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special report
globalfundmedia
December 2017
Coverline 1 Coverline 2 Coverline 3Regulatory overhaul
to increase
investment appeal
Risk-based
approach to fund
manager licensing
Responding to the
changing needs of
the global industry
In association with BFSB
The Bahamas
– regulatory overhaul
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Last July, the Securities Commission of
The Bahamas (the Commission) embarked
on a process to overhaul the Investment
Funds Act. The Investment Funds Act 2003
was largely structured to be in line with the
operations of fiduciary administrators and did
not necessarily account for the appropriate
regulation of the various roles within a fund
structure. Consequently, the SCB’s mission
last summer was to address those gaps by
asking two major law firms to develop draft
legislation and update the Investment Funds
Act that would help support institutional, as
well as private wealth business.
“In launching the overhaul, it was
important to the Commission that we
develop best in class legislation from a
regulatory point of view and to enable the
jurisdiction to gain ground in the investment
funds space, particularly with respect to
institutional funds,” explains Christina Rolle,
Executive Director, Securities Commission of
The Bahamas.
Updating the regulatory regime is being
proposed to remove and address elements
that may cause The Bahamas to be viewed
as a less attractive jurisdiction.
There are certainly other elements
in play that may not be within the
Commission’s scope but, as Rolle highlights,
it is anticipated that amending the IFA
“will accomplish key improvements to the
regulatory structure which will enhance The
Bahamas’ competitive appeal”.
BFSB MARKET INSIGHT
The Bahamas prepares
risk-based approach to
regulatory oversight
By James Williams
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GFM Special Report Dec 2017
Even offshore jurisdictions have taken
steps such as the BVI, which introduced the
BVI Approved Fund and BVI Incubator Fund.
The Incubator Fund gives start-up managers
a two-year easier ride, from a regulatory
perspective, where they can test their
investment strategy and gain a track record,
which can be extended to a third year with
regulatory consent, before converting to a
BVI Professional Fund.
The Commission sees the value in
adopting more of a risk-based approach,
with Rolle quick to confirm that there are no
plans to create a blanket requirement for the
licensing “of all fund managers”.
“It is certainly required as a global standard
that we have the capability to oversee
investment managers,” remarks Rolle.
“Jurisdictions like the Cayman Islands do it on
a risk-based approach. In The Bahamas, we
intend to adopt a similar approach. We are
considering building some AUM thresholds
into the legislation at the fund level.”
It is safe to say that in circumstances
where there are strong investor protection
concerns, for example, where fund managers
act on behalf of retail investors, the
Commission will propose licensing.
Striving for excellence
To succeed as an international funds centre
requires not just a proactive regulator but
a willingness to respond to the changing
needs of the global industry. In that regard,
The Bahamas became the first independent
country in the region with IOSCO “A” Status,
which it received on December 27, 2012.
Having a robust regulatory framework
in tandem with a commitment to meeting
international standards is something that
The Bahamas prides itself on. Being viewed
as a responsible jurisdiction requires not
just committing to global best practices but
acting upon it.
Filling the gaps
Two key changes will be coming down the
line with the new funds regime. When the
SCB commenced the overhaul, it determined
that measures would need to be taken to
introduce licensing and/or registration of the
fund manager. Also, measures will be taken to
increase the oversight of key players in a fund
structure, including the fund operator, fund
manager, investment manager and custodian.
The aim is to arrive at a realignment of the
obligations and responsibilities of the various
parties to a fund.
It is hoped that by enhancing the
regulatory framework, the SCB will
have greater oversight of the fiduciary
responsibilities of all key players and ensure
that they adhere to appropriate ongoing
reporting obligations, and in so doing
establishing best practices in keeping with
global regulatory standards.
Ultimately, the regulatory environment
must establish a regime which includes a
robust framework for the licencing, ongoing
supervision (inclusive of onsite and offsite
examinations), investigation and enforcement
of regulatory and supervisory requirements
for various investment fund participants.
“We are aiming to open the jurisdiction
to the global funds industry with the new
IFA regime,” says Rolle, adding that the
new regime will also set to establish clear
frameworks for Closed End and Master/
Feeder fund structures.
“We are seeking to extend the regulatory
framework to custodial relationships but
more importantly, we will provide a formal
framework for the regulation of investment
managers. We don’t have the intention that
all investment managers will need to be
licensed by the SCB but they will probably
need to submit to some sort of registration
as opposed to full licensing. Those operating
retail funds, for example, will need to be
licensed,” continues Rolle.
Manager oversight
With Europe now well down the path to
manager-based regulation under AIFMD,
and the SEC requiring investment managers
to register with the SEC once they exceed
USD150 million in AUM, it has become de
rigeur among global regulators to regulate
managers.
“We are aiming to open the
jurisdiction to the global
funds industry with the new
IFA regime.”
