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GT NEWS & INSIGHTS
LEGAL UPDATE: Investment Funds in The Bahamas
A. FUND FORMATION ty, real estate and distressed debt. A large majority of investment funds on the register in The Bahamas 1. Is your jurisdiction frequently used by advisers and are private funds for a small number of investors, managers for the formation of investment funds? typically employed by family offices and related What types of fund are most commonly structured? investors. Of these private funds, management of family wealth, tends to be the primary reason for The Bahamas is frequently used by advisers and establishment. There are, of course, a number of managers for the formation of investment funds. institutional funds with a long-term commitment to Presently there are over 800 licensed and regulat- The Bahamas. The new Investment Funds Bill (the ed investment funds, with numbers steadily increas- Bill) is set to attract more institutional clients with a ing year after year. focus on investment management and custody.
The Bahamas’ regulatory framework is flexible and 2. Is your jurisdiction generally used for the raising of accommodates a wide variety of strategies includ- capital from investors internationally or within your ing pure hedge funds, money market, private equi- jurisdiction?
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Due to exchange controls in The Bahamas, estab- Under the current Investment Funds Act, 2003 (IFA), lished investment funds typically raise capital from investment fund managers need not be licensed or international investors outside of The Bahamas. In- registered in The Bahamas. However, once enact- vestment funds can be organised to raise capital ed, the Bill will require that all investment fund man- domestically, subject to the approval of the Ex- agers be licensed or registered in The Bahamas. change Control Department of the Central Bank of The Bahamas (the Central Bank). Whether this ap- Licensing will be required for investment fund man- proval is necessary will depend on the currency of agers of standard funds or a non-Bahamas based the investment fund. investment funds (NBBF) whose sole nexus to The Bahamas is the investment management of the 3. Please describe the common process for setting up NBBF. investment funds in your jurisdiction and the core documents used (separately for each fund type). Prior to the promulgation of the Commercial Entities (Substance Requirement) Act, 2018 (CESA), it was An investment fund can be licensed by the Securi- not common to have a fund manager carrying out ties Commission of The Bahamas (the Commission) significant activities in The Bahamas. This was due to or, save for a standard fund, by an unrestricted in- a carve out in the Securities Industry Act, 2011 (SIA) vestment fund administrator in The Bahamas. which exempts fund managers from requiring to be licensed as a registered firm if the fund manager While The Bahamas has several different types of was incorporated under the laws of The Bahamas investment funds (which are discussed in further and solely managed investment funds established detail below), there are common documents re- under the IFA. quired for all registration types, these include: The CESA requires that an investment fund manag- • An application form. er that is incorporated or registered in The Bahamas • An offering memorandum (or term sheet) which under the International Business Companies Act, complies with the disclosure requirements in 2000 (IBC Act) demonstrate economic substance Schedule 1 to the Investment Funds Regula- in The Bahamas. Economic substance is comprised tions. of a two-pronged test, namely that: • A subscription agreement which complies with the requirements in the Investment Funds Act. • Core income generating activities (CIGA) are • Directors authorising resolutions. carried out in The Bahamas. • Constitutive documents. • That the investment manager is directed and • Due diligence on directors, senior officers, sub- managed in The Bahamas. stantial shareholders, promoters, investment manager or investment adviser. CIGA includes: • Certificate of compliance, issued by Bahamian • The taking of business decisions on the holding counsel. and selling of investments. • The prescribed application fee. • Calculating risks and reserves. • Taking decisions on currency or interest fluctua- The Commission, in their discretion, may also re- tions and hedging positions. quest any other documents they feel are necessary • Preparing relevant regulatory or other reports to license or register an investment fund. for government authorities and investors.
