In part 1 of this series we discussed in details the functions of governmental and private regulatory bodies which ensure that the investment fund vehicle are compliant with the laws of the Bahamas and the various entities that are legally required to engage in the management and operations of an investment fund. Upon receiving the necessary approvals and licensing the investment fund vehicle may introduce its investment fund program that has been approved to operate by the appropriate regulatory body. The Investment Fund Act of 2003 (hereinafter referred to as ‘the IFA’) governs the establishment and operations of an investment fund and its related activities in the Bahamas. The IFA has created four classes of investment fund, namely: Standard Funds, Professional Funds, Specific Mandate Alternative Regulatory Test (SMART) Funds, and the Recognized Foreign Fund.
Standard & Professional Funds
Under the IFA, a Standard Fund is defined as funds which do not satisfy the requirements of a Professional Fund, SMART Fund, or Recognized Foreign Fund. Similar to operations of traditional collective investment scheme, typical Standard Fund operates by either issuing or has equity interest in the purpose, or effect of which is the pooling of investor funds with the aim of spreading its investment risk and achieving profit or gains from the acquisition, holding, management, or disposal of investments. Licenses for Standard Funds are granted solely by the Securities Commission of The Bahamas and are considered highly regulated due to the fact that Standard Fund programs are offered to the general public.
Unlike Standard Funds, Professional Funds can be licensed by the SCB or an Unrestricted Investment Fund Administrator, the licensing process of which is faster than the licensing process of the Standard Fund. Professional Funds are considered to have a more sophisticated level of investors as the IFA restricts the provision of this license to investment vehicles hosting the following categories of investors, namely:
- Any bank or trust company licensed under the Bank and Trust Companies Regulations Act or similarly licensed in a prescribed jurisdiction, whether acting in its individual or fiduciary capacity;
- Any registered broker – dealer or firm registered as a securities investment adviser under the Securities Industry Act which maintain a minimum of B$120,000.00 of regulatory capital, or is a broker – dealer or firm of securities investment advisers registered in a prescribed jurisdiction;
- Any insurance company licensed under the Insurance act or licensed in a prescribed jurisdiction;
- Any investment fund licensed or registered under the Investment Fund Act or regulated in a prescribed jurisdiction;
- Any natural person whose individual net worth, or joint net worth with the individual’s spouse exceeds B$1,000,000.00;
- Any natural person who had an individual income in excess of B$200,000.00, or joint income with that person’s spouse in excess of B$300,000.00, in each of the two most recent years, and has a reasonable expectation of reaching the same income level in the current year;
- Any trust with total assets in excess of B$5,000,000.00;
- Any entity in which all the equity owners satisfy one of the above requirements;
Constitutive & Offering Documents
The Investment Funds Act requires all Standard and Professional Investment Funds are required to have both Constitutive and Offering Documents. Constitutive Documents are defined by the Act as the principal documents governing the formation of the investment fund, and includes the trust deed in the case of an unit trust, the memorandum and articles of association of a company, and the partnership agreement of a partnership, and all material agreements. The Investment Fund Regulations provided specific instructions describing the particular information and supplemental documents pertaining to the Constitutive Document that are required to be submitted to the SCB, which can be found here.
An Offering Document is defined by the Act as a document or series of documents on the basis of which:
- equity interests in the investment fund are offered for sale, or;
- persons are invited to subscribe for, or purchase equity interest in the investment fund, but does not include any other notice, advertisement, letter or other communication used in connection with the offer for sale of any equity interest in the investment fund or the invitation to any person to subscribe for or purchase any equity interest in the investment fund if before the offer or invitation is accepted or taken up the prospective investor is given the opportunity to consider an offering document containing the information prescribed in the Act.
According to the IFA, Offering Documents must describe the equity interests in all material respects, contain the prescribed details, and contain other information as is necessary to enable the prospective investor in the investment fund to make an informed decision as to whether or not to subscribe for or purchase such equity interest. Unless it is exempted from providing this information, investment funds, save for the foreign recognized fund, are required to file with the Securities Commission of the Bahamas a current Offering Document.
In the event that an investment fund hold a continuing Offering Document of equity interest to which its administrator, operator, or promoter is made aware of any material information that affects the Offering Document, it must file with the SCB an amended Offering Document in the within 21 days in the form of a supplement or sticker. Such material information includes the changing of the investment fund’s registered or principal office, change of the investment fund operator, or failing to notify the SCB of any amendments to its Constitutive or Offering Documents. The Investment Fund Regulations also provide specific instructions describing the particular information and supplemental documents pertaining to the Offering Document that are required to be submitted to the SCB.
