|The Bahamas Investor Magazine
January 21, 2015
January 21, 2015
Pictured: Now former Minister of Financial Services Ryan Pinder introduces the ICON fund at a Bahamas Landfall event in Brazil, August 2014. (BFSB Photo)
Years of focused efforts have seen The Bahamas gain a strong foothold in the Latin American market. And while wealth management is the bedrock of The Bahamas’ international financial services offerings, it is the jurisdiction’s funds industry and its innovative product offerings that are at the leading edge of its growing business from LatAm.
Brazil in particular has become an increasingly important market for The Bahamas, the result of a consistent and dedicated focus on assisting with satisfying the sophisticated hedge funds’ requirements of the jurisdiction. It would not be overreaching to say that a number of the existing funds licensed in The Bahamas originated to accommodate Brazilian funds, fund managers, investors and strategies.
Many of those funds have taken advantage of The Bahamas’ Smart Fund concept, which has been the basis of year-upon-year growth as its templates have been used as a cost-effective investment fund vehicle for families, family offices, and related investors.
While the Smart Fund has found favour in Brazil, it was conceived as a vehicle with broader international appeal. This summer The Bahamas launched what the Bahamas Financial Services Board (BFSB) describes as the “perfect product” to penetrate the investment fund-driven Brazilian and Latin American markets.
The Bahamas Investment Condominium, dubbed as ICON, is designed to be fully compliant with Brazilian laws and operates like one of that nation’s products, so is thus intended to target fund- familiar investors looking to diversify away from their domestic market. The Bahamas has created a fund for an environment that is very funds driven, that is very familiar to Brazilian investors and managers, and which accommodates their needs for portfolio diversification.
Under Brazil’s civil code the condominium was the formalization of the concept of joint ownership and administration of property (in all forms) between co-owners within an unincorporated entity. The 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.”
The Bahamas ICON provides an alternative legal structure for investment funds; one that is inherently familiar to those in Brazil and indeed those in countries that have similar civil law constructs. It was this commitment to building products that benefit from cultural and legal familiarity that saw The Bahamas introduce foundations law in 2004. The ICON is an extension of this effort.
The ICON is defined as a contractual relationship subsisting between investors (called participants), under which the investors agree to pool assets for the purposes of investing those assets as a collective. The structure is then licensed and fully regulated as an investment fund–as is done today using existing vehicles such as the International Business Company, the Exempted Limited Partnership, and the Unit Trust.
The ICON is simply a new structuring vehicle that can be licensed as a SMART Fund, Professional Fund or Standard Fund in The Bahamas. It is not a company, not a partnership, and not a trust. It is a pooling mechanism and operating instrument for investment funds.
The ICON shares many features with the Brazilian condominium: it possesses no distinct legal personality save that for the purposes of the legislation it is able to own assets in its name; enter into agreements in its name; and sue and be sued in its 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.
Aside from familiarity, there are several advantages of an ICON over a company, trust or partnership:
- Centralizing “governance” and not just “administration” within a regulated entity helps to achieve international best practices of investment fund governance and operation. The governing administrator and general administrator of an ICON are regulated, whether in The Bahamas or an equivalent jurisdiction.
- The ICON can be simply established in a much more streamlined way than a corporate vehicle.
- There is flexibility. It is possible to set up an ICON where investors are called on to contribute in the case of negative net equity, before the fund can be deemed insolvent. It is also possible to establish an ICON where the liability of the investors is limited.
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 which must be an institution that is regulated by the Securities Commission of The Bahamas as an investment fund administrator under the Investment Funds Act. The administrator will then prepare a certificate evidencing that the ICON has been established, and which contains the information specified in the schedule attached to the legislation which brought ICON into existence. This certificate subsequently is signed by the administrator and submitted along with a prescribed fee to the Registrar General for stamping.
A unique ICON feature is the provision for other types of entities– eg companies, unit trusts and exempted limited partnerships–to convert to an ICON by following a defined procedure. ICON legislation is clear as to the effect of conversion and it is important to note that conversion does not relieve a converted entity from liabilities or obligations incurred preceding the conversion to an ICON.
While designed to be reflective of Brazilian requirements, and thus intended to target fund-familiar investors looking to diversify away from their domestic market, ICON is not solely focused on Brazil. The Bahamas is also seeing considerable interest in the fund from other Latin American countries because the structure enables the governance, operation and asset optimization in a manner that other structures simply cannot. Sophisticated investors are able to access and establish offshore funds in a format to which they are already very well accustomed, where the fund administrator assumes a relatively enhanced role encompassing the traditional functions of accounting and investor relations, in addition to fund governance. Thus, a familiar legal structure can be matched up with the regulatory overlay of the Bahamian funds regime, which also has much in common with the Brazilian fund regulatory environment, considering that both countries are Members (A Signatories) of the International Organization of Securities Commissions (IOSCO).
It is important to note that the ICON is simply the structure that underpins the licensing category. It is possible to license an ICON as a standard fund, professional fund or a SMART Fund. A good example of how this works well for Brazil is the combination of the ICON with the SMART Fund model 007 license (ICON-007). The beauty of the ICON-007 is the flexibility to customize the fund’s operating structure in a way that efficiently provides for reduced legal and cost concerns. Customization of a fund for asset management requires the consideration of a number of factors, including its proposed strategy, investment policy, investment restrictions, counterparties, liquidity provisions, and total expense ratio. Moreover, the most important factor from the investor’s perspective is often found to be its tax implications and how to structure the fund so that it is tax-neutral and therefore more cost-efficient.
On this basis, the SFM 007 provides for a regulatory framework that is comparable to the onshore Brazilian multimarket super-qualified fund, which is established as a condominium and may invest up to 100 per cent of its assets outside of Brazil, unlike other types of Brazilian funds. Currently, the minimum initial investment per investor is R$1 million Brazilian reals, which is roughly equivalent to the minimum investment requirement for the SFM 007 (ie $0.5 million).
In the current climate, success for an international financial centre depends on a host of factors, but certainly one of them is the ability to develop market- responsive, compliant and innovative products. The ICON demonstrates that The Bahamas is adaptive, flexible and is looking to innovate while
not sacrificing the regulatory strength and standing of this jurisdiction. The ICON follows in the traditions of the Bahamas Foundation and the Bahamas Executive Entity in being the first of their kind in the common law world … and that is iconic indeed.
About the author: Aliya Allen began her career in 2004 at the Attorney General’s Office in Civil Litigation and Chambers. She joined Graham Thompson in 2007 as an associate and was quickly promoted to partner in the financial services practice of the firm in 2010. Allen took over as chief executive officer and executive director of the Bahamas Financial Services Board January 1, 2012.