Investment Funds 2020

Last Updated November 26, 2019

Bahamas

Law and Practice

Authors



GrahamThompson was founded in 1950 and is at the forefront in serving the principal economic sectors of The Bahamas and Turks and Caicos Islands, the tourism industry and the financial services and banking sectors. The firm’s expertise in the offshore financial arena, including private client, trusts and estates and corporate, commercial and securities, is internationally recognised, as is the firm’s expertise in real estate and development. GrahamThompson’s litigators are highly sought-after experts who provide effective and specialised representation and advice across a wide spectrum of disciplines, including the banking and finance, corporate and commercial, employment and labour, insurance, intellectual property, insolvency, regulatory and manufacturing sectors. GrahamThompson operates four offices: Nassau and Lyford Cay in New Providence; Freeport, Grand Bahama; and Providenciales, Turks and Caicos Islands.

The Bahamas is frequently used by advisers and managers for the formation of investment funds. Presently there are over 800 licensed and regulated investment funds, with numbers steadily increasing year after year. A large percentage of these investment funds are alternative investment funds (AIFs) rather than retail funds. Under the laws of The Bahamas, the most common structure for a retail fund is the Standard Fund.

The Bahamas’ regulatory framework is flexible and accommodates a wide variety of strategies, including pure hedge funds, money market, private equity, real estate and distressed debt. A large majority of investment funds on the register in The Bahamas are private funds for a small number of investors, typically employed by family offices and related investors. Of these private funds, management of family wealth tends to be the primary reason for establishment. There are, of course, a number of institutional funds with a long-term commitment to The Bahamas. The new Investment Funds Act (the “Act”), came into effect on 1 September 2019 and is set to attract more institutional clients with a focus on investment management and custody.

Fund Structures – Vehicles

An International Business Company (IBC) is the most commonly used underlying legal entity and is typically structured as a limited liability company. The IBC is flexible, easy to incorporate and requires no local directors. Unlike a unit trust, it has a legal personality and is able to sue and be sued in its own name.

A Segregated Accounts Company (SAC) can be an IBC or a local company and allows for the statutory segregation of assets and liabilities to individual accounts. By way of example, each account may invest in different asset classes, or different strategies. It would be possible for one account to take a long/short strategy while another account may invest in real estate. The returns of each account are confined to the investors of each account and there is no cross-contamination between accounts in terms of liabilities.

An Exempted Limited Partnership (ELP) is made up of one or more general partners and one or more limited partners. The general partner is responsible for the investment and management of the assets of the ELP, and in the event that assets are inadequate, is liable for all debts and obligations of the ELP. The limited partners are not liable for debts and obligations, except as provided in the partnership agreement. At least one general partner is required to be a company incorporated under the IBC Act or a person resident in The Bahamas.

An ELP is a common structure for US master-feeder funds with a US entity (usually a Delaware corporation) acting as general partner. Limited partnership interests would be subscribed for by feeder fund investors who invest all of its assets in limited partnership interests of the ELP.

A Unit Trust (UT) is a common law trust managed by a unit trustee. A UT does not possess a legal personality. The trustee represents the fund with units distributed to investors as evidence of their participation in the fund.

An Investment Condominium (ICON) was modelled after the Brazilian condominium that has formed part of the Brazilian Civil Code for over 90 years and was developed specifically for the Brazilian market. The ICON is a contractual arrangement between investors pooling assets for the purposes of operating as an investment fund, with the fund’s administrator acting for and on behalf of the fund in all matters. The ICON has no corporate personality, but is deemed to be able to hold assets in its own name when represented by its general administrator.