Christina Rolle, Securities Commission
of The Bahamas
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GFM Special Report Dec 2017
a proactive approach to ensure AIFMD
requirements are met.
“Moreover, we are looking to open the
jurisdiction to allow administration to take
place from anywhere in the world and also
to rationalise the responsibilities of each of
the fund’s operators. Both of these points
are important.
“I think it would certainly put us ‘best
in class’ from a regulatory point of view
and it would also remove any barriers
people might have when it comes to
selecting a jurisdiction that might previously
have prevented them from selecting The
Bahamas,” says Rolle.
This point about widening out
administration services is key and should go
some way to making the jurisdiction more
attractive to fund managers who may already
have longstanding relationships with Europe-
based fund administrators, for example.
Asked what the SCB would need to do to
get comfortable with Bahamian funds using
non-local administrators, Rolle responds: “We
would prescribe a list of jurisdictions that
licensed fund administrators could operate
from. The main jurisdictions in the world will
likely be on such a list. For a jurisdiction that
is not, we would need to be comfortable
with the regulatory environment. Places like
Ireland would fit into that category easily.”
Enhancing Financial and Corporate
Service Providers Act
Aside from filling the gaps by overhauling the
Investment Funds Act, The Bahamas is also
This means adhering to, and
implementing, the structures to support
international cooperation and transparency.
With that in mind, the Commission’s
aim is to ensure that The Bahamas has
all the tools necessary to ensure that
it is – and will remain – a competitive
jurisdiction. Pragmatism is the name of the
game and while The Bahamas does not
want to overregulate, it does want to be
respected for best in class regulation.
“It is our view that good fund promoters
and good businesses want to be in
jurisdictions that are considered best in class
for regulation. Anything we can do to ensure
a legislative environment that complies with
latest global standards can only bode well
for The Bahamas,” opines Rolle.
Over the years, The Bahamas has shown
its commitment by establishing robust
AML and KYC regimes, not to mention the
fact that it has now entered into 33 Tax
Information Exchange Agreements (TIEAs) to
meet international standards on transparency
and tax co-operation.
On 3rd November 2014, The Bahamas
and the US signed their Agreement to
Improve International Tax Compliance (the
Agreement) and to Implement FATCA based
on the Model I IGA. As an IGA partner
jurisdiction, Bahamas-based Financial
Institutions will not be subject to a 30 per
cent withholding tax on US source income,
unless they fail to meet the requirements
set out in the IGA and in Bahamas domestic
implementing legislation.
The Bahamas has also built upon its
FATCA platform to bring itself in line with
Common Reporting Standards (‘CRS’).
Widening the scope of administration
services
Rolle is keen to stress that more can always
be done, no matter what the jurisdiction.
She says that the Commission is looking to
enhance the legislative framework by making
key changes to the current funds regime,
particularly, by introducing oversight of
investment managers for certain funds where
investor protection is an issue and also by
addressing other key gaps, for example
oversight of custodial relationships.
“We certainly want to be up to date with
what’s going on in Europe and are taking
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As for engaging with the local financial
services industry, the Financial and
Corporate Service Providers Bill has already
gone out for public consultation and
feedback has been duly received for the
Commission’s consideration.
Proposed changes to the IFA regime, as
highlighted above, are due to go out for
public consultation in the coming weeks.
With independent directors playing a
key role in providing proper governance
and oversight to the way funds operate,
jurisdictions like the Cayman Islands have
taken strong measures to ensure that
greater transparency and accountability
are achieved.
As part of Cayman’s drive to enhance
its corporate governance environment, the
Directors Registration and Licensing Law
(2014) was introduced. Part of the rationale
for doing this was to provide CIMA with
greater transparency in respect of directors
of Cayman funds. Although this has not
made any significant change to how funds
operate or who may act for funds, CIMA
is increasingly proactive in its collation of
information and active regulation of funds.
“We are currently considering our own
register of approved directors and we are
looking into the implementation of this in line
with other jurisdictions,” confirms Rolle.
Europe still on radar
As well as addressing the custodian
and fund manager opportunities, another
catalyst for overhauling the Investment
Funds Act, 2003 is the European Union’s
Alternative Investment Fund Managers
Directive (AIFMD).
The Directive has been up and running
for several years, following its implementation
and incorporation into the national laws
of individual Member States, the rules of
which became applicable to AIFMs from
22 July 2013.
As AIFMD also applies to non-EU AIFMs
that manage or market AIFs in the EU,
Bahamian investment managers to EU funds
are subject to the impact and requirements
of the Directive. The Commission has already
engaged with and executed 27 Memoranda
of Understanding with counterpart regulators
in EU Member states, in order to facilitate
participation in their respective countries but
currently working to overhaul the Financial
and Corporate Service Providers Act.
