In this second installment of our survey of upcoming reforms to the Bahamian Investment Funds Act 2003, we explore the changes that the Government wants to make for fund administrators, as told to Compliance Matters by Christina Rolle of the Securities Commission of the Bahamas.

The first chapter of this series looked at the character of 'Bahamas-based funds' and 'non-Bahamas-based funds,' along with changes to the licensing of funds. The next area of fundamental change proposed in the draft legislation, according to Rolle, is the removal of the “nexus of the administrator” as the basis for regulatory oversight. The Bill seeks to eliminate the requirement that a Bahamas-based fund should appoint an investment fund administrator licensed in the Bahamas to provide its principal office. It says, moreover, that an administrator cannot act on behalf of an investment fund unless it holds a licence under the Act-to-be OR it if it is established and operating in a prescribed jurisdiction. In addition, as previously mentioned, the legislation also proposes to remove the category of exempt administrator. The Securities Commission will grant either an unrestricted or restricted administrator's licence.

Rolle said: “The commission accepts that this change is a necessary way of ensuring that the jurisdiction opens itself in order to gain ground globally in this sector.”

Finally, the Bill proposes some slight changes in the existing Act’s licensing requirements to ensure that the directors, officers and senior managers of an administrator have to be scrutinised for fitness and propriety. A compliance officer will have to be appointed for the administrator. Express “physical presence requirements” are to be introduced to ensure that there are two senior officers residing in the Bahamas in the case of the administrator.

By way of an update on these issues, and in reference to International Business Companies, Rolle said that “the commission has reconsidered and backed the proposed restriction that IBCs not be qualified to be licensed as an administrator.”

"The [Securities] Commission has determined to address its concerns about the differences between the way the legislation treats various legal structures. Although based on the ongoing discussions related to BEPS [base erosion and profit shifting] and the need to address ring-fencing in respect to IBCs, the differences between IBCs and companies are companies may soon disappear.”

Oversight of administrators will largely remain the same in that every person who engages in fund administration in or from the Bahamas will be required to hold a licence. There are no substantive changes to the licensing process. The new regulations do propose to establish new requirements – some are brand new and others emanate from certain policies that the Securities Commission favours. In the case of regulation 73, the commission's policy of requiring two directors to be appointed to an administrator is now embedded in the legislation. A new requirement is in the pipeline for the administrator to appoint a chief executive officer as well as a compliance officer. The people who do these jobs are to be ‘fit and proper’ and have specific duties that the regulations prescribe. The duties of the CEO include strategic leadership, fiscal responsibility, risk management, internal controls, business conduct and acting as the chief liaison officer between the firm and the commission.

The commission knows that it cannot interfere in the business considerations of its licensees but nevertheless wants them to meet their regulatory obligations. The duties assigned to the compliance officer by statute all relate to his obligation to ensure compliance with laws, standards and reporting obligations.

The administrator's job

The final and, probably, most significant matter raised in the regulations is the nature of the obligations to be assigned to the administrator. The draft legislation seeks to set fines and outline the nature of the duties and obligations assigned to the various parties whose activities are related to an investment fund. In this regard, according to Rolle, the commission wants a number of duties provided for in regulation 74(1)(a-c and e) to be reassigned to either the operators of the fund or to the investment manager, which she described as “more appropriate parties.”

She went on: “Related to the change in the requirement for the fund to appoint a licensed administrator as its principal office, there is another key change in the legislation [involving the] definition of and role of the administrator as principal office. In the draft the commission addresses the misalignment of duties and obligations under the Act as between the parties related to an investment fund – specifically, the administrator, the investment manager and the directors. The draft legislation changes the definition of principal office, currently in the Investment Funds Act 2003, from meaning the place of business of an investment fund which has ultimate responsibility for the investment fund to [meaning] the address of the regulated person.”

In this regard, Rolle added, it is the intention of the commission that the Bahamas-based fund continues to be obliged to appoint a principal office in the Bahamas to be the address of the fund. The nature of the obligations of the principal office, however, are to be adjusted as the duties of the administrator have been defined in section 54 of the draft to include the following.

• Provide the principal office for an investment fund that it administers in or from the Bahamas.
• Pay the fees for each investment fund for which it provides the principal office.
• Ensure that each party related to an investment fund is fit and proper, as prescribed by the commission.
• Make such reports to the commission, regarding the investment funds for which it acts as the administrator, as the commission may require.

These obligations are clearly limited to administrative duties and no longer include any element of fiduciary responsibility. The proposed legislation now aligns those fiduciary obligations between the fund manager and other operators of the fund.

Rolle explained: “This realignment of responsibilities the commission views as crucial in achieving a 'reset' of the regime to enable the Bahamas to be competitive in the institutional fund space. We recognise [that] the imbalance of the administrator's role versus the investment manager's responsibilities proved too onerous for the administrators of large institutional funds and, as a result, industry has not seen development in this area. By addressing this issue, we believe that the industry can once again vie for position in the institutional space.”

The concluding part of this account will be published shortly. It will look at the Bahamas' plans for reforming the regulation of fund managers and custodians.