Licensing Categories of Private Investment Funds

A professional fund may only be offered to investors meeting eligibility requirements under the Investment Funds Act, 2019 (IFA) and may be licensed by an unrestricted investment fund administrator (which considerably speeds up the setting-up process) or by the Securities Commission of The Bahamas (the “Commission”). Eligible investors are:

  • any bank or trust company licensed under the Banks and Trust Companies Regulation Act (Chapter 316) or licensed under the laws of another jurisdiction, whether acting in its individual or fiduciary capacity;
  • any firm registered under Part VI of the Securities Industry Act, 2011 (No 10 of 2011) that maintains a minimum capital of BSD120,000 of regulatory capital or is registered or licensed to carry on equivalent securities activities in a prescribed jurisdiction;
  • any insurance company licensed under the Insurance Act (Chapter 347) or licensed under the laws of another jurisdiction;
  • any pension fund where a registered investment fund manager has been appointed to manage the fund's assets;
  • any professional investor, which includes (i) an institutional investor or a financial institution, or (ii) a natural person with a net worth of BSD200,000 or more who has the expertise, experience and knowledge with respect to making their own investment decisions;
  • any natural person who had an individual income in excess of BSD200,000 in each of the two most recent years or joint income with that person’s spouse in excess of BSD300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;
  • a trust with total assets in excess of USD5 million where a licensed trustee or investment manager is responsible for investment decisions; and
  • any entity with net assets in excess of USD5 million that has appointed a licensed investment manager to make investment decisions on its behalf.

A SMART Fund is designed to permit innovative and flexible structuring of investment funds. The framework allows for any institution to propose a template for adoption as a SMART Fund rule, with specific features distinguishing it from other templates. There must be a valid business case presented to the Commission for the adoption of a new template. Presently there are seven templates. Each template will have been proposed by industry to address market needs. For instance, SMF006 was implemented as a result of the 2008 financial crisis to enable segregation of toxic assets. SMF007 was introduced to mirror the investment requirements of the Brazilian Multi-Mercado Fund and was considered to be more institutional-focused than other templates because of the larger number of investors and the minimum initial investment.

SMART Funds may be licensed by an unrestricted investment fund administrator or the Commission. Key features of the SMART Fund regulatory scheme common to each model include the prospect of using term sheets, rather than full-scale offering documents, and the opportunity in certain instances for shareholders to waive an annual audit requirement. The different models of the SMART Fund are set out below.

  • SMF001 – investors must be customers of the promoter and party to a discretionary management agreement with the promoter.
  • SMF002 – limited to no more than ten investors, who must all be qualified to invest in a professional fund, a majority of whom are afforded the right to appoint/remove the fund’s operators.
  • SMF003 – pre-existing exempt fund under former legislation; may have no more than 15 investors, who by majority can remove operators of the fund.
  • SMF004 – no more than five investors; an administrator is not required. This is the most common vehicle used for related investors and as an investment vehicle for family offices.
  • SMF005 – no more than five investors, who must all be qualified to invest in a professional fund.
  • SMF006 – investors must be qualified to invest in a professional fund; used to "side-pocket" toxic or illiquid assets.
  • SMF007 – up to 50 investors, each making a minimum investment of USD500,000 or equivalent. SMF007 was specifically designed to accommodate structuring for Brazilian managers.

A non-Bahamas-based fund is an investment fund that is incorporated, registered or established in a jurisdiction other than The Bahamas but has a nexus to The Bahamas through it being administered or managed in or from The Bahamas.

An ICON is a contractual relationship between one or more participants who have pooled assets for the purposes of operating as an investment fund, and an investment condominium must be licensed as an investment fund under the Investment Funds Act. It may be formed to operate as an open-end fund (in which participants can call for a redemption of their interests) or a closed-end fund (in which they may not). The ICON does not possess legal personality but, when represented by its administrator, is able to hold assets in its own name, enter into agreements and sue or be sued in its own name.

An investment fund can be licensed by the Commission or, save for a standard fund, by an unrestricted investment fund administrator in The Bahamas.

While The Bahamas has several different types of investment funds (which are discussed herein), there are common documents required for all registration types, these include:

  • an application form;                     
  • an offering memorandum (or term sheet) that complies with the disclosure requirements in Schedule 1 to the Investment Funds Regulations;
  • a subscription agreement that complies with the requirements in the Investment Funds Act;
  • directors authorising resolutions;
  • constitutive documents;
  • due diligence on directors, senior officers, substantial shareholders, promoters, the investment manager or investment adviser;
  • certificate of compliance, issued by Bahamian counsel; and
  • the prescribed application fee.

