In this third installment of our review of the Bahamas’ new financial services law, we look at the introduction of standards for the regulating, monitoring or overseeing of the activities of fund managers and custodians.

At the moment, these areas are largely outside the scope of the investment funds legislation of the Bahamas and beyond the regulator's purview. Christina Rolle of the Securities Commission of the Bahamas told a recent meeting: “With respect to the investment manager, the current regime which exempts fund managers from regulation is no longer sustainable in the light of changes to the IOSCO principles and adjustments proposed to the structure of the industry. The Bill mandates the appointment of an investment manager by every Bahamas-based fund except one whose investors are (i) the fund manager or parent or subsidiary of the fund manager or (ii) a feeder fund that invests 100% of its assets in a master fund.

“Furthermore, the draft Bill proposes a dual system of regulation that will implement the risk-based requirement for either the registration or the licensing of the fund manager. Generally speaking, fund managers of Bahamas-based funds which are being sold to accredited investors but will need/require registration, while managers of Bahamas-based funds being sold to non-accredited or retail investors will require the fund manager to be licensed. It is also important to note that the trigger for the requirement for [the] licensing and registration of the fund manager is the provision of investment management services to a fund. They're treated whether the services are provided by the Bahamian fund manager to local funds or to any fund in the jurisdiction other than the EU. Additionally, a Bahamas-based fund may appoint a fund manager that is licensed or registered in a prescribed jurisdiction.

“The draft Bill further provides that where an investment fund managed by the fund manager does not appoint a custodian, the investment manager will be obliged to ensure that the usual custodial obligations for holding assets are carried out as appropriate.”

These specific obligations are in section 65(2) of the draft Bill.

In cases where licensing is required and the fund manager is licensed in the Bahamas, there will of course be requirements for licensing that relate to capital and fitness and propriety. The specific requirements are provided in the draft regulations.

Licensed fund managers, Rolle revealed, will require initial capital of $125,000 but there is no capital requirement for the manager that is only registered.

Again, the application process and forms required are provided for in Schedule 3 and remain largely unchanged. In addition, the regulations establish restrictions that apply to a manager that wants the commission to register it. Regulation 27 says that the commission may register a manager as long as it is satisfied (i) that the applicant only manages a professional fund or smart fund where the AuMs do not exceed $100 million; or (ii) manages a professional fund or smart fund fund where the AuMs do not exceed $500 million and the investment fund does not use ‘leverage’ (debt) or restrict redemptions by investors within a five-year period.

The regulations further oblige the fund manager to tell the commission if it is unable to ensure compliance with the regulations and to take immediate steps to remedy the situation. Furthermore, the duties of an investment manager have recently been transferred from the Bill to Regulation 28 and include:

• acting honestly, fairly and with due skill and diligence;
• acting in the best interests of each investment fund, the investors and the integrity of the market;
• being appropriately resourced for the proper performance of its duties;
• taking reasonable steps to avoid conflicts of interest or, if they are unavoidable, identifying, managing and monitoring them and, where applicable, disclosing them, presumably to the investors;
• complying with regulatory rules; and
• treating all investors fairly.

Custodians and the regulators

The Bill also introduces regulatory oversight in relation to custodians. Rolle was at pains to emphasise the fact that there was to be no requirement to licence or register custodians separately from the investment fund. A custodian is to be ‘required’ unless the commission wants to make an exception. The custodian is to be independent of the administrator, the investment fund manager and the operator of the fund.

Because the Bill largely establishes the required regulatory requirements applicable to the custodian, the regulations only provide for the qualifications of the custodian. In Regulation 53 a custodian must be a bank and trust company licenced under the Bank and Trust Companies Regulations Act, or a bank, trust or other financial institution licensed in a prescribed jurisdiction that meets certain net worth requirements.

The Bill requires the appointment of operators to each fund, the nature of which will depend on whether the fund is a company, partnership, trust or ICON (Investment Condominium). The responsibility for the operation of the fund should rest on these parties. In some limited circumstances, it should bestow a fiduciary responsibility on the fund manager.

The regulations include provisions for qualifications of operators, mainly to ensure that they are fit and proper and independent of the administrator. The duties of the operator have been realigned and the relevant regulation proposes to make the operator responsible for ensuring compliance with the Act and the fund's constitutive documents; for ensuring that the net asset value (NAV) is calculated properly in accordance with standards in fund documents; for ensuring adherence to borrowing limited...limits; for ensuring that audits are conducted as required by law; and for maintaining books and records of the fund properly.

The Alternative Investment Fund Managers’ Directive

Bahamian managers of EU funds are subject to the requirements of the AIFMD, which imposes some regulatory requirements on non-EU AIFMs that manage or market AIFs in the EU. The Bahamas has already executed 27 memoranda of understanding with EU member-states in order to facilitate participation in their respective countries. Rolle revealed that the Bahamian Government was working to conclude MoUs with Germany and Italy.

She added: “This is part of the broader regulatory regime for AIFs in the EU. The directive provides for an EU passport for non-EU AIFMs. This passport became a requirement for industry participants beginning in 2016. The passport enables non-EU AIFMs to enjoy the same rights and to have to meet the same obligations as EU-based AIFMs.

“Although the directive does not require that the non-EU country where the 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.

“The draft Bill is seeking to address the qualifications for EU passporting. As a result, the proposed legislation includes extensive AIFMD provisions which a prominent British law firm has reviewed. 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 its responses. Actually, the response was that as soon as they get through Brexit, they'll turn some attention and resources to passporting.

“The draft Bill provides a framework for a grant of a distinct licence to managers operating in the EU or managing funds from the EU. This framework is embedded through the legislation and provisions related to AIFMs are clearly identified as such and operate wholly independently of those provisions relating to managers operating in or from the Bahamas.”

The draft Bill sets out rules for licensing alternative investment fund managers and states that an AIFM licence will be required when a person intends to market an investment fund or an EU AIF in the EU with an EU passport. The new law will require the Securities Commission to satisfy itself that applicants meet the various criteria of licensing, including standards relating to capital and fitness and propriety, and also ensure that each AIFM has a principal registered office in the Bahamas.

Rolle ended by saying: “It is important to note that the AIFMD specifically requires that a fund which intends to offer its equity in the EU must appoint no more than one AIFM and section 31 empowers the commission to license such an AIFM. To establish a complete regulatory regime compliant with the directive, the draft Bill provides various ongoing reporting obligations for AIFMs. The draft Bill was approved by the cabinet on 27 November, subject to some minor changes to it.

“There are seismic shifts intended in the regulatory regime in this industry, primarily in redefining Bahamas-based funds and the resulting shifts in the trigger for licensing, the opening up of the fund administration space to impose regulation on custodian fund managers, and the development of a regime to enable AIFMD passporting.”

For earlier parts of this review of the upcoming Bill, click here and here.