4. Regulatory: do fund structures in your jurisdiction Given that a fund manager need not be incor- have to be managed in your jurisdiction, or are porated in The Bahamas to manage a Bahamas they commonly managed in your jurisdiction? fund, the CESA will not affect all fund managers
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who manage Bahamas funds. However, the CESA licensed in The Bahamas are sponsored by Brazilian will impact the significant number of fund manag- managers. A Brazilian-focused, specific mandate ers established as international business companies alternative regulatory test fund template (SMART (IBC’s) for private funds utilised for wealth manage- Fund 007) has driven this overwhelming interest due ment purposes. to the flexibility of the templates and cost effective- ness achieved through the ability of the investors 5. Legal: do investors in funds formed in your jurisdic- to waive the audit. Most recently the investment tion benefit from limited liability? Please describe condominium (ICON) has been developed (as dis- any conditions or restrictions to them enjoying this cussed in more detail below). benefit. Are legal opinions typically given in this re- spect? Bahamas investment funds are also favourably viewed by sponsors from Latin America, specifically Investors in The Bahamas may benefit from limited Peru and Mexico. There are some very important liability depending on the underlying structure of US institutional funds which were attracted to the the investment fund. There are six different types of jurisdiction many years ago and still remain. underlying vehicles which may be used to estab- lish an investment fund. These include IBC’s, do- 8. Please describe any disclosure requirements to in- mestic companies, exempted limited partnerships, vestors with respect to investment funds formed in unit trusts, segregated accounts companies and your jurisdiction. In what circumstances is a PPM investment condominiums. Liability may be limited required to be issued? Please distinguish between either statutorily or contractually. Most vehicles es- fund types. tablished in The Bahamas do accord limited liability to investors, however it is possible to incorporate or The IFA and the Investment Funds Regulations, 2003 register a vehicle where the investors have unlim- (IFR) set out the disclosures to investors which must ited liability. In practice, legal opinions on limited be contained in either an offering memorandum or liability are not given, indeed they are rarely re- a term sheet. quested due to the clear statutory wording of the applicable legislation. An offering memorandum is required for both stan- dard funds and professional funds. A SMART Fund 6. Tax: What is the most common tax regime for in- may elect to adopt a term sheet rather than a full vestment funds (transparent, exempt, special rate scale offering document which includes the perti- or other regime)? nent details of the offering. The following are man- datory disclosures for an offering memorandum: Generally speaking there is no direct taxation ap- plicable to investment funds under the laws of The • Basic details (address of fund, place and date Bahamas, unless the fund holds real estate situated of formation). in The Bahamas. Taxes associated with Bahamas • Investment objectives and restrictions. real estate holdings are borne by the fund, not the • Risks. investor. There is no corporate income tax, capital • Names and addresses of all service providers gains tax or withholding tax in The Bahamas. (including directors/general partners) to the fund. 7. Is your jurisdiction particularly popular with invest- • Characteristics of equity interests. ment sponsors from any particular jurisdictions • Application and redemption procedure. and/or for investment in particular jurisdictions or • Valuation of property and pricing. regions? If so, is there a specific reason for this? • Distribution policy. • Fees and charges. The Bahamas is a popular jurisdiction for Brazilian • Reports and accounts. clients. It is estimated that 60% of the funds currently • Warnings (as prescribed in the schedules to the
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IFR). of the ELP, and in the event that assets are inade- • Other general information. quate, is liable for all debts and obligations of the ELP. The limited partners are not liable for debts and Although not a challenge in some jurisdictions, in obligations, except as provided in the partnership order to substantiate that the investment fund is agreement. At least one general partner is required operating in accordance with best practices, there to be a company incorporated under the IBC Act are some SMART Funds that are choosing to adopt or a person resident in The Bahamas. full scale offering memoranda. This may be advis- able if the parties are not related and the sponsors An ELP is a common structure for US master-feeder want to ensure that there is adequate disclosure of funds with a US entity (usually a Delaware corpora- all material risks. tion) acting as general partner. Limited partnership interests would be subscribed for by feeder fund in- It should be noted that any amendments post vestors who invest all of its assets in limited partner- launch must be filed with the Commission (as appli- ship interests of the ELP. cable) within 21 days. A Unit Trust (UT) is a common law trust managed 9. Describe the typical legal form(s) of investment by a unit trustee. A UT does not possess a legal per- funds in your jurisdiction, key differences between sonality. The trustee represents the fund with units the forms and what the different forms tend to be distributed to investors as evidence of their partici- used for. Please distinguish between fund types. pation in the fund.