The Commission, at its discretion, may also request any other documents it feels are necessary to license or register an investment fund.

Investors in The Bahamas may benefit from limited liability depending on the underlying structure of the investment fund. There are six different types of underlying vehicles that may be used to establish an investment fund, including IBCs, domestic companies, exempted limited partnerships, unit trusts, segregated accounts companies and investment condominiums. Liability may be limited statutorily or contractually. Most vehicles established in The Bahamas do accord limited liability to investors; however, it is possible to incorporate or register a vehicle where the investors have unlimited liability. In practice, legal opinions on limited liability are not given; indeed, they are rarely requested due to the clear statutory wording of the applicable legislation.

The IFA and the Investment Funds Regulations, 2003 (IFR) set out the disclosures to investors that must be contained in either an offering memorandum or a term sheet.

An offering memorandum is required for both standard funds and professional funds. A SMART Fund may elect to adopt a term sheet rather than a full-scale offering document that includes the pertinent details of the offering. The following are mandatory disclosures for an offering memorandum:

  • basic details (address of fund, place and date of formation);
  • investment objectives and restrictions;
  • risks;
  • names and addresses of all service providers (including directors/general partners) to the fund;
  • characteristics of equity interests;
  • application and redemption procedure;
  • valuation of property and pricing;
  • distribution policy;
  • fees and charges;
  • reports and accounts;
  • warnings (as prescribed in the schedules to the IFR); and
  • other general information.

Although not a challenge in some jurisdictions, in order to substantiate that the investment fund is operating in accordance with best practices, there are some SMART Funds that are choosing to adopt full-scale offering memoranda. This may be advisable if the parties are not related and the sponsors want to ensure that there is adequate disclosure of all material risks.

It should be noted that any amendments post launch must be filed with the Commission (as applicable) within 21 days.

FATCA and CRS

For the purposes of this following section, capitalised terms used herein shall have the meaning ascribed in the relevant Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) guidance notes.

Under the FATCA and CRS regime, a foreign financial institution (FFI) includes any entity that is regarded as an investment entity. An investment entity is any entity that primarily conducts as a business one or more of the following activities or operations for or on behalf of a customer:

  • trading in money market instruments (cheques, bills, certificates of deposit, derivatives, etc);
  • foreign exchange;
  • exchange, interest rate and index instruments;
  • transferable securities;
  • commodity futures trading;
  • individual and collective portfolio management;
  • otherwise investing, administering, or managing funds or money on behalf of other persons; or
  • the gross income of which is primarily attributable to investing, reinvesting, or trading in financial assets, if the entity is managed by another entity that is a depository institution, a custodial institution, a specified insurance company, or an investment entity.

The FFI is required to report on its equity interest holders.

In the context of investment funds, the fund will likely satisfy one of the above investment entity tests, and therefore be an FFI. As an FFI, the investment fund reports on itself for the purposes of FATCA and CRS, reporting on its equity interest holders.

There are few domestic AIFs in The Bahamas; those investors located in the jurisdiction tend to gravitate to conservative strategies such as investment in income-producing real estate. The professional investors tend to be institutional, such as large family groups or pension funds.

A Bahamas-organised and regulated investment fund is often a vehicle for international investors.

An IBC is the most commonly used underlying legal entity and is typically structured as a limited liability company. The IBC is flexible, easy to incorporate and requires no local directors. Unlike a unit trust, it has a legal personality and is able to sue and be sued in its own name.

There are few restrictions on investors investing in funds in The Bahamas. Fund-specific investor qualifications are as follows.

