The Bahamas: Investment Funds Enhance Jurisdiction Offering

Furthermore, our political, regulatory and legislative landscape has always been dedicated to ensuring that The Bahamas continues to enhance, develop and grow its financial services sector. I can say emphatically, and with assurance, that Bahamian investment funds have enhanced the total jurisdiction offering and have helped to make The Bahamas a strong choice for international financial services.

The Investment Funds Act, 2019

As we look to the future for The Bahamas’ investment fund offering, the most significant upcoming development is the new Investment Funds Act, 2019 (IFA), which will come into force of law shortly, and aims to level the playing field of global fund services in The Bahamas. Per Section 2(a) of the IFA, the legislation seeks to “modernise the regulatory framework for investment funds in The Bahamas to achieve international standards and best practices of the investment funds industry”.

There are three key initiatives proposed in the IFA that will continue to enhance The Bahamas’ product offering:  

• The removal of onerous governance burdens such as fund governance. Currently these responsibilities fall to fund administrators under the Investment Fund Act, 2003 (IFA) but will now become the duty of funds directors (or trustees or general partners) and fund managers under the IFA.
• The clarification of the role of fund managers and operators, which were previously somewhat nebulous.
• The introduction of legislation for the cooperation of Bahamian funds and fund managers with regard to the connection to the European Union of Alternative Investment Fund Managers and Directives (AIFMD), Alternative Investment Funds Managers (AIFM), Alternative Investment Funds (AIF), and AIFMD Custodians.

Bahamian investment funds and investment fund managers with current or intended business in the Europe Union will greatly benefit from The Bahamas’ clear and deliberate implementation of the directive into law. The impetus for the inclusion of AIFMD is simply because the European Union has already addressed the harmonisation of investor protection and marketing within the Union through the AIFMD. The eventual elimination of non-EU jurisdictions, like The Bahamas, from participating and marketing to professional investors in the EU without the corresponding regulations and regulatory supervision was imminent. Therefore, the IFA is strategically drafted to make appropriate legislative change which mirrors AIFMD and thus, when enacted, should allow eligible AIFMs domiciled in The Bahamas to market AIFs to EU-based professional investors.

Memoranda of Understandings

As an important pre-requisite to this initiative, the Securities Commission of The Bahamas (SCB), has established Memoranda of Understandings (MOUs) with EU members through the supervision of the European Securities and Markets Authority (ESMA) on behalf of EU Member States. These MOUs have been established with all EU countries (with the exception of Italy and Slovenia), and signify the first step in levelling the playing field for Bahamian AIFMs and AIFs. Once the IFA Act is enforced, Bahamian AIFs should be treated in the same manner as EU-domiciled funds and the marketing of Bahamian AIFMs, including hedge funds, private equity and real estate funds, should be allowed in the EU.

Under the IFA, AIFMs that are domiciled in The Bahamas and wish to market in the EU, or manage EU domiciled funds from the Bahamas, will have to be licensed by the SCB in accordance with Section 27 of the Bill, and in a manner prescribed by the SCB. A central tenet of the IFA with regards to AIFMD, AIFM and AIF is that the SCB will be lawfully obligated to regard the rules of AIFMD in the oversight of the Bahamian-based AIFM and ensure that the supervision is akin to that of EU Member States. Hence, among other requirements, quarterly reporting to ESMA will be statutorily required where the Bahamian AIFM is marketing and/or managing an AIF in European States.

The IFA further requires the AIFM:

• To meet certain initial and ongoing capital requirements.
• To implement operational policies.
• To secure indemnity insurance.
• To provide reporting to the SCB.

Notwithstanding the requirement of AIFMD, the tenor of the IFA seeks to make the investment manager, and therefore also the AIFM, more responsible and accountable.  According to the IFA, additional capital will be based upon a formula using the value of funds managed in a portfolio. The required amount of indemnity insurance needed by an AIFM will be evaluated against risk and liability due to professional negligence. In addition to the stricter requirements detailed above, AIFM must also  maintain adequate and proper human and technical resources; proper internal controls; proper documented controls to safe-guard and protect electronic data processing; sound books; and appropriate records. Under the new IFA, unprofessional investment managers will simply not be allowed to operate in The Bahamas and will certainly not be able to prospect using Bahamas investment fund vehicles as marketing structures for European investors.

Provisions for Delegation

Notwithstanding the high level of regulation and supervision by the SBC, Sections 88 through 90 of the IFA allow an AIFM to delegate some of the functions to a third party. The AIFM must first justify to the SCB why the delegation is objectively required and, after clear justification, the AIFM must demonstrate that the delegate has not only the ability, but also the resources to perform the function or functions delegated. In addition, the delegate must be fit and proper and must be able to be supervised by the SBC without interruption. Further, the AIFM must be able to monitor and give instructions directly to the delegate without any encumbrances and will need to be able to revoke the delegation with immediate effect for, and in the best interest of, investors.

Most importantly, the essence of the delegation cannot give rise to a sham where the AIFM effectively becomes a ‘letter-box entity’. The AIFM will be prohibited from delegating portfolio and risk management functions to an AIMFD custodian or to an eligible entity unless the delegate has “functionally and hierarchically separated its portfolio management or risk management functions from its other potentially conflicting functions, and the potential conflicts of interest are properly identified, managed, monitored and disclosed to the investors of the investment fund”.

