Bahamas: Offshore Business Sectors
Investment Fund Management
The securities industry is one of the fastest developing areas of the country's financial service industry, including more than 700 funds representing in excess of $130 billion in assets under administration. The Bahamas launched a new legislative platform for investment funds in December, 2003, which the BFSB (Bahamas Financial Services Board) is hoping will create an attractive, risk-based regime based on four classes of funds.
The legislation, known as the Investment Funds Act 2003 ("IFA"), establishes a regulatory regime for Professional, SMART, Standard and Recognized Foreign Funds. The IFA also maintains the existence of a dual licensing regime whereby the Securities Commission of The Bahamas (SCB) is authorized to license all classes of funds and Unrestricted Fund Administrators (UFA) are authorized to license Professional & SMART funds. UFAs are subject to continuous oversight by the SCB for compliance with prescribed guidelines and other prudential norms.
The new investment funds environment in The Bahamas is based on the clear introduction of categories of investors rather than the traditional reference to the value of investment. In essence, The Bahamas has created a risk-based fund regime.
The Professional Fund, which continues to be the dominant fund class in the Bahamas, is a separate class designed for sophisticated investors, with prescribed disclosure and other requirements typical of the global alternative investment fund market. While the SCB may license this class of fund at the client's behest, it is more likely that once the UFA is satisfied that the fund meets all due diligence and regulatory standards, the Fund will be licensed by the UFA. The launch of this type of fund can take place in a two to eight week period depending on the ability of the UFA to obtain an acceptable degree of comfort over the key fund participants, the offering document and the constitutive documents.
The Bahamas SMART funds concept is the most innovative development in the country's funds industry. It recognizes that many funds do not fit a predefined classification of retail or professional third party funds. A careful analysis of this prompted the launch of the SMART funds, or a Special Mandate Alternate Regulatory Test Fund.
SMART funds provide for the development of regulatory oversight tailored to the client structure. As the needs of clients vary and evolve, intermediaries and clients have the ability to develop and submit to the Securities Commission, proposals to establish entities with a specific mandate.
After consideration of risk - including the degree of sophistication of investors, the number of participants and the provision of service by a recognised licensed service provider - the Securities Commission may declare the mandate suitable for the alternative regulatory regime.
Typical concessions might include the use of a reduced content offering memorandum, the ability of the product to be licensed directly by a fund administrator in The Bahamas and the waiver of the standard audit requirement. These concessions, however, do not waive the requirement that clients wishing to use SMART funds are subject to due diligence reviews and are regulated by the Securities Commission.
As each specific mandate is approved, the new established template of SMART fund setting out the regulatory requirements for the specific mandate will be made available to the industry by the Securities Commission. The wider community is then able to make use of the approved model for any number of clients.
See Law of Offshore for further details of the regulatory regime for investment funds.
See Offshore Legal and Tax Regimes for further details of taxation and fees payable.
In 2004 the Bahamas passed a key piece of legislation known as the Segregated Accounts Companies Bill which it was expected to enhance the effectiveness of the Investment Funds Act. (see Forms of Company).
In January, 2005, the the Securities Commission of The Bahamas (SCB) published guidelines on the fast tracking of investment fund licence applications targeting accredited investors. The fast track process, which provides for the approval of this category of investment funds within 72 hours of receipt, eliminates the delay in the processing of applications caused by the extensive due diligence exercise undertaken in regular applications.
While due diligence will still be undertaken, this will now take place following the granting of the licence as is the practice in several competing jurisdictions, the SCB revealed. This is because the investment funds in question are targeting investors who are expected to be knowledgeable of the industry and capable of conducting their own due diligence, thereby requiring a reduced level of scrutiny by the regulator.
The guidelines are comprehensive and cover the various requirements for licensing of these investment funds and the application process. Specific guidance is provided regarding the nature and quality of the documents required, as well as what due diligence information will be necessary on parties related to the investment fund.
The SCB stated that the guidelines will prove an essential element in the successful and timely consideration of applications.