Specifically, the SCB wishes to enhance
its regulatory and supervisory powers and
to bring definition and clarity to the range of
activities that fall within the scope of the Act.
It is looking to develop Rules for each
specific activity, and to build a licensing and
supervisory structure that is centred around
each activity, as opposed to the broad, ‘one
size fits all’ licensing/supervisory regime that
presently exists.
Rolle explains this as follows: “For
example, at the moment we have one broad
Financial & Corporate Service Providers
license. Going forward, we intend to have
different categories of licenses.
“Someone who is providing corporate
services would have a corporate services
license, someone else providing escrow
services would have an escrow services
license and so on. Whatever activity they are
engaged in, provided it is covered under the
Act that is the license they will receive. Also,
it will be possible for the license to extend to
more than one activity.”
This will allow the SCB to move away
from blanket regulation that treats all service
providers the same. With these changes, they
will be regulated in a way that reflects their
activities in the market. In other words, it will
be a more considered, tailored approach.
Rolle confirms that the Commission is
in the process of finalising the Act, which
should be completed within the next couple
of months.
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entrepreneurs to raise small amounts of
capital under new Business Capital Rules.
In an interview with Tribune Business*,
Keith Davies, chief executive of the
Bahamas International Securities Exchange’s
(BISX) said the exchange had completed
internal drafts of market models for both
crowdfunding and small business listing
platforms, to boost capital access for
Bahamian entrepreneurs and small and
medium-sized businesses (SMEs).
“The idea is designed to support those
who want to raise say, USD1 million in a
crowdfunding scenario, up to USD3 million
in an over-the-counter scenario. Instead of
having to meet the full-blown requirements
of an IPO, the new rules will be lighter touch
and enable entrepreneurs to more easily
raise capital in the marketplace,” states Rolle.
Another key regulatory initiative identified
by the Commission is the development and
implementation of a risk based supervisory
framework (referred to earlier) for all
Bahamian registrants and licensees. At the
moment, the Commission takes a rules-
based, compliance-based approach.
“We are currently looking to implement
a risk-based approach which would mean
collecting much more data than we do today:
data on AUM, data on the funds’ activities,
AML data; a whole host of things. We would
then need to establish a set of parameters
on risk criteria that would be of concern to
the SCB. The next step would then be to risk
weight those parameters to provide a risk
score on each licensee.
“Finally, according to the risk score, we
would determine the level of monitoring
that we would need to conduct on the
licensee. We are at the initial stages of this,”
concludes Rolle.
With a host of regulatory initiatives and
updates underway, there are clear signs
that The Bahamas is committed to building
a funds jurisdiction that is more transparent,
more streamlined and more focused in
how it oversees different fund activities and
operations. With global jurisdictions under the
microscope more than ever, being able to
demonstrate best practices in its regulatory
regime should mean The Bahamas is well
placed for further continued growth. n
*http://www.tribune242.com/news/2017/jul/20/banking-
limitations-restrict-bisx-model-for/
there are still two outstanding, which it is
working to finalise: one with Germany, the
other with Italy.
Europe is a key market for fund
managers wishing to raise capital so it is
understandably vital that those operating
Bahamian funds have the confidence, and
the imprimatur, to continue marketing them
into individual EU Member States through
national private placement rules; hence the
importance of establishing MoUs.
Updating the regulatory regime will
go a long way towards maintaining The
Bahamas’ competitive appeal and satisfy EU
regulators that the necessary controls and
best practices are in place, in keeping with a
progressive offshore jurisdiction.
“The Commission has reached out to
ESMA requesting to be included in the
next round of assessments to be done by
them for purposes of the AIFMD passport.
Although things aren’t moving that quickly,
we are continuing to dialogue with ESMA
with respect to that process.
“In the meantime, we are writing the
legislation that will enable us to be ready for
passporting under AIFMD,” says Rolle, who
rightly points out that Europe is “too large a
market” for any serious jurisdiction to ignore.
In the Cayman Islands, the Mutual
Funds Law has been revised primarily to
introduce the concept of an “EU Connected
Fund” to give such funds the option to be
registered or licensed under the Mutual
Funds Law. When the AIFMD Like Regime
is formally introduced, Cayman promoters
will have the opportunity to have a registered
EU Connected Fund or become an EU
Connected Manager.
“We aren’t looking to go that route. Rather,
we will be updating our licensing regime,
making additional requirements which will
meet AIFMD standards,” confirms Rolle.
What’s on the horizon?
Looking ahead to 2018, The Commission is
in the final stages of developing legislation to
address crowdfunding and over the counter
capital raising. It is also looking to make
some key amendments to the Securities
Industry Act early next year.
With respect to equity crowdfunding,
new legislation is being drafted that will
make it easier for smaller businesses and