There are several types of entities that may be used An ICON was modelled after the Brazilian condo- to structure an investment fund in The Bahamas pri- minium which has formed part of the Brazilian civil or to licensing. code for over 90 years and was developed specifi- cally for the Brazilian market. The ICON is a contrac- An IBC is the most commonly used underlying legal tual arrangement between investors pooling assets entity and is typically structured as a limited liability for the purposes of operating as an investment company. The IBC is flexible, easy to incorporate fund with the fund’s administrator acting for and on and requires no local directors. Unlike a unit trust, it behalf of the fund in all matters. The ICON has no is has a legal personality and is able to sue and be corporate personality, but is deemed to be able to sued in its own name. hold assets in its own name when represented by its general administrator. A Segregated Accounts Company (SAC) can be an IBC or a local company and allows for the statu- 10. Describe the typical regulatory status(es) for invest- tory segregation of assets and liabilities to individual ment funds in your jurisdiction, key differences be- accounts. By way of example, each account may tween statuses and what they tend to be used for. invest in different asset classes, or different strate- Please distinguish between fund types. gies. It would be possible for one account to take a long short strategy while another account may The IFA establishes four classes of investment funds: invest in real estate. The returns of each account standard funds, professional funds, SMART funds, are confined to the investors of each account and and recognised foreign funds. there is no cross-contamination between accounts in terms of liabilities. The standard fund is a highly regulated investment vehicle designed to operate as a traditional collec- An Exempted Limited Partnership (ELP) is made up tive investment scheme. No investor qualifications of one or more general partners and one or more (eg, as net worth or minimum investment) are man- limited partners. The general partner is responsible dated for standard funds and for this reason they for the investment and management of the assets are often used for “retail” funds. Further, there are
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no limits on the number of investors in a standard template will have been proposed by industry to fund. However, because the interests in a standard address market needs. For instance, SMF006 was fund may be so broadly offered, a standard fund implemented as a result of the 2008 financial crisis may only be licensed by the Commission. to enable segregation of toxic assets. SMF007 was introduced to mirror the investment requirements A standard fund must have a full roster of service of the Brazilian Multi-Mercado Fund and was con- providers, including an administrator, an investment sidered to be more institutional-focused than other manager, an auditor and a custodian. templates because of the larger number of inves- tors and the minimum initial investment. Interests in a standard fund must be offered via an offering document, and there are express require- SMART Funds may be licensed by an unrestricted ments as to its contents and the required disclo- investment fund administrator or the Commission. sures. Key features of the SMART Fund regulatory scheme common to each model include the prospect of A professional fund may only be offered to inves- using term sheets, rather than full scale offering tors meeting eligibility requirements under the IFA documents and the opportunity in certain instanc- and may be licensed by an unrestricted investment es for shareholders to waive an annual audit re- fund administrator (which considerably speeds the quirement. The different models of the SMART Fund set-up process) or by the Commission. Eligible inves- are set out below. tors are: SMF001 – investors must be customers of the pro- • A licensed bank or trust company. moter and party to a discretionary management • A registered or otherwise regulated broker-deal- agreement with the promoter. er or firm of security investment advisers. • A licensed insurance company. SMF002 – limited to no more than ten investors who • A licensed or registered or otherwise regulated must all be qualified to invest in a professional fund, investment fund. a majority of whom are afforded the right to ap- • A natural person with net worth (or joint net point/remove the fund’s operators. worth with spouse) in excess of USD1 million. • A natural person with annual income in excess SMF003 – pre-existing exempt fund under former of USD200,000 (or joint income with spouse in legislation; may have no more than 15 investors excess of USD300,000) for the last two years with who by majority can remove operators of the fund. reasonable expectation of the same income for the current year. SMF004 – no more than five investors; an administra- • A trust with total assets in excess of USD5 million. tor is not required. This is the most common vehicle • Any entity in which all equity owners satisfy fore- used for related investors and as an investment ve- going requirements. hicle for family offices. • Any entity with net assets in excess of USD5 mil- lion. SMF005 – no more than five investors who must all be qualified to invest in a professional fund. A SMART Fund is designed to permit innovative and flexible structuring of investment funds. The frame- SMF006 – investor must be qualified to invest in a work allows for any institution to propose a tem- professional fund; used to “side-pocket” toxic or il- plate for adoption as a SMART Fund rule, with spe- liquid assets. cific features distinguishing it from other templates. There must be a valid business case presented to SMF007 – up to 50 investors, each making a min- the Commission for the adoption of a new tem- imum investment of USD500,000 or equivalent. plate. Presently there are seven templates. Each SMF007 was specifically designed to accommo-
