By Aliya Allen, CEO & Executive Director, BFSB – The Bahamas, in keeping with its long history of providing investment fund services, has taken measured steps over the past ten years to differentiate it from other jurisdictions. A key point of differentiation is the regulatory environment for investment funds which is robust though flexible. The Bahamas can accommodate any strategy and any investor, whether individual or institutional, and the creation of the SMART Fund is an example of the truly risked based framework for regulation that the Investment Funds Act, 2003 embraces.
The Bahamas’ growing attraction as a funds centre received a further boost early this year when it achieved Signatory A status under the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (the MMoU) of the International Organisation of Securities Commissions (IOSCO). With this achievement, The Bahamas became the first independent country in the region with IOSCO “A” Status.
Being a signatory to the MMoU is a statement of a jurisdiction’s commitment with regard to mutual assistance and the exchange of information for the purpose of enforcing and securing compliance with the laws and regulations of the relevant jurisdictions.
There is the ability to license standard funds for retail investors, and professional funds for sophisticated investors but The Bahamas’ commitment to meet the evolving requirements of a global market is balanced by its equal dedication to the creation of highly specialised investment vehicles, like the SMART Fund.
The SMART©Fund is a shining example of the jurisdiction’s reputation for ingenuity in the private investment funds space. The concept responds to the rising demand for alternative investments which offer more user-friendly, turn-key investment fund solutions for complex money management. It provides industry participants with the means to provide clients with innovative, progressive and flexible structuring solutions via a regulated vehicle, domiciled in a premier international financial centre. For example, where investment funds are essentially private arrangements such as private equity or a family office fund, they will now enjoy a supervisory environment appropriate for the limited, specific nature of the project and will not suffer the ‘broad brush’ regulatory approach, which is unavoidable elsewhere.
According to the Securities Commission of The Bahamas (“SCB”), the sector regulator, the number of active SMART funds has more than doubled in the past five years. “This rapid growth is a result of the many benefits derived from investing via SMART Funds, such as streamlined reporting, flexibility, operational efficiency, risk management efficiency, transferability and transparency, often at a relatively immaterial cost,” said Brian Jones, President of the Bahamas Investment and Business Securities Association.
SMART Funds are used in many types of investment structures, including private family funds for succession and wealth planning structures. Another common use is as an incubator fund for asset managers to test new strategies or establish a track record. SMART Funds also prove practical for use as regulated special purpose vehicles, to capture limited duration or event-driven investment opportunities.
There are now seven distinct risk-adjusted SMART Fund templates or models, giving The Bahamas a unique instrument adaptable to both the structuring needs of high net worth private investors and to the requirements of the alternative investment industry
The latest version, formally the Super Qualified Investor Fund but popularly dubbed Model 007, was officially approved by the Securities Commission of the Bahamas on August 10, 2012. Such funds may be offered on a private placement basis to up to 50 ‘super qualified’ investors who must make a minimum initial investment of USD500,000. This investor-centric fund model is designed to better accommodate professional asset managers, institutional investors and ultra-high net worth individuals, all of whom stand to benefit from the risk-based approach to structuring and operating private placement funds available in The Bahamas.
Similar to the other SMART Funds, for the SFM007 the structure could be operational in a matter of weeks (post due diligence), where a concise term sheet is issued. A great attribute of these SMART Funds is that their streamlined set up does not, by any means, diminish their robustness as properly organised and duly regulated investment funds. Moreover, depending on the profile of the fund and its investor base, the SFM007 manager may wish to adopt an elaborate offering memorandum.
What sets this SMART Fund model apart, other than the expanded investor pool, is that the directors of the Fund choose the appointment and location of the fund administrator, similar to the appointment of any other service provider. Such dynamics are crucial because these decisions tend to be driven by many factors, including the fund’s investment strategy, investor profile, cost, time zone, etc. In addition, the administrative functions may be expressly contracted by the SFM007 to any reputable service provider in any approved jurisdiction on an “as needed basis”. Thus, any functions not so delegated remain the responsibility of the directors.