Self – Administered & Recognized Foreign Funds
A Self – administered fund is an investment fund administered by its own operators who are responsible for the functions of the fund’s administrator. According to the Investment Fund Act only the SCB can license a Self – administered fund, and where the principal office of the self – administered fund is outside of the Bahamian jurisdiction the investment fund must have a place of business in the Bahamas where duplicate corporate and accounting records are available. Operators of the self – administered fund are restricted from dealing with the fund as a principal.
Recognized Foreign Funds are not required to be licensed in accordance with the Investment Fund Act but must be registered with the SCB. In order to be registered as a recognized foreign fund, the fund must be licensed or registered in a prescribed jurisdiction or has submitted evidence of its listing on a prescribed securities exchange (i.e. London Stock Exchange, New York Stock Exchange, Bermuda Stock Exchange, etc.) and has paid the required fees to the SCB and has submitted information of the investment fund within thirty (30) days of the date of commencement of its operations as a Bahamas based investment fund.
Specific Mandate Alternative Regulatory Test (SMART) Funds are considered to be one of the industry’s most innovative financial products which offer more flexible and user friendly investment fund solutions for the management of assets. It is defined by the Investment Fund Act as an investment fund established by the Securities Commission as a Specific Mandate Alternative Regulatory Test that satisfies certain prescribed parameters and requirement of a category, class or type of investment fund previously approved by the SCB. At present there are Seven (7) established SMART Funds, the latest version, formally the Super Qualified Investment Fund and now called Model 007 was officially approved by the SCB in 2012. As its definition suggests, it is possible for other SMART Funds to be created by financial institutions or professional advisers, which may submit a written proposal to the SCB for the approval of additional templates, to which the SCB, on approval of the proposed template, will prescribe regulations for that type of SMART Fund.
Essentially a SMART Fund is an investment vehicle that provides a more effective method of formation by limiting the documentation required. In contrast to the extensive documentary requirements of a Standard or Professional fund, SMART Funds require only the submission of a term sheet, and can be licensed by unrestricted fund administrators, thereby speeding up the process involved in the licensing of SMART Funds compared to its other classes of investment funds.
Smart Fund Model 001
Under the Investment Funds (SMART Fund) (SFM 001 – 004) Rules, a Licensor may license a fund as a SFM 001 if the promoter of the fund is a financial institution and its investor(s) are party to a Discretionary Management Agreement with the financial institution. Under this model a term sheet is not required, however if it is decided that a term sheet should be provided it must contain information required by the Rules. The promoter may be domiciled either within or outside of the Bahamian jurisdiction and may be directly or indirectly involved in the formation of the fund, but does not include professional advisors or underwriters acting on behalf of the promoter. The assets of the investors that are invested into the fund are subjected to fees at either the fund or management level.
The Subscription Agreement of the fund must contain a statement by the promoter confirming the existence of a Discretionary Management Agreement between itself and its investors. Under the Investment Funds (SMART Fund) (SFM 001 – 004) Rules operators of the fund must certify to the SCB that the fund is qualified to operate as a SFM 001. The fund is also required to file unaudited financial statements to the SCB performance report with the SCB summarizing the subscriptions and redemptions to the fund, net asset value (NAV) at the end of the relevant period, return earned at the end of the period, and the asset allocation of the fund.
Smart Fund Model 002
Under SFM 002, the Investment Funds (SMART Fund) (SFM 001 – 004) Rules require no more than 10 investors who hold equity interest in the fund and the investor must be an individual that would qualify to be an investor in a Professional Fund. Under this model the majority of the investors who hold equity in the fund have the ability to both appoint and remove the operators of the fund. A Term Sheet is required for SFM 002, and the fund may be licensed and launched the same day through an unrestricted fund administrator or a 72 hour response from the SCB.
Under the requirements of the Investment Funds (SMART Fund) (SFM 001 – 004) Rules the Subscription Agreement of the fund must confirm that the investor in the fund agrees with the regulatory requirements applicable to the SFM 002 and that its constitutive documents must provide for the majority of investors holding equity interest in the fund to have the power to appoint or remove the operators of the fund. The Rules also require that the fund’s financial statements are audited unless all of the investors (holding equitable interest in the fund) unanimously agree to waive the annual audit, to which it must file a performance report of the fund within 6 months of the waiver and every 6 months thereafter as long as the waiver exists. The administrator of the fund must make the NAV reports available to the investors upon request and the pperators of SMF 002 must certify that the investment fund is qualified to operate as an SFM 002 to the SCB on an annual basis and pay the annual fee of B$950 or B$1,000 where self administered.
