Bahamas: An Overview of Mutual Funds in The Bahamas

Most funds operating in the Bahamas take the form either:

• managed investment companies with shares, or to a lesser extent,
• trusts with units representing ownership.

There are two corporate types available:

• regular companies, and
• International Business Companies (IBCs).

IBCs are most commonly used for the many international offshore funds due to their flexibility, freedom from exchange controls and guaranteed tax exempt status.

Bahamian citizens are not eligible without approval to invest in Bahamian resident funds owning foreign investments. In addition to union and pension funds, there are currently several Bahamian collective investment schemes available to the Bahamian public.

The Mutual Funds Act, 1995 ("the Act") and the Mutual Funds Regulations, 1995 ("the Regulations") seek to regulate the mutual fund industry in the Bahamas through oversight and supervision by a Securities Commission and licensed Mutual Fund Administrators. Mutual Funds with a "connection" to the Bahamas and local mutual fund administrators are required to hold a licence in order to carry on business. The concept of "self regulation" has been adopted as the Act allows certain licensed administrators to grant licences to mutual funds they administer.

The Act does not however aim to regulate what are in essence private investment companies and accordingly entities with not more than 15 investors, the majority of whom are capable of appointing or removing the operator, are exempted from compliance with the Act.

The Act also aims to minimise the compliance requirements for mutual funds established for sophisticated investors and to this end, a special category of fund termed "an authorised fund" which requires registration has been created for funds with minimum subscription levels of $50,000. Funds which are listed on a stock exchange recognised by the Commission also fall under this classification.

In recognition of the stature and soundness of the Bahamas’ regulated banking industry, funds whose administrator is also a licensed bank or trust company will also be exempted from compliance with a number of the regulations.

A Mutual Fund is defined as:

"A unit trust, an investment company, or a partnership, that issues or has equity interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors in the mutual fund to receive profits or gains from the acquisition, holding, management or disposal of investments.

The definition excludes a person licensed under the Banks and Trust Companies Regulation Act, the Insurance Act, the External Insurance Act. It also excludes a person enrolled under the Friendly Societies Act. Finally, it excludes any company, trust or partnership, whether Bahamian or foreign, which is primarily engaged in any industrial, commercial or charitable enterprise".

A "Bahamas-based mutual fund" is defined as a fund which has a connection to the Bahamas including the use of an address in the Bahamas.

"The Commission" relates to the Securities Commission established by the Securities Board Act, 1995, and subsequently renamed.

Except for exempt or authorised funds (noted below), a mutual fund shall not carry on or attempt to carry on business in or from the Bahamas (see definition below) unless:-

• either - it holds a Mutual Fund Licence and has a registered office in the Bahamas or if a unit trust, the trustee is a Bahamian unrestricted licensed bank or trust company, or such other acceptable bank or trust company with a minimum of $2,000,000 capital plus surplus or is an individual(s) approved by the Commission;
• or - it holds a Mutual Fund Licence and a licensed mutual fund administrator is providing its principal office in the Bahamas.

Additionally, in order to carry on business, the prescribed annual registration fee must be paid and unless waived, a copy of the current offering document and a synopsis of the fund must be filed with the Commission.

Notwithstanding the above, funds with minimum subscriptions of $50,000 or those listed on a stock exchange recognised by the Commission (deemed "authorised mutual funds") may carry on business in the Bahamas if registered with the Commission, prescribed details regarding the current offering document are filed with the Commission and the prescribed annual registration fee has been paid.

Funds with no more than 15 participants or funds licensed in a jurisdiction prescribed by the Commission are exempted from the licensing requirements (deemed "exempt mutual funds").

A Fund is deemed to be carrying on business in the Bahamas if it is incorporated, registered or established in the Bahamas or under Bahamian law or has investment advisers, managers or administrators located in the Bahamas or uses an address in the Bahamas.