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date structuring for Brazilian managers. pected that the Bill will be passed into legislation before the end of Q2. The Bill’s focus is clarifying the A recognised foreign fund is an investment fund duties of directors and administrators; establishing licensed or registered in a prescribed jurisdiction standards that are AIFMD compliant to eventual- and not suspended from operation, which is to be ly allow The Bahamas to qualify for EU passporting offered to investors in The Bahamas. It is deemed and to mandate the licensing and/or registration of Bahamas-based by virtue of its relationship with a fund managers in line with global standards. local service provider. It is required to register di- rectly with the Commission. This category of fund The Removal of Preferential Exemptions Act, 2018 will be abolished when the Bill is enacted. (RPEA) was enacted on 21 December 2018 and addresses the removal of ring fencing provisions. A non-Bahamas based fund is an investment fund The RPEA revokes preferential tax exemptions previ- whose sole nexus to The Bahamas is through its sale ously afforded to IBC’s, executive entities, ELP’s and of interests in or from The Bahamas. An NBBF may ICON’s on the Bahamas Company Register, prior to not have any service providers (e.g. investment the commencement of the RPEA and which were manager, administrator, custodian) within The Ba- deemed non-resident for exchange control pur- hamas. It is required to apply for the appointment poses and thus previously enjoyed an exemption of a local representative, and this representative from all taxes from the date of incorporation/reg- must be approved by the Commission. When the istration, for a period of 20 years. These entities will Bill is enacted, the sale of equity interests will no lon- now lose these preferential exemptions, effective ger create a nexus requiring a representative to be three years from the date of commencement of appointed. Instead, a representative will only be re- RPEA (approximately 2021). quired to be appointed if the fund is administered or managed in or from The Bahamas. Newly incorporated entities will have no express statutory exemption from taxation in The Bahamas. An ICON is a contractual relationship between one The revocation of preferential exemptions is not ex- or more participants who have pooled assets for pected to materially impact investment funds es- the purposes of operating as an investment fund, tablished in The Bahamas. and an investment condominium must be licensed as an investment fund under the Investment Funds The CESA was enacted on 20 December 2018 and Act. It may be formed to operate as an open-end- is expected to impact fund managers (as discussed ed fund (in which participants can call for a re- herein). It is not expected to impact investment demption of their interests) or a closed ended fund funds. (in which they may not). The ICON does not possess legal personality but, when represented by its ad- B. FUND INVESTMENT ministrator, is able to hold assets in its own name, enter into agreements and sue or be sued in its own 12. Describe the types of investors located in your juris- name. diction you predominantly see investing in invest- ment funds (eg institutional investors, high net worth 11. Are there any legal, regulatory or tax legislative individuals, family offices, etc.) changes in process which may impact the current environment? The types of investors in The Bahamas which pre- dominantly invest in investment funds include insti- There are several recent and forthcoming amend- tutional investors, high net worth individuals (HNWI), ments which are applicable to investment funds family offices and retail investors. and fund managers, the most important of these is that the IFA is due to be repealed and replaced Institutional investors, HNWI and family offices that in 2019 with the Investment Funds Bill, 2019. It is ex- are non-resident for exchange control purposes
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may invest without restriction in any investment There are few restrictions on investors investing in fund denominated in any currency other than the funds in The Bahamas. Fund specific investor qualifi- Bahamian dollar. cations are described under the heading Fund For- mation. 13. What legal, regulatory and investment structures do the investors in your jurisdiction prefer to invest in, or The Bahamas has an exchange control regime do they tend to be agnostic? which restricts and regulates the conversion of Bahamian currency and is applicable to those Investors in The Bahamas tend to be conservative, deemed or designated resident for exchange con- valuing fairly liquid investment funds which provide trol purposes. A resident in this context does not stable but lower returns. They tend to be agnostic necessarily indicate a physical presence in The Ba- about structure, unless the structure provides other hamas, as there are a number of individuals and benefits. entities deemed or designated non-resident, even though they are physically present in The Bahamas. Non-Bahamian institutional investors tend to invest Citizens and permanent residents with an unrestrict- in more complex strategies, such as private equity ed right to work in The Bahamas are considered res- funds and hedge funds. Here we see a combina- idents for exchange control purposes. tion of structures such as master-feeder involving a US master fund and a Bahamas feeder fund. Anoth- Should a resident investor wish to invest in an invest- er popular vehicle is the SAC which allows multiple ment fund whose base currency is a currency other strategies to be run in a single fund, with statutory than Bahamian dollars, the investor must seek the protection from cross-class liability and contamina- prior approval of the Exchange Control Depart- tion. An SAC is also highly attractive for achieving ment of the Central Bank. economies of scale with the potential for shared costs and expenses. It should be noted that there have been recent relaxations to these policies issued by the Central For private equity funds in particular, the SMART Bank which now enable resident investors to invest Fund models provide particular advantages. The in certain approved US Dollar denominated funds ability to waive the requirement to perform an sponsored by regulated financial institutions in The annual audit allows the audit to be delayed until Bahamas, without the investor seeking any approv- the occurrence of a liquidity event, which is highly al. advantageous from a cost and administrative per- spective. 16. Please provide an overview of the marketing re- strictions applicable to the marketing of investment 14. Please describe any common legal, regulatory or funds to investors in your jurisdiction. Please distin- tax themes or issues to investors in your jurisdiction. guish between fund types.