A professional fund may only be offered to investors meeting eligibility requirements under the IFA and may be licensed by an unrestricted investment fund administrator (which considerably speeds up the setting-up process) or by the Commission. Eligible investors are:

  • any bank or trust company licensed under the Banks and Trust Companies Regulation Act (Chapter 316) or licensed under the laws of another jurisdiction, whether acting in its individual or fiduciary capacity;
  • any firm registered under Part VI of the Securities Industry Act, 2011 (No 10 of 2011) that maintains a minimum capital of BSD120,000 of regulatory capital or is registered or licensed to carry on equivalent securities activities in a prescribed jurisdiction;
  • any insurance company licensed under the Insurance Act (Chapter 347) or licensed under the laws of another jurisdiction;
  • any pension fund where a registered investment fund manager has been appointed to manage the fund's assets;
  • any professional investor, which includes (i) an institutional investor or a financial institution, or (ii) a natural person with a net worth of BSD200,000 or more who has the expertise, experience and knowledge with respect to making their own investment decisions;
  • any natural person who had an individual income in excess of BSD200,000 in each of the two most recent years or joint income with that person’s spouse in excess of BSD300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;
  • a trust with total assets in excess of USD5 million where a licensed trustee or investment manager is responsible for investment decisions; and
  • any entity with net assets in excess of USD5 million that has appointed a licensed investment manager to make investment decisions on its behalf.

The Bahamas has an exchange control regime that restricts and regulates the conversion of Bahamian currency and is applicable to those deemed or designated resident for exchange control purposes. A resident in this context does not necessarily indicate a physical presence in The Bahamas, as there are a number of individuals and entities deemed or designated non-resident, even though they are physically present in The Bahamas. Citizens and permanent residents with an unrestricted right to work in The Bahamas are considered residents for exchange control purposes.

Should a resident investor wish to invest in an investment fund whose base currency is a currency other than Bahamian dollars, the investor must seek the prior approval of the Exchange Control Department of the Central Bank.

It should be noted that there have been recent relaxations to these policies issued by the Central Bank that now enable resident investors to invest in certain approved US dollar-denominated funds sponsored by regulated financial institutions in The Bahamas, without the investor seeking any approval.

The licensing categories for private investment funds are found in 2.1.1 Fund Structure.

The IFA introduced an AIFMD compliant regime which may allow investment managers incorporated in The Bahamas who market either an investment fund or an EU AIF in the EU or manage an EU AIF to qualify for passporting across the EU on the basis of a single authorisation extended by the Securities Commission of The Bahamas. However, The Bahamas regime has not been assessed by the EU for the extension of passporting and even those countries who had been assessed for passporting, has not yet been granted passporting.

Experts within the industry are monitoring the developments in the EU given that there have been reports that the third-country passport may be essentially revoked.

Under the IFA, the requirements for an AIFM are fairly prescriptive.

A new feature of the IFA is that a fund administrator that is licensed and/or registered in a prescribed jurisdiction and subject to regulation in that jurisdiction as a fund administrator is able to administer a Bahamas licensed investment fund. Previously, this was only allowable in certain SMART Fund models, or when the fund had elected to be self-administered.

An AIF must designate a custodian that is licensed in a prescribed jurisdiction and meets minimum net worth requirements of paid-up capital and non-distributable surplus of USD2 million unless the operators can certify in writing that the nature of the fund’s assets are such as to not require the appointment of a custodian.

The operators of a fund – namely its directors, general partners, trustee, or governing administrator – shall be fit and proper and there is no residency requirement for the operators to be located in The Bahamas.

An administrator licensed by the Commission and an investment manager registered under the IFA is required to procure approval from the Commission for certain material changes in their operations.

If a manager is licensed or registered in a prescribed jurisdiction and managing a professional fund or a SMART Fund whose equity interests are limited to being offered to accredited investors only, the manager must be registered under the IFA.

If a manager is not licensed or registered in a prescribed jurisdiction and managing funds as described above, the manager must still be registered; however, the process for disclosure is more comprehensive.

An investment fund can be licensed by the Securities Commission of The Bahamas (the Commission) or, save for a standard fund, by an unrestricted investment fund administrator in The Bahamas.

While The Bahamas has several types of investment funds (which are discussed in further detail below), there are common documents required for all registration types, these include:

  • an application form;
  • an offering memorandum (or term sheet) that complies with the disclosure requirements in Schedule 1 to the Investment Funds Regulations;
  • a subscription agreement that complies with the requirements in the Investment Funds Act;
  • directors authorising resolutions;
  • constitutive documents;
  • due diligence on directors, senior officers, substantial shareholders, promoters, investment managers or investment advisers;
  • certificate of compliance, issued by Bahamian counsel; and
  • the prescribed application fee.