The IFA further enhances The Bahamas’ product offering by inclusion of legislation that defines the role of the AIFM Custodian. For the purpose of AIFMD and per Section 91 of the IFA, only a) banks and trusts regulated by the Banks and Trust Companies Regulation Act (Ch. 316); b) person registered under the Securities Industry Act, 2011; c) similar regulated entities, with ongoing supervision in a prescribed jurisdiction; and d) AIFMD custodians authorised by a competent authority in a EU Member State, can perform as custodians under the new IFA. The IFA seeks to align custody rules for Bahamian AIF with those of EU AIF by clearly laying out provisions that deal with AIFM conflicts of interest, cash flow monitoring, compliance, and delegation functions; as well as addressing numerous reporting and compliance requirements to protect and safeguard the European investor and the overall reputation of The Bahamas as a jurisdiction.

Innovation Nation: The ICON Fund

Five years ago, The Bahamas, in keeping with its spirit of innovation, launched a novel and ground-breaking piece of legislation which greatly enhanced our country’s product offering, and was the first of its kind in any IFC. In contrast to the above provisions, developed for the benefit of EU investors and investments, the target segment here was Brazilian multi-market funds and the manner in which they were structured. In order for The Bahamas to partner with the Latin American market and, more specifically, the Brazilian funds market, the idea of creating an Investment Condominium (ICON) structure to work along with the Brazilian investment fund market was proposed. Thus, a civil law product was introduced in a common law context in order that the Latin American market could easily understand the workings of this structure.

The ICON is a legal structure underpinning the investment fund in the same way that investment funds are otherwise legally organised as companies, exempted limited partnerships, and unit trusts. Once established and licensed, the ICON structure bears all the attractive features of a fund, including, but not limited to, asset planning, pooling of resources, and family investment planning. The ICON’s purpose is tied to its operation as an investment fund and is defined as the contractual relationship subsisting between participants agreeing to the pooling of assets for the purpose of investing those assets collectively.

Similar to the Brazilian condominium, the ICON possesses no distinct legal personality, save that for the purposes of the legislation it is able to hold assets in its name; enter into agreements in its name; and sue and be sued in its name. The lack of legal personality is addressed by the appointment of an administrator that is empowered to transact in its name and represent and bind the ICON.

Getting in Formation

From the Administrator’s perspective, the ICON structure is not strictly a company, nor a partnership, but some hybrid of both. Similar to a corporation with articles and memorandum of association, or a limited partnership with a partnership agreement, the ICON is organised by its Governing Regulations and evidenced by a Certificate of Establishment, which is signed by its initial participants. In other words, while corporations have shareholders and partnerships have partners, ICONs have participants. Further, the ICON has a Governing Administrator that is responsible for “corporate governance” (for the lack of a better expression) of the entity – similar to how a company has a director and a partnership.

Another key role in fund establishment is the Fund Administrator. Under the ICON structure, this role is referred to as the General Administrator. This counterparty is responsible such tasks as net asset value calculations and registrar and transfer agency functions.

Use of the ICON Fund

ICON funds have been established as private equity funds, traditional equity funds, and hedge funds, as well as for various asset classes - not limited to traditional bankable assets. ICON- based funds have also been able to open brokerage and custody accounts in many jurisdictions and with many global financial institutions.  Based on our corporate experience so far, the quirkiness of this hybrid structure of common law and civil law has neither prohibited it from establishing itself as a mainstay Bahamian product, nor from being accepted by mainstay financial institutions.

From a technical perspective, the regulations require that, upon establishment, the ICON indicates that it was established exclusively for the purpose of an investment fund under the Bahamas Investment Fund Act, 2003. The regulations further describes inter–alia, the provisions for the dissolution of the ICON, the number and currency of participation interests to be issued, the authority to issue classes and series, and the manner in which material agreements and the governing documents are to be formatted. The offering document of the ICON would be typical of any fund and, among other things, details the methodology of fees, including performance and management fees. It also provides clear details of the risk associated with the investments and details of the subscription and redemption process.

Participants of an ICON are required to provide standard due diligence information, and the general administrator must also supply acknowledgement, confirmation of investment, and a statement of participation.

Committed to Meeting Client Needs

The Bahamas has been extremely progressive in the investment funds space, offering a significant number of products designed to meet unique client needs and speak to specific demographics. While these structures vary considerably in a superficial sense, they share a common purpose; to meet the bespoke demands of various clients. As a participant in the financial services industry of The Bahamas, it is evident to me that our product offering is intended to meet the demands of the global market. The Bahamas’ investment fund product offerings, including the ICON structure, constitute a compelling variety of effective and innovative solutions and continue to promote The Bahamas as a jurisdiction of choice for global professionals.

Antoine Bastian
Antoine W. Bastian currently serves as the Executive Chairman and CEO of Genesis Fund Services Limited, a licensed Investment Fund Administrator in the Bahamas and the CEO of GFS Financial Services LTD, an affiliate fund administrator in Singapore. Antoine Bastian earned his B.Sc. in Accounting from Indiana University in 1989. After university, Antoine joined Deloitte and Touché, Nassau Bahamas and subsequently qualified as a Certified Public Accountant. Shortly thereafter, Antoine was a mutual fund administrator with MeesPierson Fund Service and after that a manager at St. Matthew Investment Fund Accounting Limited... a Bahamian fund administrator that was associated with Michael J. Liccar & Co, based in Chicago, Illinois. Subsequent to this position, Antoine served on the Board of The Private Trust Corporation Limited and as Manager of its Mutual Fund Department, Genesis. In 2004, the department was relaunched as an independent entity, Genesis Fund Services Limited. Antoine also currently serves on numerous boards, inter alia, the Bahamas Financial Services Board, The Nassau Cruise Port Board, and the Yes Foundation. He also serves as the priest warden and a member of the vestry at the Church of the Most Holy Trinity.