There are no significant legal, regulatory or tax is- With respect to marketing restrictions, the IFA ex- sues faced by investors under the laws of The Ba- plicitly states that an investment fund that wishes to hamas. Note that as the majority of funds in The sell its equity interests in or from The Bahamas must Bahamas are organised to raise funds outside The appoint a representative. The Bill contains no such Bahamas, there may very well be tax issues associ- restrictions; the Commission may issue policies or ated with an investor’s home jurisdiction. guidance in the future which address restrictions on marketing. 15. Please describe any restrictions on an investor in your jurisdiction investing in any types of invest- ment funds.
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C. REGULATORY ENVIRONMENT Presently there are no restrictions for a fund manag- er registered in another jurisdiction to provide ser- 17. Describe the current regulatory regime in your ju- vices to a fund in The Bahamas. As discussed herein, risdiction with respect to advice and management the Bill will mandate that a fund manager, whether of investment funds. Include details on the authori- incorporated in The Bahamas or elsewhere, shall be sation or licensing processes, requirements of the required to be licensed or registered in The Baha- regulator, typical timings and any difficulties that mas. are frequently encountered. Under the Bill, if a fund manager is licensed or reg- As mentioned previously, a fund manager or ad- istered in a prescribed jurisdiction, they are only re- viser incorporated in The Bahamas and managing quired to register with the Commission. This registra- and/or advising only Bahamas licensed investment tion process is intended to be light touch. Licensing funds is not required to be licensed or registered un- on the other hand contemplates a full scale appli- der the SIA. There is also no licensing or registration cation process. We expect that the provisions will requirement under the IFA. follow those contained in the SIA, however, we do not have clarity on this process at this time. A fund manager incorporated in The Bahamas which intends to manage Bahamas funds and funds 19. Does marketing of investment funds in your jurisdic- incorporated in other jurisdictions is required to be tion require regulatory approval? licensed. An application is made to the Commission consisting of an application form, due diligence, There is no restriction on the marketing of funds li- business plan containing three year projections censed or registered with the Commission. and all requisite policy and procedure manuals. Fund managers and advisers are required to have There is a general prohibition on the marketing of written policies and procedures addressing AML/ funds (which would include cold-calling, circula- CFT, conflicts of interest, client classification/suitabil- tion of materials which intend to induce a person ity, business continuity and general trading policies. to purchase equity interests in a fund, even on a A straight-forward application typically takes up reverse solicitation basis) which are not licensed or to 90 days; applications may become prolonged registered with the Commission. Under the IFA, an if the intended operations are complex or if there investment fund which intends to sell its equity inter- are even minor regulatory breaches (or investiga- ests in or from The Bahamas shall not offer its equity tions) uncovered by the Commission in the course interests for sale, unless it has appointed a represen- of their due diligence which need to be responded tative approved by the Commission. to and addressed. As a point of practice, if there are any known regulatory issues, these should be However, there is a tolerated market practice fully disclosed at the outset with supporting docu- which has been informally accepted by the Com- mentation which evidences adequate resolution. mission as constituting regulatory policy and this is The Commission is a conservative regulator and has demonstrated by the provisions in the Bill. The Bill demonstrated a preference for licensing and regis- removes the nexus created by the selling of equity tering firms which have a regulated presence in an interests in or from The Bahamas which previously IOSCO A jurisdiction. existed under the IFA. An investment will no longer be required to appoint a representative solely by 18. Describe the territorial reach of the regulator in your virtue of offering to sell equity interests in The Baha- jurisdiction. How easily can a manager registered mas. In the interim, the tolerated market practice is in another jurisdiction provide services to a fund in that equity interests in investment funds which are your jurisdiction? not licensed or registered in The Bahamas may be offered to a limited number of investors who are non-resident for exchange control purposes.