The Commission, at its discretion, may also request any other documents it feels are necessary to license or register an investment fund.

Under the Securities Industry Act, 2011 (the “SIA”), the offer of equity interests in an investment fund may constitute arranging deals in securities, a licensable activity if conducted in and from The Bahamas.

“In and from The Bahamas” is defined under the SIA as follows: “a person carries on securities business in or from The Bahamas if such person –

  • a. is incorporated, established or registered under any law in The Bahamas;
  • b. carries on securities business from a place of business maintained by such person in The Bahamas; or
  • c. engages in an activity the doing of which constitutes the carrying on by such person of securities business in or from The Bahamas under an order made under subsection (2.)”

Given the offer will not typically be made from a person who is incorporated, established or registered under the laws of The Bahamas nor carrying on securities business from a place of business in The Bahamas and, to date, the authors are not aware of any order being issued by the Securities Commission of The Bahamas regarding the cross-border provision of securities business, it is unlikely to trigger a licensing requirement under the SIA.

So long as the equity interests in alternative funds not licensed or registered under the laws of The Bahamas that are only being offered to accredited investors and the fund is not being administered or managed in or from The Bahamas, neither the fund nor the investment manager are required to be registered or licensed under the laws of The Bahamas.

While there are no specific restrictions other than eligibility requirements for investors in the investment fund, the IFA does provide the following rules for the protection of investors.

  • Conflicts of interest must be adequately disclosed in the offering memorandum of the fund.
  • Prohibition against complete delegation of an investment manager’s function. An investment manager cannot delegate risk function or portfolio management without the approval of the Commission and may not delegate both.
  • An investment fund must establish and maintain an effective complaints handling system and procedure to ensure that an adequate record of complaints is kept. This responsibility lies with the administrator of the investment fund.
  • Investor consent is required if the possibility of a change in dealing has not been disclosed or there are no exceptional circumstances that make it in the best interests of the fund to change the dealing without the approval of investors.

Generally speaking, the Commission is co-operative in its approach to regulatory questions. There have been challenges in receiving published guidance on regulatory matters, although it is inclined to respond to questions on a case-by-case basis. Although this may create issues from a regulatory interpretation and consistency standpoint, the Commission tends to be flexible and pragmatic in its approach. Licensing applications are typically dealt with punctually.

Historically, the Commission’s enforcement powers have focused on business conduct and consumer protection. It is expected that the Commission will be more aggressive on anti-money laundering and counter-terrorist financing (AML/CTF) breaches, which is highlighted in its published policy on the Assessment of Administrative Penalties for Anti-Money Laundering and Counter-Terrorist Financing Infractions.

Although an investment fund is not a financial institution under the Financial Transactions Reporting Act, a fund administrator licensed in The Bahamas is required to comply with the AML/KYC rules of The Bahamas or if licensed in a prescribed jurisdiction, the AML/KYC rules of such jurisdiction.

There is no prohibition on short selling in The Bahamas. The IFA contains market conduct rules that discourage market abuse and include prohibitions on the following activities:

  • misleading or deceptive conduct, including trading or marketing an investment fund, issuing or establishing an investment fund, publishing a notice in relation to an investment fund or carrying on negotiations or making arrangements or doing any other act preparatory to or related to the foregoing;
  • misleading the Commission, including knowingly or recklessly providing the Commission with information that (i) is false, (ii) is misleading in a material particular or (iii) fails to state a fact that is required to be stated or that is necessary to make the statement not misleading;
  • making false or misleading statements in The Bahamas or elsewhere that, inter alia, are likely to induce persons in The Bahamas to acquire an interest in an investment fund or to have the effect of increasing, reducing or maintaining or stabilising the price for acquiring an interest in an investment fund;
  • inducing persons to deal by, inter alia, making or publishing a statement, promise or forecast if the person knows or is reckless as to whether the statement is misleading false or deceptive; and
  • dishonest conduct in relation to an investment fund.