The legal system is modelled on the British pattern. English common law provides the basis of much of the law combined with Bahamian statute law. The statute under which IBCs are organised is the International Business Companies Act, 1989 and for regular companies, the Companies Act 1992. In the case of a unit trust, The Trustee Act, 1998.

Mutual funds are regulated by the Mutual Funds Act, 1995 and the Mutual Fund Regulations, 1995.

Unless exempted, persons shall not carry on business as a mutual fund administrator without holding a Mutual Fund Administrator’s Licence. Exemptions may be granted by the Commission if it is satisfied that the applicant would otherwise be granted a restricted licence and will not be administering more than one fund. A prescribed annual exemption fee is payable.

Unless specified otherwise in the licence, the holder is authorised to administer an unlimited number of regulated mutual funds. A restricted licence may be granted authorising the holder to administer specified regulated mutual funds.

An application for a Mutual Fund Administrator’s Licence shall be made to the Commission in the prescribed form accompanied by the prescribed application fee. The Commission must be satisfied that the applicant has sufficient expertise, is of sound reputation and will administer the mutual funds in a proper manner.

In order to be licensed as an unrestricted mutual fund administrator, a minimum capital of $500,000 (or $150,000 plus liability insurance coverage of $350,000) is required unless waived by the Commission if it is satisfied otherwise as to the financial viability of the applicant. Additionally, the applicant for an unrestricted licence must have a place which will be its principal office in the Bahamas and two individuals as resident agents in the Bahamas and any subsequent changes thereto must be approved in advance by the Commission. In the case of an application for a restricted licence, the applicant must have a registered office in the Bahamas.

The Commission may impose conditions to a licence as it considers appropriate.

Except for licensed Bahamian banks or trust companies, any change in ownership or issuance of shares of a corporate administrator must be approved in advance by the Commission unless the obligation to do so was waived.

Upon starting to provide the principal office for a regulated fund, the administrator shall immediately provide the Commission with the prescribed details and pay the prescribed fee in respect of the fund. The annual fee for itself and administered funds must be paid on or before 31st January in each year. A late payment penalty applies unless waived by the Commission for good cause.

With reasonable cause, the Commission may require an administrator to increase its paid-up capital or provide guarantees, insurance cover or other financial support as the Commission shall think fit.

Licensed administrators shall not provide a principal office to a regulated fund unless satisfied that the promoters are of sound reputation, that the administration of the fund will be carried out by persons with sufficient expertise and of sound reputation and that the business of the fund will be carried out in a proper manner.

If a licensed administrator knows or has reason to believe that a fund, or a promoter or operator of such fund, is or is likely to become unable to meet its obligations as they fall due, or is in contravention of the Act or is carrying on business that is or is likely to be prejudicial to investors or creditors of the fund, it shall immediately notify the Commission in writing giving reasons for its knowledge or belief.

Unless exempted by the Commission or a holder of a Mutual Fund Administrator’s Licence, no person shall carry on business with a name including the words "fund management", "fund manager" or "fund administrator" or any of their derivatives nor represent in any way that he is carrying on the business of fund administration in or from the Bahamas.

Licensed mutual fund administrators shall be audited annually by an auditor approved by the Commission and shall submit their audited accounts to the Commission within four months of the end of the fiscal year unless an extension has been received.

There are no legal limits imposed on the fees that may be charged by managers or trustees.

The only restriction imposed on the investment policies of international funds established as IBCs is a prohibition on their owning an interest in real estate situated in the Bahamas and companies carrying on domestic business in the Bahamas. A lease of office space for the fund’s use is permitted.

There are no local investment restrictions on regular companies owned by Bahamians. Since such a company would be subject to exchange controls, it would have to comply with the relevant legislation prior to investing outside the Bahamas, including investments in Bahamian based funds investing outside the Bahamas.

Such foreign investments can only be purchased through a pool of foreign funds where a premium is applied on purchase of the foreign currency.

There are no legal restrictions on the borrowing powers of funds in the Bahamas.