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While there is no restriction on investment funds es- It should be noted that there are presently no for- tablished in The Bahamas accessing fund financ- mal policies or guidelines on the marketing of in- ing or leverage within The Bahamas, the banks and vestment funds. financial institutions do not commonly engage in providing this financing or leverage. 20. Describe the general approach of the regulator in your jurisdiction, for example, whether they are 22. Are there any restrictions, issues or requirements in generally co-operative and open to discuss reg- relation to borrowing? ulatory questions, whether they regularly publish guidance on regulatory matters, whether they tend An investment fund may borrow as part of its over- to be punctual in dealing with matters within ex- all strategy, subject to full disclosure of its ability to pected timeframes, whether they have a history of borrow (including any restrictions and/or thresh- enforcement or what their approach to enforce- olds) being made in its offering document or term ment tends to be. sheet.
Generally speaking, the Commission is co-opera- E. TAX ENVIRONMENT tive in its approach to regulatory questions. There have been challenges in receiving published guid- 23. Describe the tax framework that applies to fund ance on regulatory matters, though they are in- structures and allocations and distributions to in- clined to respond to questions on a case-by-case vestors and to carried interest participants. Include basis. Though this may create issues from a regula- a description of the withholding position. Please tory interpretation and consistency standpoint, the distinguish between fund types. Commission tends to be flexible and pragmatic in its approach. Licensing applications are typically As discussed herein, there are no applicable taxes dealt with punctually, though complex matters can to investment funds or, for that matter, to investors lengthen timelines significantly. under the laws of The Bahamas at this time.
With respect to enforcement actions, the Com- 24. Provide an overview of the tax treaty network of the mission recently published its Examination Priorities jurisdiction and how this impacts the funds industry. for 2019, with a focus on sufficiency of a registered firm’s anti-money laundering and counter terrorist Due to the absence of any direct taxation, The Ba- financing (AML/CTF) processes and the business hamas has no double taxation treaties. Investment conduct and risk profile of systemically important funds are therefore organised using a tax neutral entities. Historically, the Commission’s enforce- platform, typically avoiding double taxation in any ment powers have focused on business conduct event. and consumer protection. It is expected that the Commission will be more aggressive on AML/CTF The Bahamas is party to tax information exchange breaches which is highlighted in their recent pub- agreements and has adopted FATCA and the lished policy on the Assessment of Administrative Multi-Lateral Convention on Mutual Administrative Penalties for Anti-Money Laundering and Count- Assistance in Tax Matters which implements the er-Terrorist Financing Infractions. common reporting standard.
D. FUND FINANCE 25. Describe the FATCA and CRS regimes in your juris- diction. 21. Can funds in your jurisdiction access fund finance for subscription financing and/or leverage? For the purposes of this following section, capital- ised terms used herein shall have the meaning as-
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cribed in the relevant FATCA and CRS guidance always be considered. notes. F. MISCELLANEOUS Under the FATCA and CRS regime, a foreign finan- cial institution (FFI) includes any entity which is re- 27. Are courts or arbitration generally preferred in re- garded as an investment entity. An investment enti- lation to fund documents governed by the laws of ty is any entity that primarily conducts as a business your jurisdiction? one or more of the following activities or operations for or on behalf of a customer: Investment fund documents are generally drafted with clauses which submit disputes to the jurisdic- • Trading in money market instruments (cheques, tion of the Bahamian courts. While this is the prefer- bills, certificates of deposit, derivatives, etc). ence for many funds, The Bahamas is party to the • Foreign exchange. Convention on the Recognition and Enforcement • Exchange, interest rate and index instruments. of Foreign Arbitral Awards and has a strong arbitral • Transferable securities. framework through the Arbitration Act. In practice, • Commodity futures trading. if arbitration clauses are incorporated into the fund • Individual and collective portfolio manage- documents, The Bahamas is not often the venue of ment. arbitration, though it remains a seat of arbitration. • Otherwise investing, administering, or manag- ing funds or money on behalf of other persons. 