With the release for public consultation of the draft Investment Funds Bill, 2017, The Bahamas is on the cusp of overhauling its legislative framework for the regulation of collective investment schemes. This overhaul was undertaken as a major project for the Securities Commission of The Bahamas and was formally launched in July 2017, with the appointment of drafting and industry consultants along with a project team comprised of senior industry professionals, who advised and assisted with the review of the draft legislation.

In launching this legislative overhaul, the commission had three overarching objectives for the development of the legislation and regulatory framework:

1. To address the concerns raised in the 2012/13 financial sector stability assessment, with the goal to achieve best in class regulatory standards;

2. To develop the legislative infrastructure that would enable The Bahamas to enhance its competitive landscape and to attract institutional as well as private funds business; and

3. To put in place the necessary legislative framework that would enable The Bahamas to achieve AIFMD/EU passporting status, thereby enabling Bahamas-based funds and fund managers to market to Europeans.

Stability assessment
The main areas that needed to be addressed as a result of the 2012 Financial Sector Stability Assessment Programme review centred around licensing and oversight of the investment manager, as well as putting in place a regulatory framework for custodians.

The principles set out by IOSCO require standards to be put in place to address how investment managers conduct their activities. Currently, there is no requirement in The Bahamas for the investment manager of a fund to be licensed by the Commission. This will likely change somewhat as the new legislation is proposing to require some form of licensing or registration using a risk-based approach. At the core of this risk-based approach is the level of sophistication of a fund’s investors. Moreover, it is now necessary to ensure that the Commission will be able to set standards for how assets are to be held by custodians as well as monitor the custodian of assets as part of its offsite and onsite supervisory processes. The new legislation and regulatory framework will also provide for minimum standards with respect to the management and valuation of the underlying assets of an investment fund with the aim of ensuring the appropriate level of protection for a fund’s investors.

In revamping this regulatory framework, the Commission looked at and sought to appropriately align the fiduciary responsibilities, as well as the ongoing reporting obligations of each of the operators and other parties related to the fund. It benchmarked their regulatory oversight against other jurisdictions in the industry. In the end, The Bahamas’ funds legislation and regulatory proposals are seeking to establish a regime which includes appropriate frameworks for the licensing, ongoing supervision (onsite and offsite examinations), investigations and enforcement of regulatory and supervisory requirements, as may be appropriate for various investment fund participants.

Enhancing competitiveness
To improve The Bahamas’ visibility and selection as a jurisdiction of choice for both private and institutional investment funds, the development project took a hard look at the challenges faced by The Bahamas over the years. In as far as it is possible to make improvements through the legislative and regulatory infrastructure, the Commission is seeking to meet those challenges and remove barriers that may be inadvertently hindering the industry’s potential.

One particular area the proposed legislation will seek to revamp is the centring of fiduciary risks and responsibilities around the investment manager, director, or other operator, as opposed to the current structure which puts the principal office, that is, the fund administrator, as the focal point. While this current view has its roots in the historical development of The Bahamas’ industry, it is long past due that the jurisdiction move away from it and appropriately and adequately provide for the effective oversight of asset management activity and by extension, the investment manager.

This current lack of oversight of the investment manager meant that the legislation had to assign fiduciary responsibilities to another player and to the consternation of the fund administrator, that responsibility fell to them. This inappropriate recognition of the administrator’s role versus the investment manager’s responsibilities perpetuated an imbalance that proved too onerous for the administrators of large institutional funds. We must now correct this imbalance if The Bahamas is to have even a starting chance to vie in the institutional arena.

The legislative overhaul is also proposing to rationalize the oversight of “non-Bahamas based” funds by reviewing the criteria by which a nexus for regulation ought to be created. This will bring much needed changes to the current structure of Recognized Foreign Funds.

A fund will be considered non- Bahamas based for the purposes of regulation, if it:

1. has an administrator that is licensed in The Bahamas;
2. has an investment manager that is licensed in The Bahamas; or
3. sells itself to accredited investors in The Bahamas.