In order to obtain a Mutual Fund Licence, an application shall be made to the Licensor (the Commission or an unrestricted mutual fund administrator) in the prescribed form accompanied by the current offering document (or latest draft) together with a synopsis of the fund. Certain other details may be required along with the prescribed application fee. The applicant must also satisfy the Licensor that the promoters and administrators of the fund are of sound reputation and that the business of the fund shall be carried out in a proper manner. The Licensor may impose such conditions as it considers appropriate.

The operator is responsible for ensuring that all conditions of a fund’s licence are complied with.

Regulated mutual funds (including authorised funds) shall be audited annually by an auditor approved by the Licensor and shall submit their audited accounts to the Licensor within four months of the end of the fiscal year unless an extension has been received.

A fund may choose any end date for an accounting period.

The Commission may at any time instruct a regulated fund to have its accounts audited and submit them in a specified time.

If requested to do so by the Commission, a promoter or operator of a regulated fund shall give to the Commission such information or explanation as the Commission may reasonably require to enable it to carry out its duties under the Act.

If requested to do so by the Commissioner, the promoter or operator of a regulated fund shall give the Commissioner access to, or provide at any reasonable time all records relating to the fund. The Commissioner may copy or take extracts of the records.

If the Commission has reasonable grounds for believing a person is carrying on or attempting to carry on business as a mutual fund in or from the Bahamas in contravention of the licensing requirements, it may instruct the person to give it such information or explanation as it may reasonably require.

If it appears to the Commission that a fund is carrying on business in or from the Bahamas in contravention to the licensing requirements, it has the power to apply to the Court for such orders as it thinks fit to preserve the investors’ assets in the fund or to protect the fund’s creditors.

The Commission has very broad powers to take action it considers necessary to protect investors in or creditors of regulated funds if it is satisfied that the fund:

• is or is likely to become unable to meet its obligations as they fall due; or
• is carrying on or attempting to carry on business or is winding up its business in a manner that is prejudicial to its investors or creditors; or
• is carrying on or attempting to carry on business without complying with a condition in its licence.

For the purpose of alerting him as to whether or not any of the above have occurred or are likely to occur, the Commissioner shall immediately enquire into and ascertain the reason for any failure of a fund:- to change its name in accordance with a direction given; to have an audit and submit its accounts to the Licensor annually or to the Commission when instructed; to pay prescribed licence or registration fees; or to provide information or allow access when requested.

Among others, actions which the Commission may take are - revoking licences; requiring substitution of promoters or operators; appointing advisors to the fund; appointing a person to assume control of the fund’s affairs or reorganise or wind up the fund.

Where it considers it necessary or appropriate to do so, if practical, the Commission shall inform investors of any action it is taking or intending to take.

As above, broad powers to take action are conferred on the Commission if it is satisfied that a licensed administrator is or is likely to become unable to meet its obligations as they fall due; is carrying on or attempting to carry on business or is winding up its business in a manner that is prejudicial to its investors or the investors or creditors in an administered fund; or is carrying on or attempting to carry on business without complying with a condition in its licence.

The Commissioner shall immediately enquire into and ascertain the reason for any failure of a fund administrator to comply with the various requirements under the Act.

There are no restrictions on the percentage of shares or units which any person or group of persons may own except that Bahamian residents are prohibited from owning shares in IBCs and in funds which have non-Bahamian assets unless Central Bank approval is obtained.

Virtually unlimited flexibility in ownership structure is available. ‘Funds of funds’ are permitted, as are ‘umbrella funds’.

There are no restrictions on offering units in bearer form although many institutions will not deal with the same.

At present, the Government of the Bahamas has appointed a Steering Committee comprising representatives from local firms involved in the finance industry to advise on and carryout the implementation of an international securities exchange. It is anticipated that this market will be in place by late 1999. The exact requirements for listing have not yet been determined but are expected to be particularly flexible for funds.

However, Bahamian funds may be listed on exchanges of other countries.

