Friday, May 19, 2017
Friday, May 19, 2017
The past 12 months has seen The Bahamas review its existing legislative framework for investment funds, with a view to ensuring that it maintains its competitiveness. Under the existing framework, some of the innovations that The Bahamas has introduced, such as the ICON legal structure and the SMART Fund series, have raised the jurisdiction’s profile and helped attract new business. However, it is time for a refresh of the 2003 Investment Funds Act which provided for these innovative instruments which support private wealth management.
As Tanya McCartney, CEO and Executive Director of the Bahamas Financial Services Board comments, while the 2003 legislation led to enhancements compared to the 1995 Act, in terms of meeting international regulatory standards for collective investment schemes, “Several key opportunities for enhancement persist in the regulatory framework for investment funds as we seek to remain an attractive jurisdiction for this type of business.”
McCartney explains that The Bahamas is largely compliant with principles set forth by the International Organisation of Securities Commissions (IOSCO) but the consensus is that we can always strive to do more “to ensure that we remain competitive with respect to collective investment schemes”.
“This commitment to continuous improvement has precipitated work being done to review and update the existing legislative and regulatory framework.”
The Investment Funds Act 2003 was largely structured to be in line with the operations of fiduciary administrators and did not necessarily account for the appropriate regulation of the various roles within a fund structure. Nonetheless there are opportunities in terms of how fund managers and custodians are regulated. In response to this, last July the Securities Commission of The Bahamas (SCB) embarked on a mission to address those gaps by asking two major law firms to develop draft legislation and update the Investment Funds Act that would help support institutional, as well as private wealth business.
“In this regard, the current legislation (IFA, 2003) perhaps viewed the appropriate placement of fiduciary risks and responsibilities through a narrower perspective, stemming from whom the primary users of funds were in the early 2000s, and how the funds were used. The regime placed great fiduciary responsibility on the investment fund administrator.
“It is expected that the review will result in a regime that balances the level of responsibility placed on both fund administrators and fund managers,” confirms McCartney.
The overhaul of the legislative framework will centre around licensing and oversight of key players in a fund structure, including the fund operator, fund manager, investment manager and custodian. It is hoped that by enhancing the regulatory framework, the SCB will have greater oversight of the fiduciary responsibilities of all key players and ensure that they adhere to appropriate ongoing reporting obligations, and in so doing establishing best practices in keeping with global regulatory standards.
Ultimately, says McCartney, the regulatory environment must establish a regime, “Which includes a robust framework for the licensing, ongoing supervision (inclusive of onsite and offsite examinations), investigation and enforcement of regulatory and supervisory requirements for various investment fund participants.
“One area the proposed legislation will seek to revamp is to centralise fiduciary risks and responsibilities around the fund manager, as opposed to the current structure which makes the principal office, that is, the fund administrator, the focal point.”
Currently, there is no requirement in The Bahamas for the fund manager to be licensed by the SCB. The new legislation, however, will likely require some form of licensing or registration, depending on the level of sophistication of the fund’s investors. “Moreover, the Commission is likely to set standards for the activities of the custodian as well as monitor such activities and conduct onsite examinations. The same goes for the activities of the fund operators,” asserts McCartney.
AIFMD necessitates Innovation
As well as addressing the custodian and fund manager opportunities, another catalyst for overhauling the Investment Funds Act, 2003 is the European Union’s Alternative Investment Fund Managers Directive (AIFMD). The Directive has been up and running for several years, following its implementation and incorporation into the national laws of individual Member States, the rules of which became applicable to AIFMs from 22 July 2013.
“The AIFMD also applies to non-EU AIFMs that manage or market AIFs in the EU. Thus, Bahamian investment managers to EU funds are subject to the impact and requirements of the AIFMD. The Securities Commission of The Bahamas has already engaged with and executed 27 Memoranda of Understanding with counterpart regulators in EU Member states, in order to facilitate participation in their respective countries,” confirms McCartney.
Europe is a key market for fund managers wishing to raise capital so it is understandably vital that those operating Bahamian funds have the confidence, and the imprimatur, to continue marketing them into individual EU Member States through national private placement rules; hence the importance of establishing MoUs.
Updating the regulatory regime will go a long way towards maintaining The Bahamas’ competitive appeal and satisfy EU regulators that the necessary controls and best practices are in place, in keeping with a progressive offshore jurisdiction.
In terms of business growth, The Bahamas has seen the number of investment funds rise 25%, from 735 to 916, over the last four years.
There are now more than 50 ICON structures licensed and operating in The Bahamas since the Investment Condominium Act was introduced in 2014.
To clarify, the novel ICON is a legal structure underpinning the investment fund in the same way as investment funds are legally organised as companies, exempted limited partnerships and unit trusts. McCartney explains that the ICON’s purpose is tied to its operation as an investment fund and is defined as “the contractual relationship subsisting between participants agreeing to the pooling of assets for the purpose of investing those assets collectively”.
It possesses no distinct legal personality, save that for the purposes of the legislation it is able to hold 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. One unique feature of the Investment Condominium Act is the provision for other types of entities – e.g. companies, unit trusts and exempted limited partnerships – to convert to an ICON by following a defined procedure.
“The ICON demonstrates The Bahamas’ keen understanding of the regulatory environment and the needs of the clients we service,” concludes McCartney.
The Bahamas is a well regulated international financial centre. The strong supervision of the sector coupled with a commitment to innovation are factors which makes The Bahamas the jurisdiction of choice for investment funds.