Smart Fund Model 003
The Smart Fund Model 003 applies only to “Exempted Funds” that existed prior to the present Investment Fund Act, 2003 under section 3(4) of the now repealed Mutual Funds Act, 1995 which at the time of the introduction of the Investment Fund Act and Investment Funds (SMART Fund) (SFM 001 – 004) Rules, were allowed to apply to the Commission or an unrestricted investment fund administrator to be licensed as SFM 003 and allowed to continue business for a limited time. Under the Rules, SFM 003 are permitted to have no more than 15 investors to hold equity interests in the fund, and similar to SFM 002, the majority of the investors who hold equity in the fund have the ability to both appoint and remove the operators of the fund. The Investment Funds (SMART Fund) (SFM 001 – 004) Rules required the administrator of the SFM 003 to submit a certified copy of the register of holders of equity interest in the fund or certification by either an attorney or the administrator of the fund that the fund has no more than 15 individuals holding equitable interest in the fund.
Smart Fund Model 004
A licensor may license an investment fund as a SFM 004 if the fund has no more than 5 investors who hold equitable interest in the fund and that the fund operates as a private investment company. A SFM 004 fund can be administered by its operators as there is no need to appoint an administrator, however it will not be categorized as a self – administered fund. Term sheet are not required to be filed, however if it is decided that a term sheet should be provided it must contain information required by the Investment Funds (SMART Fund) (SFM 001 – 004) Rules. The Investment Funds (SMART Fund) (SFM 001 – 004) Rules have imposed the same legal requirements for the SFM 004 as seen in SFM 002 with regards to the Subscription Agreements, Constitutive Documents, Annual Certification, and its financial reporting.
The Investment Funds (SMART Fund) (SFM 001 – 004) Rules have imposed similar legal requirements for SFM 004 in comparison to SFM 002 in which the Subscription Agreement must contain confirmation that the investors agree with the regulatory requirements applicable to its SFM category and that its Constitutive Documents must provide for the ability to appoint and remove the fund’s operators by majority of its investors holding equity interest in the fund. The financial reporting requirements are also similar to those imposed on SFM 002 which require that the fund’s financial statements be audited unless unanimously waived by all equitable investors, to which it must file a performance report of the fund within 6 months of the waiver and every 6 months thereafter as long as the waiver exists. The fund’s administrator must make the NAV reports available to the investors upon request and its operators must certify that the investment fund is qualified to operate as an SMF 004to the SCB on an annual basis.
Smart Fund Model 005
In accordance with the Investment Funds (SMART Fund) Rules, 2005 in order for an investment fund to be considered an SFM 005 it must operate as a private investment vehicle and requires a maximum of 5 investors holding equity interests in the fund, to which each investor must be an individual to whom a professional fund may be offered. A SFM 005 can be licensed immediately by an unrestricted fund administrator or within 72 hours through the SCB. Term sheet are not required to be filed, however if it is decided that a term sheet should be provided it must contain information required by the Rules. The Investment Funds (SMART Fund) Rules, 2005 have imposed the same legal requirements for the SFM 005 as seen in SFM 002, 003, and 004 with regards to the Subscription Agreements, Constitutive Documents, Annual Certification, and its financial reporting.
The administrator of SFM 005 can be a financial institution which does not require a license from the Securities Commission as an investment fund administrator. Where the appointed administrator is an unrestricted investment fund administrator it may license the fund provided it will be the administrator of the fund and will provide the principal office. In the event that a SFM 005 wishes to transfer to another administration the Rules provide that where the fund is licensed by the Commission it must provide a 14 day notice to the SCB prior to the date of transfer. Where the SFM 005 is licensed by an unrestricted investment fund administrator it can not transfer to another financial institution or restricted investment fund administrator unless the fund is licensed by the SCB prior to the transfer. Where the fund transfers to another unrestricted investment fund administrator, the fund will not be required to be licensed by the SCB prior to its transfer provided that the unrestricted fund administrator to whom it transfer will license the fund and provide the fund’s principal office.
