Investment Funds Act 2006 on the same basis as any other fund, with no additional or varied statutory requirements, but highlights certain features unique to Shariah compliant funds that need particular attention in disclosure and governance.

• Shariah Supervisory Board (SSB): The Authority has no supervisory role over the SSB; oversight of the SSB sits with the fund's board of directors (or equivalent). SSB members are expected to be independent of the board and investment manager, and conflicts of interest must be recognised, managed and disclosed per the Fund Prospectus Rules 2007. A sponsor level SSB may be used instead of a fund level SSB if properly disclosed.
• Prospectus disclosures: The prospectus must describe investment policy and restrictions arising from Islamic financial jurisprudence, the SSB's roles, composition, competence and contractual arrangement with the fund, how fiduciary and Shariah compliance risk is managed, how non compliant investments will be treated and liquidated, and any purification mechanism and its valuation impact.
• Constitution: The fund's constitution should reflect requirements relating to compliance with Islamic financial jurisprudence, and service providers must report to the Authority under section 26 of the Act when management or investment strategy is not materially in accordance with the constitutional documents.
• Material changes: Under section 25 of the Act, the fund operator must give written notice to the Authority of any proposed material change to the fund's prospectus, including changes affecting ongoing compliance with Islamic financial jurisprudence (e.g. changes to investment restrictions); a mere change in SSB membership is not automatically material.

The BMA does not exercise prudential oversight over the competence of SSB members or the accuracy of Shariah compliance opinions, treating these as non prudential matters, but expects any material risk arising from this lack of oversight to be disclosed to investors in the prospectus.

Key obligations

• Islamic Collective Investment Schemes must be authorised under the Investment Funds Act 2006 like any other fund.
• The fund's board of directors (or equivalent) must ensure SSB independence and that conflicts of interest are recognised, managed and disclosed in line with the Fund Prospectus Rules 2007.
• The prospectus must disclose the fund's investment policy and restrictions arising from Islamic financial jurisprudence, the SSB's role, composition and contractual arrangement, and how fiduciary and Shariah compliance risks are managed.
• The prospectus must disclose how the fund will handle and communicate investments deemed non compliant with Islamic financial jurisprudence, including timeframes for liquidation and any purification mechanism.
• The fund's constitution must reflect requirements relating to compliance with Islamic financial jurisprudence.
• Service providers must report to the Authority under section 26 of the Investment Funds Act 2006 when management or investment strategy is not materially in accordance with the constitutional documents.
• The fund operator must give written notice to the Authority under section 25 of the Investment Funds Act 2006 of any proposed material change to the fund's prospectus, including changes affecting Shariah compliance.

Applies to

Islamic Collective Investment Schemes, authorised investment funds, fund operators, fund service providers, investment managers