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Bahamas: Law of Offshore

Mutual Fund Law

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.

Four SMART fund templates have received SCB approval for the following purposes:

Discretionary Managed Clients: to provide an investment vehicle for client funds managed under a discretionary management service. It includes the provision of term sheets and waiving of the audit requirement, where investors executed a discretionary mandate of recognized financial institutions and, the fund is established for administrative rather than asset gathering purposes. With these Discretionary Investment Management Funds, the investor benefits from a lower expense ratio due to lower costs for structuring and the elimination of annual management and audit fees relating purely to the fund structure.

Incubator Fund: to provide an incubator structure to generate performance history prior to upgrading to a third party fund. Recognizing the unique requirements of funds established to create a track record or to allow institutional investors to test a particular fund strategy, investment managers can utilize the Incubator Fund to receive seed capital from a limited number of institutional investors on the basis of a term sheet and an investor approved waiver of a statutory audit thereby providing a streamlined, cost efficient fund structure.

Private Client Fund: to provide a credible, licensed holding vehicle for a small group of persons, perhaps under a Family Office structure. Families and small groups of individuals quite often seek to pool funds for investment and hire (with the right to remove) the services of independent investment managers. These Private Client Fund structures do not have the same risk profile as a third party fund. The Bahamas is an attractive place to establish these funds since the SCB allows for the investors to launch them with a term sheet and to waive the statutory audit.

Transitional Exempt Fund: a special class established to permit funds previously exempt due to the existence of no more than 15 investors with the power to remove the promoter, to be brought within the regulatory scope of the SCB.

The Recognised Foreign Fund is an investment fund which is not licensed in The Bahamas, whose equity interests are listed on a prescribed exchange or an investment fund licensed or registered in a prescribed jurisdiction and not suspended from operation. This class of fund facilitates funds domiciled in other reputable jurisdictions to be administered or managed from The Bahamas.

The Standard Fund is a Bahamian-based investment fund that does not meet the definition of a Professional, SMART or Recognised Foreign fund. While the Standard fund follows similar disclosure rules of the Professional fund, it anticipates an offering to the general public or a client driven request and consequently may be licensed by the SCB only.

While administrators of a Bahamas-based fund must have a physical presence in the jurisdiction, this requirement does not encumber the contracting of certain tasks to institutions outside of The Bahamas as agreed between the fund, administrator and other third parties.

Investment Management Companies established outside The Bahamas that are appointed as investment managers to a Bahamian fund are not required to be licensed or registered in The Bahamas. Additionally, in the event the promoter wishes to appoint a Bahamian company to act as investment manager to a Bahamian fund, such company is not required to be registered or licensed by the Securities Commission of The Bahamas in cases where its activities are limited to providing investment management services to Bahamas regulated investment funds.

Holders of unrestricted licenses must have minimum capital of USD500,000 (or USD150,000 plus liability insurance coverage of USD350,000), must have a physical office in the Bahamas, and at least two resident agents.

Licensed Administrators are subject to numerous regulations, and need to apply 'know your customer' rules to their clients. They are audited annually by approved auditors and must submit audited accounts within 4 months of the end of a year (the same rule applies to the mutual funds themselves).

Bahamian mutual funds have investment freedom, except as regards Bahamian real estate. Most funds choose International Business Company, Limited Duration Company, Exempted Limited Partnership or Unit Trust form, all of which have taxation and exchange control advantages - see Forms of Company and Offshore Legal and Tax Regimes. Funds of funds and umbrella funds are permitted. Units can be offered in bearer form, although many institutions won't deal in them.

The Commission has sweeping powers to control mutual funds and mutual fund administrators, if it chooses to use them. The Act provides the Commission with 'administrative sanctioning' powers allowing it to deal swiftly and effectively with breaches of the Act by both regulated and unregulated funds.



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