Tuesday, August 26, 2014
Tuesday, August 26, 2014
Here follows the statement on a bill for an Act to Facilitate the Formation of an Investment Condominium by Minister of Financial Services Ryan Pinder given in the House of Assembly August 25, 2014:
Introduction and Background
Today I rise to move for the second reading of a Bill for an Act to Facilitate the Formation of an Investment Condominium in the Bahamas between Participants for the Purpose of Collective Investments and for Connected Purposes.
Together, Mr. Speaker, these bills establish The Bahamas as the first common law jurisdiction to have created an investment fund vehicle which perfectly aligns with the traditional structuring of Brazilian funds. The Bahamas has termed this fund the Investment Condominium or ICON.
In February 2013, my Ministry launched its Strategic Plan to steer the Bahamian financial over the next 10 years. One of the key issues addressed in this plan was the development of new products and new markets as well as a deepening of existing products and services. My Ministry was interested in “expanding the financial services pie”, so to speak so that all market participants could find a niche. Indeed, the Ministry of Financial Services recognized that securing the future of the financial services industry in The Bahamas meant expanding our product and service offerings.
The Road to the ICON
The story of the ICON is one which also reflects the commitment of the Ministry of Financial Services to remain engaged in the international financial services community. On a 2013 visit to Brazil, I and my delegation had the opportunity to meet with some of the top people at some of Brazil’s leading financial services firms.
One topic kept on coming up in all of our meetings – the structure of Brazilian investment funds and the possibilities for The Bahamas of creating a structure which emulated this structure.
My Ministry did not sit idly on this information and within a few months partnered with the BFSB and the AIBT to engage a Brazilian law firm to review the applicability of the structure for The Bahamas. Within a few months of this, an industry-Government working group was able to put together a draft bill. The collaborative effort is a hallmark of my Ministry.
Then, in early February 2014, a closed-door meeting was held with experts in the Brazilian advisory community including Brazil’s leading tax firms, law firms, family offices and banks. The ICON concept was presented by the Ministry of Financial Services, BFSB and Bahamas industry participants and feedback was sought. Last year the top Brazilian law firm Ulhoa Canto was retained to work with us in creating the product. Several Brazilian audit firms also have vetted various iterations of the Bill for compliance from a Brazilian perspective.
Industry has been engaged through BFSB’s working group as well as through focus group meetings with the wider industry in March and the Bahamas Association of Compliance Officers (BACO) in April. Finally, a large industry briefing took place in July to ensure that there is the widest possible understanding of the ICON. This briefing was opened to members of professional associations like The Bar Association, Bahamas Institute of Chartered Accountants (BICA) and BACO.
Innovation in Financial Services: A Bahamas Tradition
Being nimble and innovative is the foundation to the re-defining of the Bahamas financial services industry. The ICON is another example of The Bahamas’ never-ending commitment to be first in class in the provision of market responsive regulated and sophisticated products, but only the latest example of it. This commitment is evident in a host of other products, including the SMART Fund, the Bahamas Executive Entity, and the Foundation. The later two are examples of where civil law concepts were incorporated into our statutory law to create products for specific markets, and specific types of clients.
In terms of the Smart Fund, The Bahamas recently has witnessed an upward trend in investment fund registrations which is indicative of the successful niche fund business this jurisdiction has built, largely on the back of the investment fund vehicle known as the SMART Fund. We have witnessed SMART Funds being used as a cost-effective investment fund vehicle for families, family offices, and related investors.
The ICON, created by the legislation we debate today, is an example of this innovative and nimble approach to the industry. The Bahamas has shown it is skillful in the adaptation of innovative concepts for international markets.
Predicated for Success: The Rational for ICON
Of the SMART Funds on the register it would not be overreaching to estimate that 50-60% originated to accommodate Brazilian families, fund managers, investors and strategies. The SMART Fund in particular has been embraced in Brazil because of its flexibility and because of its cost effectiveness in comparison to other jurisdictions. It has proven ideal as a fund for families and it can also now be utilized on a more institutional basis with the newest SMART Fund template, 007. However, notwithstanding this embrace, the structure of these funds have been less familiar to Brazilian advisors, particularly with the use of companies as the incorporating vehicle of the funds.
Indeed, Mr. Speaker, all of Brazil’s 13,000 plus investment funds are legally organized as condominiums, a civil law concept that has been in existence since the early 1900s in Brazil. There is a tax differential in Brazil between income in an investment fund, taxed at 15%, and income distributions from a company, taxed at 27.5%. Therefore, it is not beyond doubt that an investment fund organized as a company will always be so recognized since it is arguable that because it does not “look” exactly like a Brazilian fund, it is not in fact an investment fund but a company.
Quite apart from the tax implications of the ICON there is also a significant opportunity in attracting new funds to The Bahamas specifically because of the environment in Brazil. Up until 2012 or so, money managers were very bullish on the domestic economy of Brazil, but with the economic forecasts showing a steady decline in growth – this has changed. The inward looking strategies are now turning to outward looking and focusing on diversification away from domestic Brazilian assets. Mr. Speaker, this means that there will likely be more opportunity for jurisdictions which provide investment fund structures that can access international assets.
