Industry News

Regulation of the Securities Industry in The Bahamas

Thursday April 3rd, 2008

Category: Securities Industry, Industry Information, Investment Funds & Asset Management

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Regulation of the securities industry is structured to protect the interests of those who do business with financial institutions licensed in The Bahamas, and to ensure the Bahamas’ business environment continues to meet the highest international standards.

The Securities Commission (SCB) was established in 1995. As part of its endeavour to keep abreast in an ever-changing global regulatory environment, and to ensure a Bahamian contribution toward improving the efficiency and conduct of international markets, SCB became a member of the IOSCO and the Council of Securities Regulators (COSRA) in 1996 and 1997 respectively. SCB’s mission is to effectively oversee and regulate the activities of the securities and capital markets, and to protect investors, while strengthening public and institutional confidence in the integrity of those markets.

The principal areas of focus are the securities industry, including the oversight of broker dealing and securities investment advisory services, and the growing area of investment fund administration. A special focus on the regulation of this dynamic area, including that of hedge and private equity funds is provided below.

Bahamian Fund Administration Balances Flexibility with Governance

Market responsiveness within a proper regulatory environment is the philosophy that is followed in The Bahamas, and will continue to be the driving force for development. This is especially evident in the country’s growing funds sector.

The Bahamas has a long history of providing investment fund services and has taken measured steps over the past ten years to differentiate itself from other jurisdictions by creating a mechanism to establish different types of funds with more flexibility and appropriate levels of governance.

With the overriding objective set as compliance with the IOSCO, close attention is paid to the need for a strong corporate governance environment while maintaining a regulatory framework that is appropriately responsive and vigilant for funds and clients investing in them.

In this regard, a dual licensing regime exists in The Bahamas. The Securities Commission of The Bahamas is authorized to license all classes of funds and Unrestricted Fund Administrators (UFA) are authorized to license funds offered only to accredited investors. A restricted fund administrator cannot license but only administer funds. Irrespective of who licenses the fund, the fund must operate in a manner that is consistent with its constitutive documents and adherence to Bahamian law, specifically the Investment Funds Act and anti-money laundering legislation.

All administrators also have a statutory duty to take reasonable efforts to ensure among other matters that a fund adheres to its constitutive documents and is not carrying on its business in a manner which is - or likely to be - prejudicial to investors and creditors.

What distinguishes The Bahamas from other jurisdictions is the latitude provided to administrators that at the same time must meet and maintain certain licensing and governance requirements. This also has negated the need to impose the requirement for independent directors.

This combination of SCB or administrator oversight, depending on the fund, creates a high degree of flexibility for fund administration in The Bahamas while providing an appropriate level of corporate governance for the growing but increasingly complex funds industry.

An Unrestricted Fund Administrator in The Bahamas has several advantages within its regulatory scope. It can, for example, complete the necessary due diligence review of fund parties and coordinate with onshore and offshore parties for the completion of the offering memorandum and constitutive documents. The UFA can also certify fund compliance within Bahamian law and license the fund under its own internal authorization procedures.

These capabilities provide the UFA with competitive advantages within a regulated environment. For example, it can market a fund within 24 hours of company incorporation and the completion of licensing procedures; and can also administer funds domiciled in recognized jurisdictions from The Bahamas without any further licensing procedures other than a filing notification with SCB.

Speed to market is also a factor that was recognized several years ago by the Securities Commission of The Bahamas when it published guidelines, providing direction for the fast tracking process of applications for investment funds that target accredited or high net worth investors. Under this process SCB guarantees approval of these categories of investment funds within 72 hours of receipt of a complete application and complement the fast tracking process that already existed for Unrestricted Fund Administrators to license Professional and SMART©Funds.

The fast tracking process utilizes a declaration, signed by either the lawyer or the administrator to the fund, certifying to the SCB that the application and all supporting documentation are in compliance with the Investment Funds Act and Regulations, 2003.

The rationale for this course of action is that the investment funds in question are targeting investors who are deemed to be knowledgeable of the market and capable of conducting their own due diligence, thereby requiring a reduced level of scrutiny by the regulator.