By Owen S-M. Bethel, President

In 1990, with the introduction of the International Business Companies Act, the Government of The Bahamas started a process of rejuvenation of the offshore financial services sector that also had a significant impact on the development and growth of the offshore mutual fund industry. This piece of legislation allowed for ease of incorporation and operation of the entity, along with flexibility in both reporting and accounting requirements, the frequency and method of meetings of the board of directors and meetings of shareholders. Further, the absence of a requirement to disclose or file the names of directors and beneficial owners, and the ability to issue bearer shares, made the International Business Company ("IBC") an ideal vehicle for both the utilization and structure of an investment instrument such as an offshore mutual fund which necessitated speed and ease of transfer of ownership rights with minimum regulatory reporting requirements in a very dynamic and competitive market.

The Bahamas' status as a premier offshore financial centre, with the presence of numerous established financial institutions and a diverse and well-qualified professional infrastructure, ensured that within the first year of enforcement of the legislation that the jurisdiction would be a major rival and competitive force to other jurisdictions which had previously led the way in the enactment of international business companies' legislation and formation. However, it is important to note that the growth of the offshore mutual fund industry was not driven primarily by the enactment of enabling legislation in the offshore jurisdictions, but more particularly as a dramatic response to the onerous and reactionary regulations on operations and investments being imposed in the home-countries of the investment managers.

Today there are approximately 600 mutual funds registered in The Bahamas, representing some $90 billion under administration and this has encouraged the establishment of a professional cadre of licensed administrators. this growth also reflects the popularity of the offshore market for legitimate international investment and business transactions, concurrently structured in such a way to be tax-advantaged.

The Bahamas International Securities Exchange

In 1999 the Securities Industry Act was passed in order to establish a regulatory environment for the creation and operation of a securities exchange. The enactment of this legislation marked yet another step in the enhancement of the financial services sector to allow the practitioners in the market to provide a comprehensive range of products complimentary to the traditional private banking and trust services. This legislation also advanced The Bahamas as the jurisdiction of choice as it allowed the possibility of providing yet another layer of innovative financial products and structures to compete effectively with the level of development and sophistication achieved in other offshore jurisdictions.

The Securities Industry Act will guide the establishment of the Bahamas International Securities Exchange ("BISX"). The Exchange. envisioned as a "dual-tiered" structure to facilitate the trading of securities in both the domestic and international markets concurrently, similar to the existing banking community, will accommodate the listing of mutual funds and the recording of valuations of these mutual funds for public disclosure and verification. Such a facility is essential for those funds which seek to attract major institutional and pension fund monies, but which are required to have an independent source of valuation reporting. This facility will apply whether the fund is an open-end or closed-end fund. This ability to list on an exchange, in certain instances simply recognized as "a listing of convenience", provides the mutual fund with a degree of credibility. Luxembourg, Ireland (Dublin), The Caymans, and Bermuda have all distinguished themselves as leaders in this service. The Bahamas will introduce an exchange at a unique and opportune time in the history of international financial markets as measured by the degree of volatility, consistent economic growth, the increased movement and investment of monies in the international sector, and the rapid technological advancements in the distribution of information through the Internet. As an electronic-based trading exchange, BISX will be at the leading edge of the industry in the offshore sector. The experience of the financial sector in the United States of America in both the significant movement of cash on a daily basis into domestic-USA mutual funds and the increased utilization of on-line trading systems by both average and sophisticated investors is an indication of the potential value of both BISX and the financial services sector of The Bahamas as both investors and investment managers continue to recognize the value in replicating domestic-based investment vehicles, products, and methods in the international environment.

Benefits To The Domestic Market of The Bahamas

As The Bahamas grows in importance in the international financial sector, the products and investment/financial sophistication developed elsewhere will have an impact on the introduction of similar products and services in the domestic market. It is not immaterial that during the growth of the offshore mutual fund business there was also the introduction in 1994 in the domestic market of the first Bahamian dollar mutual fund, the MSI Preferred Investment Fund (now the Colina-MSI Preferred Investment Fund), for investment in Bahamian-based securities. Subsequently there has been another domestic mutual fund launched, the Fidelity Growth & Income Fund. This trend is likely to continue as novice investors in a fairly new and developing market take comfort in the benefits of a mutual fund as they gain confidence in the investment market.

The Exchange, in the first instance, will accommodate domestic securities. This component of the "dual-tiered" structure will facilitate the trading in the domestic stocks reserved for investment only by Bahamians. Accordingly, at least one of the domestic mutual funds has indicated intent to list the fund on the Exchange. Competition will ensure that others follow. This will certainly benefit the Bahamian investor, as Further transparency of transactions will result.

Both the mutual fund as an investment product and the BISX as the avenue for channelling those investments will contribute significantly to the economic development and growth of The Bahamas as resources and alternative means of financing become available to entrepreneurs. Of course, while the Government has highlighted the importance of entrepreneurial development to the country the ability to lap into equity financing will be significantly impacted by the rules and regulations of BISX in facilitating such access as the Exchange becomes the primary avenue for the allocation of surplus funds by investors The creation and listing of venture capital funds and the creation of a "bulletin board" clone within BISX only for domestic enterprises are conceivable and opportunities which should be pursued.

The Global Challenges

Including the presence of competition from other established and reputable offshore centres, the pressures from without on the entire offshore financial sector are significant and expected to grow. Paramount of these pressures is the effort by the OECD members to bring sanctions on countries that they consider are maintaining or encouraging "harmful or unfair tax regimes". It is accepted in all quarters of The Bahamas that criminal activities such as fraud and money laundering the proceeds of a crime such as drug-trafficking must not be tolerated. However, the apparent attempt to capture all offshore financial activities which may not be liked or even understood by the authorities in the OECD member-countries in a simple effort to identify tax evaders and encourage the disclosure and exchange of information is a classic example of the risk of "throwing the baby out with the bath water".

Offshore financial centres, and particularly The Bahamas, provide an essential and legitimate link in the free flow of international trade, finance and business transactions. Any requirement to disclose the identity of investors and/or beneficial ownership in an offshore mutual fund is both impractical and difficult to verify. Such measures are also ineffective unless all markets subscribe to the same standards, including those of the OECD member-countries.

The existence of competition from other established jurisdictions and the continued growth of emerging centres will require The Bahamas to remain responsive to the demands of the marker and flexible in its regulatory environment, providing keen oversight and monitoring of the market but not impeding its innovation, development and growth. Such positive attributes as political and economic stability, ease of access by different modes of transportation, modem communications facilities, and its status as an independent nation places The Bahamas in a unique position among other jurisdictions. It is these features, combined with the comprehensive array of products and services offered in this jurisdiction, that will ensure the continued growth and importance of The Bahamas.

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