Bahamian legislation provides for the preservation of secrecy, in addition to the common law requirements of confidentiality. The Banks Act restricts disclosure of information relating to the affairs of a bank or of a customer of the bank by any person who has acquired such information in the performance of the duties or the exercise of his functions under the Banks Act. The Commission, the Commissioner, a licensed administrator and their staff shall not disclose any information relating to a licence application, the affairs of a fund or a fund administrator or the affairs of an investor in a fund nor shall they use any such information for their benefit. Criminal penalties exist for cases of improper or unauthorised disclosure.

A Bahamian IBC can be incorporated in 24 hours. A unit trust agreement can be drawn up quickly with many of the local trust companies. Government fees to establish an IBC range from $250 to $1,000 and professional adviser fees may range from $5,000 to $25,000 depending on complexity and the level of advice needed. The overall process can take between one and two months.

The application fee for a mutual fund licence is $500. The annual licence fee is $500, and the annual registration fee for an authorised mutual fund is $500.

The Bahamas markets itself as a desirable offshore centre for the establishment and/or management of international funds and accordingly, there are no restrictions on foreign funds except from carrying on business with residents of the Bahamas.

There are no restrictions on offering bearer shares.

The Bahamas has no income taxes, withholding taxes, capital transfer taxes, wealth taxes or gift and inheritance taxes.

Open-ended mutual funds take the form of either unit trusts, or investment companies with or without variable share capital.

A Bahamas International Business Company (IBC) is the ideal corporate vehicle for mutual funds.

There is an annual licence fee payable by companies but not by unit trusts. This applies to a mutual fund IBC at a progressive scale as follows:

Where the authorised capital does not exceed $50,000 - Fee $250
Where the authorised capital exceeds $50,000 - Fee $1,000

By statute a Bahamian IBC is exempt from taxes on its income. The exemption is guaranteed for 20 years from the date of incorporation. It is not liable to taxation on its gains nor on its distributions.

Unit trusts are not subject to taxes.

The application fee for a mutual fund licence is $500. The annual licence fee is $500, and the annual registration fee for an authorised mutual fund is $500.

Bahamian residents are not eligible without prior approval to invest in Bahamian resident funds owning foreign investments, however, in cases where they are eligible there are no Bahamian taxes.

No tax is payable by a resident unitholder in a non-resident fund. Residents require exchange control approval for such investment and may not hold shares in an IBC.

There are no taxes payable by unitholders or shareholders. A unitholder is generally regarded as being in receipt of income only when the fund makes a distribution. However, this is not defined in statute.

The Bahamas has no income taxes, withholding taxes, capital transfer taxes, wealth taxes or gift and inheritance taxes.

The application fee, and annual exemption fee for an administrator exempted from obtaining a mutual fund administrators licence is $200.

The application fee, and annual licence fee for a mutual fund administrator who is a financial institution holding an unrestricted bank or trust licence in the Bahamas is $500.

The application fee and annual licence fee for a restricted mutual fund administrators licence is $2,000.

The application fee, and annual licence fee for an unrestricted mutual fund administrators licence is $5,000.

In addition, companies also have to pay the normal annual licence fee to the Registrar of Companies. For companies designated as non-resident under the Exchange Control Act, the licence fee is $100.

A unitholder’s entitlement to income is not defined by statute. It is generally considered that a unitholder is entitled to income only when a fund makes a distribution, and not when income arises to the fund.

None.

All investment vehicles in the Bahamas are tax-favoured as there is no taxation.

There are no transfer taxes levied in the Bahamas on international mutual funds. Stamp taxes are only payable on the authorised capital of a domestic company and any subsequent increases after incorporation. Capital duty does not apply to the purchase and sale of shares or units in a mutual fund.

At present there are no specific legal restrictions on the use of the internet as a marketing tool for domestic or foreign funds. At present such marketing is limited.

Overseas marketing

Overseas marketing of funds established in the Bahamas is permitted and would only be subject to laws of the country in which the fund was being marketed.

The information contained in this article is of a general nature and it is not intended to be an exhaustive reference guide. Prior to acting on any of the information contained herein, proper professional advice should be sought.