While there is no restriction on investment funds established in The Bahamas accessing fund financing or leverage within The Bahamas, the banks and financial institutions do not commonly engage in providing this financing or leverage.

An investment fund may borrow as part of its overall strategy, subject to full disclosure of its ability to borrow (including any restrictions and/or thresholds) being made in its offering document or term sheet.

Generally speaking, there is no direct taxation applicable to investment funds under the laws of The Bahamas, unless the fund holds real estate situated in The Bahamas. Taxes associated with Bahamas real estate holdings are borne by the fund, not the investor. There is no corporate income tax, capital gains tax or withholding tax in The Bahamas. Note that as the majority of funds in The Bahamas are organised to raise funds outside The Bahamas, there may very well be tax issues associated with an investor’s home jurisdiction.

The Removal of Preferential Exemptions Act, 2018 (RPEA) was enacted on 21 December 2018 and addresses the removal of ring-fencing provisions. The RPEA revokes preferential tax exemptions previously afforded to IBCs, executive entities, ELPs and ICONs on the Bahamas Company Register, prior to the commencement of the RPEA and that were deemed non-resident for exchange control purposes and thus previously enjoyed an exemption from all taxes from the date of incorporation/registration, for a period of 20 years. These entities will now lose these preferential exemptions, effective three years from the date of commencement of the RPEA (approximately 2021).

Newly incorporated entities will have no express statutory exemption from taxation in The Bahamas. The revocation of preferential exemptions is not expected to materially impact investment funds established in The Bahamas.

Prior to the promulgation of the Commercial Entities (Substance Requirement) Act, 2018 (CESA), it was not common to have a fund manager carrying out significant activities in The Bahamas. This was due to a carve-out in the SIA that exempts fund managers from the requirement to be licensed as a registered firm if the fund manager was incorporated under the laws of The Bahamas and solely managed investment funds established under the IFA.

The CESA requires that an investment fund manager that is incorporated or registered in The Bahamas under the International Business Companies Act, 2000 (IBC Act) demonstrate economic substance in The Bahamas. Economic substance is comprised of a two-pronged test, namely that:

  • core income generating activities (CIGA) are carried out in The Bahamas; and
  • the investment manager is directed and managed in The Bahamas.

CIGA includes:

  • the taking of business decisions on the holding and selling of investments;
  • calculating risks and reserves;
  • taking decisions on currency or interest fluctuations and hedging positions; and
  • preparing relevant regulatory or other reports for government authorities and investors.

Given that a fund manager need not be incorporated in The Bahamas to manage a Bahamas fund, the CESA will not affect all fund managers who manage Bahamas funds. However, the CESA will impact the significant number of fund managers established as IBCs for private funds utilised for wealth management purposes.

As of today’s date, the CESA does not significantly impact investment funds save for the reporting requirement discussed herein.

The legal structures for retail funds are the same as those for AIFs, although sponsors tend to prefer a straightforward corporate vehicle for such purpose.

The standard fund is a highly regulated investment vehicle designed to operate as a traditional collective investment scheme. No investor qualifications (eg, as net worth or minimum investment) are mandated for standard funds and for this reason they are often used for “retail” funds. Further, there are no limits on the number of investors in a standard fund. However, because the interests in a standard fund may be so broadly offered, a standard fund may only be licensed by the Commission.

Although the disclosure required in the offering memorandum is the same as AIFs, in practice the disclosures tend to be more comprehensively addressed due to the nature of the prospective investors and their presumed lack of investment experience and knowledge. In addition, the IFA now requires that a retail fund has a more transparent net asset value (NAV) calculation process, including appointing an external valuer that is independent of the fund and the investment fund manager or the fund manager must perform the valuation function.

The application process and documentation is as discussed previously in this chapter (in relation to AIFs) except that (i) the application is made directly to the Commission; (ii) retail funds must appoint an external valuer; and (iii) the investment manager of a retail fund must be licensed under the SIA or licensed in a prescribed jurisdiction and registered under the IFA.

The application process and approval tends to take longer than licensing an alternative investment fund as a greater focus is placed on ensuring the protection of retail investors. Retail funds like AIFs that are licensed as professional funds must have audited financial statements provided to investors within six months of the end of the financial year or such longer period provided by the Commission on application.

