At a recent presentation in the City of London, Christina Rolle, the executive director of the Securities Commission of the Bahamas, gave her British audience an account of the Investment Funds Bill, which the Bahamian cabinet had just approved.

The regulatory body to which Rolle belongs issued the Bill, which is designed to repeal and replace the highly successful Investment Funds Act 2003, in its original form in November 2017. Rolle announced that a total overhaul of the Bahamas’ investment funds regime was nearing completion. She spoke about the development and consultation process for the Bill and accompanying regulations and the status of both.

The appointment of the technical and drafting consultants and the establishment of the Investment Funds Act project team happened in November 2017. The draft Bill was issued for public consultation, with the comment period concluding on 27 February last year. The draft regulations were issued on 13 April, and their own consultative period ended on 15 June.

The proposed legislation

The most noteworthy changes in the Investment Funds Bill relate to the definition of 'Bahamas-based funds' and 'non-Bahamas-based funds,' changes to the triggers for licensing funds, the ability to appoint international administrators without requiring them to be licensed in the Bahamas, the introduction of licensing requirements for fund managers, the regulatory oversight of custodians and the establishment of a new regime with a view to the Bahamas qualifying for a European Union passport in accordance with the Alternative Investment Fund Managers Directive, which the Government hopes will allow Bahamian funds to sell their facilities to HNW investors in EU countries.

Rolle began by putting the proposed regime into context with some important terminology: “Look at the definitions for 'carrying on business in or from the Bahamas' and 'investment fund or funds.' These two definitions as triggers for licensing form the basis of understanding the application of the regime throughout the legislation. ‘To carry on business in or from the Bahamas’ has been clarified to mean a fund that is incorporated or established in the Bahamas, has its governing law as the Bahamas or is offered for sale to retail investors in the Bahamas.

“The definition makes [it] clear that a foreign fund in which, for example, [someone] subscribes as an accredited investor does not have to seek licensing or registration in the Bahamas. In relation to the definition of an investment fund, the current definition was amended to no longer tie the definition of investment fund to its being a Bahamas-based fund. The proposed definition therefore deleted references to a specific nexus between the fund and the jurisdiction. That is, appointing an administrator or manager in the Bahamas."

Funds based in and outside the Bahamas

The first crucial change that Rolle identified related to the definition of Bahamas-based funds and non-Bahamas-based funds and their licensing and registration respectively. The new legislation, she explained, proposes to reorient the definition of Bahamas-based funds as well as to rationalise the regulatory regime applicable to non-Bahamas-based funds.

“The licensing of Bahamas-based funds under the new regime will be the fact of the carrying-on (or the attempt to carry on) business in or from the Bahamas. In the Bill, a fund is considered to be carrying on business in or from the Bahamas if it is incorporated, registered or established in the Bahamas, has its governing law as the Bahamas in the case of a unit trust, or if it invites persons in the Bahamas that are not accredited investors to subscribe to the fund.

“By contrast, under the Investment Funds Act 2003, funds are Bahamas-based and required to be licensed if they are incorporated or established in the Bahamas or the administrative manager or advisor is incorporated or has a place of business in the Bahamas.

“So the Bill removes the nexus of administration or being managed from the consideration of a Bahamas base. This change in the trigger for licensing is to rationalise the basis for licensing so that the funds will be licensed based on the activity being conducted by the fund and not the fact that service providers are physically located and/or licensed in the jurisdiction."

New regulations

The draft regulations contain details of standards, processes and requirements to which these licensees will have to conform in accordance with the new regime. Application forms for all licenses are mentioned in Part 10 of the regulations and provided in Schedule 3 of the regulations.

In relation to the forms and specific requirements for applications by funds based in the Bahamas, Rolle explained that there are no new requirements to be found in the draft regulations. In fact, there are very few changes to the requirements. Those changes offer clarification in language as opposed to changes of substance. In relation to continuing obligations and related requirements and procedures, again Rolle said that there was nothing to report. The draft regulations try largely to re-establish the current standards and processes as they relate to the obligations of funds based in the Bahamas to report information.

The regulations relate to the content of this-or-that offering, ‘constituted documents, ‘circumstances in which the operators of a fund can effect changes to it, standards related to reporting and performance data and advertising by funds based in the Bahamas, obligations to report changes in this-or-that fund to the investors, the format and content of the annual declaration of a fund based in the Bahamas, transfers to and from the jurisdiction and changes in the administrator of a fund.

A lighter touch

Rolle concluded: “The impetus for amending the legislation was about the shift in the final infrastructure of the regime. You'll be pleased to hear that many of the procedure and operating regulatory standards did not require change, because the Regulatory Procedures and Standards Establishment 2003 Regime was largely appropriate.

“Having said that, I can advise that the commission accepted the position of the project team that professional or smart funds that are based in the Bahamas through a corporation should have a lighter-touch oversight. The specifics of what the lighter-touch ongoing regulation will be is being finalised for inclusion in the follow-up draft of the regulations. I can also announce that in September the commission removed the character reference as a requirement for submission in the licensing process. This policy applies to all licensing categories for individuals.”

Funds not based in the Bahamas

Rolle turned to the regulatory regime that the draft legislation envisaged for ‘non-Bahamas-based funds,’ as she called them. In clause 10 of the draft Bill released in November 2017, a non-Bahamas-based fund is defined as an investment fund that is incorporated, registered or established in a jurisdiction other than the Bahamas but shares a connection or ‘nexus’ with the Bahamas because it offers its equity interests for sale to accredited (i.e. sophisticated HNW) investors in the Bahamas or it is administered or managed in or from the Bahamas. She added: “This differs from the definition in the current IFA 2003 as it narrows the potential nexus to the Bahamas which will subject a fund to [a] non-Bahamas-based fund regulatory regime.”

The Act of 2003 is much broader because it says that any fund that is not based in the Bahamas that is being sold in the Bahamas or has any other nexus with (throughout, Rolle said 'to') the Bahamas (including, but not limited to, having appointed a Bahamian custodian, manager or advisor to the fund) is a non-Bahamas-based fund.

The Bill seeks to simplify and rationalise the regulation of non-Bahamas-based funds. Having mulled over the submissions it received from firms when briefing them about the Bill, the regulator has decided not to re-establish the existing requirement for any professional fund sold in the Bahamas to appoint a representative in the Bahamas. It wants, instead, to remove this criterion from the definition of non-Bahamas-based funds altogether. It accepts that this requirement is burdensome. Moreover, it has concluded that any regulatory risk arising from the sale of foreign securities products to accredited investors in the Bahamas ought to be the regulatory burden of the home jurisdiction(s) of those products.

Rolle seemed to confuse past with present as she said of the legislative proposal: “As it now stands, the definition of a non-Bahamas-based fund no longer includes a reference to a fund that is being offered to accredited investors in the Bahamas and is solely linked to a licensee of the commission, that is an administrator or fund manager acting on behalf of a fund that is registered in another jurisdiction. This enables the commission to adequately oversee and monitor the activities of its licensees. There is no requirement for the appointment of a representative and only a notification to the commission by the licensee is required.”

For a continuation of this informative speech, click here.