28. What level of litigation/arbitration has there been • The gross income of which is primarily attribut- locally in relation to investment funds management able to investing, reinvesting, or trading in finan- or investment? cial assets, if the entity is managed by another entity that is a depository institution, a custodial There are few cases which have been heard in institution, a specified insurance company, or the courts of The Bahamas relating to investment an investment entity. funds and investment fund managers. This tends to be an incident of our funds industry largely being The FFI is required to report on its equity interest comprised of private funds. To date, the most com- holders. prehensive analysis of administrators and directors of investment funds in The Bahamas is to be found In the context of investment funds, the fund will like- in the decision of Justice Lyons in Oceanic Bank & ly satisfy one of the above investment entity tests, Trust Limited v MJ Select Global Limited. Although and therefore be an FFI. As an FFI, the investment the applicable legislation during this case was the fund reports on itself for the purposes of FATCA and predecessor to the IFA, the Mutual Funds Act, the CRS, reporting on its equity interest holders. decision is considered to be applicable to the cur- rent duties and obligations of administrators and 26. From an investor’s perspective, describe the tax im- directors under the IFA. The case established the pact on allocations to and receipt of distributions applicable standard of care for directors of invest- by investors (differentiated by type of receipt and ment funds. Of course, the Bill rebalances the re- type of investor) from domestic and international sponsibilities between fund administrators, directors funds, and describe any tax structuring preferences and fund managers; the IFA was generally consid- of investors as a result. ered to place too onerous a burden on administra- tors. There are no applicable taxes to be paid in The Ba- hamas on allocations to and receipt of distributions It should be noted that The Bahamas is a common by investors. Of course, as the majority of investors law jurisdiction and courts lean heavily on prece- in Bahamian funds are not tax-resident in The Baha- dents from other common law jurisdictions which, mas, an investor’s home jurisdiction’s tax rules must
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while not binding, are persuasive in their use. There- 30. Can investors in your jurisdiction give powers of at- fore, despite the dearth of case law, practioners torney in favour of fund managers? If so, please de- are comfortable that courts in The Bahamas would scribe any limitations. generally follow cases in other major common law fund centres, to the extent that there are similarities There are no limitations on an investor providing in our statutes. a power of attorney in favour of a fund manag- er, however we are not aware that this is common 29. Are there any periodic reporting requirements for practice in The Bahamas given the composition of funds in your jurisdiction? If so, is any of the informa- our funds industry. To the extent that an investor has tion publicly available? given an investment manager a power of attorney which allows the manager to exercise discretion An investment fund established in The Bahamas and vote without consulting, this might be restrict- must comply with the annual reporting require- ed by the IFA if the decision to be taken is poten- ments set out in the IFR. These include making its tially prejudicial to the interests of the investor. It is annual audited financial statements available to typical in most fund structures in The Bahamas for investors within six months of the end of the invest- there to be a class of management shares which ment fund’s financial year and producing at least carry voting rights and investor shares which typi- one report to the Commission containing an anal- cally do not. It is also fairly typical for the investment ysis of the fund’s performance. If investors have manager to hold all of the management shares waived the fund’s annual audit, a feature avail- to enable them to make key, strategic decisions able to SMART Funds only, the investment fund must along with the directors. This level of control is dis- give semi-annual performance reports to investors closed in the offering memorandum, such that an and to the Commission in lieu thereof. investor has no expectation of participating in the management of the fund.
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Investment Funds in The Bahamas
For more information contact Ryan Pinder
Ryan Pinder is a partner in the law firm Ryan’s institutional practice comprises regulatory mat- of Graham Thompson and ters including coordination of license applications with member of the firm’s Cor- financial services regulators in The Bahamas; inspec- porate and Financial Ser- tions and investigations, and cross-border inquiries. He vices Practice Group. His also advises on commercial transactions, including re- practice focuses on private organisations, mergers and acquisitions. Ryan is a US client planning and struc- Board-Certified Tax Attorney and has been recognised tures, and regulatory and licensing matters for finan- by Chambers and Partners in the High Net Worth, Off- cial services institutions. Ryan’s private client practice shore Trusts sector. A former Minister of Financial Ser- includes specialization in financial services solutions, vices and Trade in The Bahamas Government (2012 planning and wealth management. He also advises – 2015), Ryan continues to serve in various policy and private clients on matters related to banking, corpo- legislative advisory capacities on recent legislative and rate and commercial law, investment funds, securities regulatory changes in the financial services sector in law, capital markets, taxation, trusts and estate plan- The Bahamas. ning and structuring.
L. Ryan Pinder Partner Graham Thompson T: +1-242-322-4130 Email: [email protected]
[email protected] I www.grahamthompson.com
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