Investor liability is limited by the amount unpaid on their equity interests. In practice, equity interests are always issued as fully paid and, as such, investors are not responsible for the liabilities of the fund. When the fund is structured as an ELP, the limited partnership investors are protected in the same manner as investors in a limited liability company.

Disclosure requirements for retail funds are similar to AIFs with respect to FATCA and CRS. In addition, although investment funds are not included entities for economic substance purposes, Bahamas law requires that they register and report as non-included entities.

Investor appetite for retail funds is strong and growing, given that in The Bahamas there are limited domestic investment opportunities. An investment in a retail fund that tends to have access to foreign asset classes enables investors to truly diversify in an otherwise limited investment climate. Investors in retail funds tend to be middle to upper-income families not yet meeting the accredited investor threshold.

The common legal structures for an investment fund manager to a retail fund that is not being marketed to the public in The Bahamas is an IBC. If the retail fund intends to sell its interests to the public in The Bahamas, a more common legal structure would be a domestic company.

There are no significant restrictions on investors in retail funds. Note, however, that The Bahamas has an exchange control regime that restricts and regulates the conversion of Bahamian currency and is applicable to those deemed or designated resident for exchange control purposes. A resident in this context does not necessarily indicate physical presence in The Bahamas as there are a number of individuals and entities deemed or designated non-resident even though they are physically present in The Bahamas; citizens and permanent residents with an unrestricted right to work in The Bahamas are considered residents for exchange control purposes.

Should a resident investor wish to invest in an investment fund whose base currency is a currency other than Bahamian dollars, the investor must seek the prior approval of the Exchange Control Department of the Central Bank.

It should be noted that there have been recent relaxations to these policies issued by the Central Bank that now enable resident investors to invest in certain approved US dollar-denominated funds sponsored by regulated financial institutions in The Bahamas without the investor seeking any approval.

The standard fund is a highly regulated investment vehicle designed to operate as a traditional collective investment scheme. No investor qualifications (such as net worth or minimum investment) are mandated for standard funds and for this reason they are often used for "retail" funds. Further, there are no limits on the number of investors in a standard fund. However, because the interests in a standard fund may be so broadly offered, a standard fund may only be licensed by the Commission.

As discussed above, there are no prescriptive requirements on the nature of investments or limitations on strategies that may be employed by a retail fund. The Bahamas’ regime is flexible in this regard and largely disclosure-based such that investors are taken to be informed of the risks associated with an investment in the fund.

A standard fund must have a full roster of service providers, including an administrator, an investment manager, an auditor and a custodian. Interests in a standard fund must be offered via an offering document, and there are express requirements as to its contents and the required disclosures.

A new feature of the IFA is that a fund administrator that is licensed and/or registered in a prescribed jurisdiction and subject to regulation in that jurisdiction as a fund administrator is able to administer a Bahamas licensed investment fund. Previously, this was only allowable in certain SMART Fund models, or when the fund had elected to be self-administered.

A standard fund must designate a custodian that is licensed in a prescribed jurisdiction and meets minimum net worth requirements of paid-up capital and non-distributable surplus of USD2 million unless the operators can certify in writing that the nature of the fund’s assets are such as to not require the appointment of a custodian.

The operators of a fund – namely its directors, general partners, trustee, or governing administrator – shall be fit and proper and there is no residency requirement in The Bahamas.

An administrator licensed by the Commission and an investment manager registered under the IFA is required to procure approval from the Commission for certain material changes in their operations.

Investment managers to a standard fund are required to be registered in The Bahamas, under the SIA, or licensed in a prescribed jurisdiction and registered under the IFA. The following information is contained in the application for registration for a manager that is already licensed in a prescribed jurisdiction:

  • copy of CV, if individual;
  • audited or unaudited financial statements, in the case of a company or partnership;
  • name of applicant;
  • address of applicant;
  • telephone number;
  • fax number;
  • email address and website (if any);
  • name of contact person, in the case of a company;
  • copy of licence;
  • level of regulatory capital; and
  • level of professional indemnity insurance maintained.