A private placement fund may invest in traditional or alternative investments, and its objective may be simple or complex. On one hand, the SFM007 may serve to facilitate a complex solution such as serving as the master fund for an onshore feeder fund. This set up allows onshore funds to enhance their performance by accessing global markets via a regulated investment vehicle while diversifying their onshore portfolios. On the other hand, the SFM007 is simply ideal for a single-manager private placement fund offered to one or more qualified investors.
A dual licensing regime exists in The Bahamas. The SCB is authorised to license all classes of funds and Unrestricted Fund Administrators (UFA) are authorised to license funds offered only to accredited investors. A restricted fund administrator cannot license but only administer funds. Irrespective of who licenses the fund, the fund must operate in a manner that is consistent with its constitutive documents and adherence to Bahamian law, specifically the Investment Funds Act and anti-money laundering legislation.
All administrators of Professional, Standard and Registered Foreign Funds have a statutory duty to take reasonable efforts to ensure among other matters that a fund adheres to its constitutive documents and is not carrying on its business in a manner which is – or likely to be – prejudicial to investors.
The combination of SCB or administrator oversight, depending on the fund, creates a high degree of flexibility for fund administration in The Bahamas while providing an appropriate level of corporate governance for the funds industry.
An Unrestricted Fund Administrator (UFA) in The Bahamas has several advantages within its regulatory scope. It can, for example, complete the necessary due diligence review of fund parties and coordinate with onshore and offshore parties for the completion of the offering memorandum and constitutive documents. The UFA can also certify fund compliance within Bahamian law and license the fund under its own internal authorisation procedures.
These capabilities provide the UFA with competitive advantages within a regulated environment. For example, it can market a fund within 24 hours of company incorporation and the completion of licensing procedures; and can also administer funds domiciled in recognised jurisdictions from The Bahamas without any further licensing procedures other than a filing notification with SCB.
Funds domiciled in The Bahamas must have a Bahamian fund administrator; certain functions can be delegated to another licensed financial institution with the agreement of the fund administrator.
Enhancements to the regulatory framework
To further strengthen the legislative framework, the Commission in 2010 amended the country’s Investment Funds Act, providing significant business enhancements such as (i) removing the nexus of the investment manager/adviser as a requirement for the licensing of a fund; (ii) amending the definition of the “Professional Fund” to expand its application by repealing the requirement that investors in the fund reside in a prescribed jurisdiction and expanding the categories of persons that qualify to invest in a professional fund; (iii) amending the definition of “Recognised Foreign Fund” to allow funds that are not licensed or registered in a prescribed jurisdiction or listed on a prescribed exchange to register as a Recognised Foreign Fund, provided that the investment manager/advisor to the fund is regulated in a prescribed jurisdiction; and (iv) lengthening the time for the submission of audited financial statements.
Additionally there was an amendment to the Commission’s Fast Track Guidelines, allowing all funds offered to accredited investors to make applications for licensing under the expedited process. These guidelines provide direction for the fast tracking process of applications for investment funds that target accredited or high net worth investors. Under this process the SCB guarantees approval of these categories of investment funds within 72 hours of receipt of a complete application, complementing the fast tracking process that already existed for Unrestricted Fund Administrators (UFA) to license Professional and SMART©Funds.
The Bahamas’ funds industry has experienced steady growth based on funds that are domiciled in the country and a large number of funds that are domiciled elsewhere but are administered from the jurisdiction. The Bahamas has the ability to grow the work force required to provide services and this has led to an increased focus on administration of funds, notwithstanding the domicile of the fund.
Speed to market is a factor that was recognised several years ago by the SCB when it published its Fast Track guidelines, which are updated as necessary to meet market demands.
Global and the niche investment managers have found both the infrastructure and human capacity that will allow their asset management and investment funds to operate successfully from The Bahamas.