Smart Fund Model 006
SFM 006 funds are considered ‘special purpose vehicles’ intended to hold illiquid assets of another Bahamian investment fund and provides a significantly streamlined administration and cost effective measures for this purpose while maintaining ownership rights of the investors of the original investment fund. All investors holding equitable interest in SFM 006 must be an individual to whom a professional fund may be offered and they along with creditors of the fund and the fund’s assets must be the same as those of the originating investment fund (which excludes recognized foreign funds) in order to facilitate the very purpose of the SFM 006 fund. Because of the nature of SFM 006 the Investment Fund (SMART Fund) Rules, 2009 prohibits the inclusion of new subscribers into the fund once it has been launched and no more than 30% of gross assets of the identified Bahamian investment fund may be invested into the SFM 006 fund. In order to establish an SFM 006 at least 75% of shareholders and creditors of the originating investment fund must approve the establishment of the fund. Such characteristics of investors holding equitable interest and creditors of the fund ought to be reflected in Statements which should be included in the fund’s Term Sheet which must be filed in the SCB.
Statements included in the Term Sheet must also state that the fund shall not be audited annually and that a performance report/ management accounts shall be filed every six months with the SCB and each shareholder of record, and that net asset valuation reports are not required and shall only be effected at the discretion of the fund’s operators, who must also confirm that they are satisfied that due diligence on each shareholder of record and that the fund itself is qualified to operate as a SFM 006. The Statements must also reflect whether the fund’s assets require a custodian/ prime broker, fees, expenses, as well as conditions pertaining to the termination of the fund itself.
The Investment Fund (SMART Fund) Rules, 2009 also provides for the optional submission of a Subscription Agreement by an SFM 006 fund, however in the event that the SCB requires a Subscription Agreement to be submitted it must confirm that the investor of the fund has complied with the regulatory requirements applicable to the SFM 006 fund and that due diligence is satisfactorily completed. Under the Rules, SFM 006 funds are not required to appoint a licensed fund administrator in accordance with the Investment Fund Act, in which case the fund’s operators will be responsible for the daily administrative functions of the fund and can appoint any reputable person in any jurisdiction on an as needed basis. Once appointed the Rules require operators to certify with the SCB that the holders of equitable interest in the fund, creditors of the fund and the fund’s assets are the same as those of another specified fund. Operators must also certify with the SCB on an annual basis that the fund is qualified as a SFM 006 and must also file a performance report/ management account every 6 months with the SCB and each shareholder of record.
Smart Fund Model 007
Smart Fund Model 007 or the Super Qualified Investment Fund is the financial service industry’s most recent template, having been introduced to the public on the 22nd of August 2012. In accordance with the Investment Funds (SMART Funds) (SFM 007) Rules, 2012 SFM 007 is limited to having no more than fifty (50) investors who hold equity interest in the fund and the minimum initial investment of each investor in the fund is five hundred thousand dollars in US currency (USD$500,000.00). SFM 007s must provide an offering document or term sheet, and the fund’s operators must certify in its statement that the fund has met the legal requirements provided by the Rules pertaining to the amount of equitable investors and the minimum initial investment by each investor. The operators must also provide a statement declaring that they (the operators) accepts responsibility for the information contained in the offering document/ term sheet is accurate and the fund must also confirm in its subscription agreement that the investors agree to the regulatory requirements provided by the Rules.
SFM 007s have proven to be more flexible than other SFM templates in its regulatory policies as the fund is not required to appoint an administrator. The operators of the fund may partake in the fund’s administration and may outsource its administrative functions to any reputable individuals on an as needed basis, however the fund will not be considered to be a self-administered fund. Similar to other SFM templates the fund’s financial statements must be audited on an annual basis unless all investors holding equitable interest in the fund unanimously agree to waive the audit, upon which a performance report of the fund must be filed with the SCB every six (6) months thereafter as long as the waiver exists. The fund is also obligated to provide NAV reports to its investors upon request.
Dormant Investment Funds
An investment fund is considered dormant when it ceases trading and liquidates its assets without formally liquidating its structure, to which the fund must inform the SCB within fourteen (14) days of becoming dormant. Once informed the SCB will suspend the fund’s license or registration and will publish a formal notice of the fund’s state in the local gazette. If the fund decides to recommence its activities it must do so within a year of it becoming dormant and must apply to the SCB to have its suspended license or registration lifted. All prescribed fees must be paid to the SCB when submitting its application. Once the SCB is satisfied that the fund is compliant with the provisions of the Investment Fund Act the SCB will lift the suspension of the fund’s license or registration and will publish a formal notice of the fund’s re-launch in the local gazette. The fund also has the option to apply to the SCB to extend the period of its dormancy which can be granted for a period no longer than eighteen (18) months.
|Mario L. McCartney is the Founder and Principal of Lex Justis Chambers, a boutique law firm providing Corporate, Private Client, and Traditional legal services in the Commonwealth of The Bahamas. Mr. McCartney is also the present editor and main contributor of firm’s blog site and welcomes all opinions and comments to his articles.|
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