The application fee is BSD200. Once registered, the investment manager is required to submit an annual declaration. Note that there are no fees payable annually to the Commission after application.

The Securities Commission does have an expedited process for applications but this process is not available to standard funds, which are routinely subject to more rigorous scrutiny. As a result, timelines can vary, but typically, the Commission aims to turn around all licensing applications within 21 days.

A firm that markets a retail fund in The Bahamas may be subject to registration under the SIA under the category of arranging deals in securities. Note that the IFR now contains a requirement that any person who publishes, issues an advertisement or other invitation for persons to invest must ensure that the advertisement or invitation contains sufficient relevant information that is not misleading and where made, issued, or published outside of The Bahamas, such advertisement or invitation must be in compliance with applicable laws. Any advertisement issued in The Bahamas must be approved by the Commission prior to publication on application.

The marketing of standard funds to investors in The Bahamas must be done through a registered firm under the SIA. Once an investment fund has been licensed as a Standard Fund, there are no restrictions as to whom the equity interests can be offered to. However, for completeness, it should be noted that an investor may need approval from the Exchange Control Department of the Central Bank depending on the currency of the fund and the status of the investor. By way of example, Bahamian citizens would be deemed “resident” for exchange control purposes and require approval from the Exchange Control Department of the Central Bank to deal in currencies other than the Bahamian dollar (and vice versa for those deemed/designated “non-resident”).

Investor protection rules for standard funds are the same as those for AIFs, save for that a standard fund must appoint an external valuer to value the fund’s assets.

Please see the discussion above in relation to AIFs.

There are no published restrictions or limitations on a retail fund’s investment strategy, although the Commission may be concerned if the fund’s strategy is not appropriately diversified and/or the asset class is extremely volatile. All funds are required to appoint a custodian where the nature of their assets justifies such appointment. The custodian must be licensed in a prescribed jurisdiction and meet minimum net worth requirements discussed above.

Where an investment manager conducts the valuation function, they must ensure that the valuation task is functionally independent from the portfolio management; the remuneration policy and other measures ensure that the conflicts of interests are mitigated and measures are taken to avoid undue influence upon the employees. Although a custodian may also be appointed as the external valuer, the manager must be satisfied that the custodian has functionally and hierarchically separated the performance of its custodial functions from its tasks as an external valuer and is able to manage the potential conflicts of interest and can monitor and disclose those conflicts to the investors of the fund.

The external valuer must, inter alia, be able to demonstrate that it is either subject to mandatory registration under the law or to rules of professional conduct.

Please see the discussion in relation to AIFs for details on market conduct rules applicable to all funds licensed in The Bahamas.

Please see the discussion in relation to AIFs.

Please see the discussion in relation to AIFs.

Due to the IFA’s recent promulgation, there continue to be amendments proposed and made to the IFA in an effort to refine the legislation. In recent revisions to the IFA, the deadline for fund manager registration has been extended to 1 September 2020. The prescribed jurisdiction rules are also now in effect. It should be noted that there are effectively three prescribed jurisdiction lists, each respectively applying to custodians, investment managers and fund administrators.

GrahamThompson

Sassoon House
Shirley Street & Victoria Avenue
P. O. Box N-272
Nassau, Bahamas

+1-242-322-4130

+1-242-328-1069

info@gtclaw.com www.grahamthompson.com
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GrahamThompson was founded in 1950 and is at the forefront in serving the principal economic sectors of The Bahamas and Turks and Caicos Islands, the tourism industry and the financial services and banking sectors. The firm’s expertise in the offshore financial arena, including private client, trusts and estates and corporate, commercial and securities, is internationally recognised, as is the firm’s expertise in real estate and development. GrahamThompson’s litigators are highly sought-after experts who provide effective and specialised representation and advice across a wide spectrum of disciplines, including the banking and finance, corporate and commercial, employment and labour, insurance, intellectual property, insolvency, regulatory and manufacturing sectors. GrahamThompson operates four offices: Nassau and Lyford Cay in New Providence; Freeport, Grand Bahama; and Providenciales, Turks and Caicos Islands.

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