We are extremely encouraged by the interest that has been shown in the investment condominium from Brazil. However, this product is not only Brazil targeted. Initial soundings from international advisors also indicate that this would be useful in other jurisdictions that prefer non-corporate but transparent vehicles for the organization of investment funds. Therefore keen interest has been shown from advisors targeting Mexico, Peru as well as Chile.
The Investment Condominium Explained
A condominium under the original civil law concept was the formalization of the concept of joint ownership and administration of property (in all forms) between co-owners within an unincorporated entity that looks very similar to a partnership but operates in many respects like a company. To be clear a condominium is not a legal entity separate and apart from co-owners and the administrator is empowered to act on behalf of and represent it in all matters. As a result of further amendments, a condominium investment fund was created; this modified the original condominium concept providing that a condominium (in the investment funds context) was a ‘pooling of funds intended for investments in a diversified portfolio composed of financial assets and other instruments available on the financial market.’
Formation and Governance
The Bahamas investment condominium continues The Bahamas’ commitment to bringing to market client responsive legislation and will fulfill the following aims:
- Provide an alternative legal structure for investment funds that is inherently familiar to those in Brazil and indeed those in other Latin American countries which have similar constructs.
- Strengthen the case for the substantive recognition of Bahamas funds as an “investment fund” for Brazilian purposes.
- Ensure that The Bahamas is always seen as innovative in the funds space and that it remains competitive.
The ICON is the legal structure underpinning the investment fund in the same way as investment funds are legally organized as companies, exempted limited partnerships and unit trusts. The ICON’s purpose is tied to its operation as an investment fund.
Sections 3 through 6 of the Bill speak to the definition constitution and governance of an ICON. The ICON is defined as the contractual relationship subsisting between investors (in the Bill called participants) under which the participants agree to the pooling of assets for the purpose of investing those assets collectively. The legislation states that the ICON possesses no distinct legal personality save that for the purposes of the legislation it is deemed to be able to:
- Hold assets in its own name;
- Enter into agreements in its own name represented by its administrator; and
- Sue and be sued in its own name.
The lack of legal personality is addressed by the appointment of an administrator that is empowered to transact in its name, and represent and bind the ICON. The ICON is established by the initial participants signing “governing regulations” which is the governing document of the ICON. The initial participants engage the ICON’s administrator. The administrator will then prepare a certificate evidencing that the ICON has been established, and which contains the information specified in the schedule to the Act. This certificate subsequently is signed by the administrator and submitted along with a prescribed fee to the Registrar General for stamping.
Section 8 speaks to the appointment, powers and duties of the administrator. The responsibility for governance of the ICON is centralized in the ICON’s administrator. If the ICON chooses to engage a single administrator, that administrator performs the governance role of the operator as well as the general administration role of the administrator under the Investment Funds Act. Alternatively, the ICON may split the governing and general administrator functions between two institutions called the general administrator and the governing administrator.
Where the functions are split, the governing administrator is the operator of the ICON under the Investment Funds Act in the same way that a director is the operator of a company, a trustee the operator of a unit trust, or a general partner the operator of a partnership under the Investment Funds Act. The governing administrator’s role is critical in that it is given the power to bind the ICON in all matters and it also bears a fiduciary responsibility to the ICON’s participants, it is also the primary interface between the fund, its services providers, and its investors.
The general administrator, on the other hand, performs the duties of general administration of an investment fund with typical responsibilities of processing subscriptions, sending confirmations and providing essential and traditional activities common to fund administrators and as defined by an administration agreement between the fund and itself. The general administrator is required to keep a record of the participants’ interests in a “Register of Participants”. The administrator is also required to keep proper books and records and provide net asset valuations.
The governing administrator must be either a “financial institution” as defined in the ICON Act; or an institution licensed as a corporate services provider under the Financial and Corporate Services Providers Act (Ch.369); or an institution licensed under the Securities Industry Act (No. 10 of 2011) to deal in securities; or a bank or trust company licensed by the Central Bank of The Bahamas under the Banks and Trust Companies Regulation Act (Ch. 316); or an entity registered with or licensed by a regulatory authority in a foreign jurisdiction, which regulatory authority exercise functions that correspond to regulatory functions exercised by the Central Bank of The Bahamas or the Securities Commission of The Bahamas. The general administrator also must be a financial institution as defined in the ICON Act. It performs the duties of administration of an investment fund with typical responsibilities.
An administrator may be removed and replaced by participants entitled to vote in respect of their participation interests by way of resolution agreed or consented to by such majority as specified in the governing regulations. It is to be noted that an administrator cannot be removed unless and until a replacement administrator has agreed to act and has entered into an administration agreement.
Formation and Conversion
There are 3 routes to becoming an ICON:-
- Establish an ICON and then license it as an investment fund;
- Convert an existing Bahamian International Business Company (“IBC”), Exempted Limited Partnership (“ELP”) or Unit Trust (“UT”) into an ICON and then license the converted ICON as an investment fund; or
- Re-domicile a foreign company or partnership to its Bahamian counterpart, convert the entity into an ICON, or in the case of a foreign trust change its governing law to that of The Bahamas, and convert it into an ICON and then license the ICON as an investment fund.