Where a non-Bahamas based fund has appointed an administrator or investment manager who is licensed in The Bahamas, the administrator or investment manager will only be required to notify the commission of their appointment. In cases where a non-Bahamas based fund is being sold to accredited investors in The Bahamas, the representative of such a fund will only be required to register itself with the Commission. It is further anticipated that registration of the representative will be a very simplified process almost akin to a notification.

Moreover, we are proposing that the only criteria by which a fund will be deemed “Bahamas based,” and thus be required to be licensed by the Commission, is if it is:

a. incorporated in The Bahamas; or
b. being sold to non-accredited investors in The Bahamas.

It is very important for The Bahamas that it repositions itself as an open jurisdiction. In this vein, the new legislation is proposing that for a “Bahamas-based” fund, the administration of that fund can take place from anywhere in world. Of course, “anywhere” will depend on a jurisdiction having minimum regulatory standards for collective investment schemes and, it will take the form of a prescribed list of jurisdictions. It is anticipated that most major financial centres will qualify to be on this prescribed list.

Other features the Commission is proposing to improve are around the provision for a sensible and streamlined licensing structure with respect to the master/feeder relationship, as well as definition and clarity for self-administered funds. All of these are bare minimum changes needed in order for The Bahamas to modernize its funds legislation and regulatory environment.

Passporting requirements
On July 22, 2011, the directive 2001/61/EU on alternative investment fund managers (AIFMD) entered into force in the EU. The directive creates a comprehensive and effective regulatory and supervisory framework for alternative investment fund managers (AIFMs) within the EU, as well as establishing certain regulatory requirements for non- EU AIFMs that provide services to EU investment funds. The European Commission adopted a number of the provisions of the directive for implementation in July 2012 which were incorporated into the national laws of Member States. The rules of the AIFMD therefore became applicable to AIFMs as from July 22, 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 Bahamas has already engaged with and executed 27 memorandums of understanding with EU member states in order to facilitate participation in their respective countries. However, as part of the broader regulatory framework for AIFs in the EU, the directive provides for an EU passport for non-EU AIFMs. The passport enables non-EU AIFMs to enjoy the same rights and are subject to the same obligations, as EU-based AIFMs. While the directive does not require that the non-EU country where an AIFM is established must have AIFMD-equivalent rules, the non-EU AIFMs must be able and willing to operate in the EU in compliance with rules established in relation to the AIFMD.

There is a certain degree of urgency for the Commission in performing this review within the context the AIFMD/EU passporting developments. While meeting international standards, The Bahamas must also maintain its capacity to conduct business within jurisdictions relevant to the Bahamian industry by meeting the various regulatory oversight requirements that have been established by those jurisdictions with whom our industry is interested to conduct business. We are therefore proposing to ensure the new legislation meets with standards that would enable granting of the EU passport. While this still appears to be a moving target, we have developed and are proposing standards benchmarked from jurisdictions which have been granted the EU passport and have tried to learn from those who have been denied.

As a result, the proposed legislation includes extensive AIFMD provisions which have been reviewed by a leading UK law firm. The Commission has also reached out to the European Securities and Markets Authority, seeking inclusion for review in its next round of assessments for passporting and we are so far encouraged by the responses we have received.

Conclusion
Financial services provides a critical element in the overall economic development of The Bahamas as it has been seen to support the middle class, with salaries averaging three times the national average. We must ensure the viability of this sector as an alternative to tourism and in order to do this, robust and modern legislation is just the beginning.

The investment funds sector represents a unique opportunity for The Bahamas to expand its reach in financial services. While, for the past several years, the Commission has seen year-on-year increases in the number of investment funds licensed in the jurisdiction, there is much more opportunity for growth in this area, especially, for institutional funds. To grow this sector, The Bahamas must be seen as a well-regulated jurisdiction of choice. We believe that the overhaul of the investment funds legislative framework will bring best in class regulation, which will in turn enable much needed growth.