The formation of a new ICON is rather straight forward, as discussed. The conversion and re-domiciling of existing funds is fundamental to the success of the ICON as a product. The conversion provisions can be find in Sections 16 and 17 of the Act. The Bahamian ICON legislation allows for the conversion of an existing Bahamian IBC, ELP or UT into an ICON. The conversion process is very similar to that of establishment.
In summary, once the name is chosen and reserved (following the naming conventions mentioned above), all of the directors and majority of voting shareholders, all of the general partners and majority of voting limited partners or the trustee and majority of the voting unit holders, as the case may be, approve the Articles of Conversion. At the date of conversion, all of the assets and liabilities of the existing Bahamian structure will be vested in the ICON and the existing Bahamian structure will be struck off the register and will cease to exist without being dissolved or wound-up, as the case may be. All of the equity interests of the structure will be converted into participation interests in accordance with the Articles of Conversion.
Of particular importance was to ensure that a client could re-domicile their fund using a ICON as we anticipate attracting significant business from other jurisdictions. The client re-domiciles a foreign company, Exempt Limited Partnership or Unit Trust to a Bahamian IBC, ELP or Unit Trust, respectively and then convert the Bahamian structure into an ICON. In relation to foreign companies and ELPs the caveat is that the foreign law and constitutional documents of the company or partnership must allow for the re-domiciliation of the entity. With respect to foreign trusts, the trust instrument must include powers to (i) change the governing law of the trust to that of The Bahamas; and (ii) vary the provisions of the trust.
As part of this debate we are also moving for the second reading of the following amendments:
- Exempted Limited Partnership (Amendment) Bill, 2014
- International Business Companies (Amendment) Bill, 2014
- Companies (Amendment) Bill, 2014
- Investment Funds (Amendment) Bill, 2014
- Investment Funds (Amendment) Regulations, 2014
The amendments seek to accomplish a few objectives. The first is to amendment the substantive Exempted Limited Partnership and International Business Company legislation in order to provide for the conversion of such entities to an investment condominium in the manner provided and for connected purposes. The amendments to the Investment Funds Act and Regulations are to allow for an Investment Condominium to be used as a fund.
The amendments to the Companies Act and the International Business Companies Act also look to have a direct impact on the easy of doing business for the Bahamas in the context of corporate law. These amendments empower the Registrar General to receive and process electronic communications relating to such matters under the Companies Act and the International Business Companies Act as the Registrar General shall determine. Online transactions include receiving and processing applications for incorporation and certificates of good standing and so on. These amendments, although seemingly small, are very significant to the ease of processing of company documents and enabling the incorporation and other activities as determined to be accomplished electronically. Those in the practice would recognize this is a significant step forward in the ease of doing business.
Finally, awareness of the ICON is essential going forward. The regulators and the financial services community have begun in earnest to initiate local awareness of the ICON and will continue to educate and inform end users over the ensuing months and years. This will take public and private resources as well as international partnerships to spread the news about this exciting legislation through all important international financial centres. Building familiarity will be important to setting up custodial and banking relationships in centres unfamiliar with condominium investment fund structures.
The ICON is an innovative and dynamic piece of legislation and one that ensures we remain relevant as a funds jurisdiction of choice.
Mr. Speaker, my Ministry has launched a comprehensive strategy for Latin America beginning with our sponsorship of the STEP Latam conference in Mexico City in the beginning of September. Our aim is to raise the profile of The Bahamas, throughout the entirety of Latin America. The Bahamas will become the international financial centre of choice because of the superiority of our products and services, its longstanding regulatory integrity and stability, and of primary importance, its sovereignty as a financial center.
The creation of the ICON is a result of true partnership between the private sector, the government and the applicable regulators. The private sector through the BFSB became aware of the opportunity for a new vehicle as a result of its long history in Brazil and its close relationship with the Brazilian advisory community, and a partnership with the Ministry of Financial Services’ in its efforts in increasing the visibility of The Bahamas in Brazil since 2012. The Office of the Attorney General, and its drafting team, has been critical in the vetting and development of the draft that is being submitted to Cabinet for consideration. The Securities Commission of The Bahamas has been a part of the private sector composed working group which consists of legal, audit, banking and compliance professionals almost since its inception in the third quarter of last year.
The ICON and this legislation were created from scratch to provide another innovative opportunity for planning and the Bahamian financial services industry. The product was vetted by Brazilian and Bahamian private sector participants, and had regulatory involvement from the very beginning. We are very proud of these efforts, and I want to pay special commendation to Aliya Allen, the BFSB and its private sector working group, Antoinette Russell of the AIBT, the Securities Commission of the Bahamas, the Director of Legal Affairs and her team, my legal counsel, Brandace Duncanson and my Director of Financial Services, Dr. Nicola Virgil-Rolle for bringing this ground breaking legislation and product to fruition, the Investment Condominium.