REMARKS

BY

THE HONOURABLE ALLYSON MAYNARD GIBSON

MINISTER OF FINANCIAL SERVICES AND INVESTMENTS

ON THE

SECOND READING OF

the investments fund bill

at the

honourable house of assembly

on

wednesday, 30th april, 2003

 

 

 

 

 

 

Mr. Speaker,

 

At our last session I tabled “An Act to Provide for the Regulations of Investment Funds in The Bahamas and for Matters Connected Thereto” also known as the Investment Funds Act.  This is the fourth in the series of legislative reform measures proposed by the government in an effort to modernize the financial services sector and to ensure that The Bahamas remains competitive. 

 

Mr. Speaker, with your indulgence last week I presented to the House a revised version of the Investment Act which has been amended to ensure that the legal references are correct and updated and to effect typographical changes. I now move that the Investment Act be read a second time.

 

With your support, Mr. Speaker, on 16 April, the Ministry of Financial Services and Investment held a forum for parliamentarians with representatives of the private sector and the regulatory agencies to explain why changes were needed to the 1995 Mutual Funds Act and to discuss the elements of this new legislation.  Parliamentarians were addressed by experts in the Industry who provided an overview of the International Funds Industry, two Technical Presentations of the Investment Funds Bill and Draft Regulations, a Perspective on Fund Administration and a report on Consultative Work completed to date for the Investment Funds Bill and Draft Regulations.  It is my hope that with the knowledge gained from this seminar the members of the House will have a greater appreciation of the need for this amended legislation and an understanding of the intentions of this Bill.

This Bill is the result of extensive consultations with industry and Regulators.  The PLP has been at the fore-front of every major paradigm shift in this country. In the 20th century, the PLP was on the vanguard of demonstrating that black Bahamians could run a country.  In this century, the 21st century, the PLP in on the vanguard of demonstrating that all Bahamians (including and all people who call The Bahamas home) understand that good governance means that elected officials are servants of the people and that citizens and stakeholders have a say in how their country is run.  We have created an environment where citizens feel their obligation to good governance.

I take this opportunity to thank all of those of so willingly gave their time, talent and treasure to ensuring proper and full consultation. I also thank those experts who spent the day with Senators and Members of this place so that the import and technicalities of this legislation could be understood and so that Parliamentarians could participate in a full and meaningful way in debate.

 

Mr. Speaker,

Offshore Funds continue to provide an efficient, innovative means of facilitating cross-border connections among investors, investment managers and investment opportunities.  They are delivery vehicles for international investment capital.

 

Offshore investment funds have been organized using a variety of legal structures in different jurisdictions.  As the investment fund industry develops globally, new investment products are developed by fund sponsors and advisors seeking to attract different types of investors in various jurisdictions.  At the same time, the rules and regulations in many jurisdictions continue to evolve, generally in ways permitting greater flexibility in structure investment products for particular investors and markets. 

 

The most typical form of offshore investment fund is a corporation, trust or limited partnership in a low tax or no-tax jurisdiction.  In selecting an appropriate legal structure and domicile for an offshore investment fund, a fund sponsor or manage must consider the tax and regulatory consequences of a particular structure on the fund itself, on the investors in the fund, and on the sponsor or manager.  The specific consequences of a particular structure will vary based upon the location of targeted investors and the types of investments to be held, as well as on the location of the sponsor or manager. 

 

Mutual funds have become a major growth area in The Bahamas' financial services industry over the past decade, and the country has developed into a major international center for mutual funds. This increase in mutual fund investment prompted the Government to pass the Mutual Funds Act in 1995, which protects investors by regulating the fund industry through a Securities Board (now the Securities Commission) and Administrators that license mutual funds.

 

Since the creation of the Securities Board (now the Securities Commission) and the passing of the Mutual Funds Act and the Regulations in 1995, The Bahamas has gained considerable credibility and recognition as a properly regulated environment for the establishment and operation of funds. There are more than 50 licensed fund Administrators in The Bahamas. They manage in excess of 700 funds with reported assets under management of approximately $90 billion. At the moment, these funds are either licensed or registered by the Securities Commission or operate on an exempt basis from The Bahamas.  The following chart provided by the BFSB sets out the current position of The Bahamas vis-à-vis our competitors. 

 

The subject of mutual funds and the need to revise the related legislation has been widely discussed by persons within the industry for several years.  Earlier versions of the draft Bill have been in circulation for a significant period of time and I am satisfied that there has been a lively and comprehensive debate covering the major substantive issues relating to the Bill.  The present draft of the Bill has taken into account the disparate views and opinions expressed on the numerous issues and represent a reasonable distillation of the different positions enunciated by persons who participated in the debate.  Moreover, the Bill strikes a reasonable balance between regulatory and market interests which, based on all available information, would provide a strong, attractive and fertile platform for the further development and expansion of investment fund business within the financial services sector.

 

The primary objective of the Government’s current mutual funds legislation is to ensure that there is appropriate supervision in relation to the affairs of Bahamas-based mutual funds. The legislation has four primary purposes: (i) to ensure full disclosure having regard to the sophistication of the investor; (ii) to ensure full compliance with the fit-and-proper test as it relates to directors, investment managers and sponsors; (iii) to encourage further growth of this sector; and, (iv) to ensure that The Bahamas remains at the cutting edge as a major international centre for mutual funds.  It is envisaged that the Investment Act will replace the Mutual Funds Act, Chapter366.

 

The 1995 Act and Regulations is a concern that the legislation resulted in significant restrictions on the ability of the Securities Commission to regulate the industry.  The existing legislation recognized a category of funds called “exempt funds” that were private in nature and therefore not to be subject to regulatory oversight.  However, this category was abused including the establishment of entities that effected fraudulent schemes.  Further, the court ruled that the existing legislation did not give the Securities Commission the authority to regulate entities once it was determined that they were in fact abusing this category of exempt funds.  This and other regulatory weaknesses are addressed in the proposed legislation. 

 

The three traditional Bahamas advantages were our tax neutrality, bank secrecy and regulatory ease.  The Government in “Our Plan” has reaffirmed the tax neutrality of the jurisdiction.  We have reaffirmed our commitment to a strong anti money laundering and strong anti terrorist financing regime, while providing for lawful personal privacy. Further, we have strengthened regulatory environment in line with the trend in the industry worldwide to regulate the activities of the offshore funds. 

 

In order to secure our investment funds industry, we must develop a risk based system of regulation, i.e. a framework that identifies the risk of the business area and seeks to regulate it without adding undue bureaucracy.  In achieving this balance, while it is proposed that all funds will now be subject to the regulatory oversight of by the Securities Commission, the legislation establishes a series of classes of funds each subject to varying regulatory oversight based on its defined risks. 

 

I shall now give highlights of the major provisions of the Investment Funds Bill.

 

1.     Name Change

 

The name of the Bill has been changed from ‘Mutual Funds’ to ‘Investment Funds.  By using the name ‘investment funds’ as opposed to ‘mutual funds’ this legislation ensures that any product falling within the definition of an investment fund under the Bill will come under jurisdiction of the Act, thereby eradicating any doubt that products such as ‘hedge funds’ are subject to the jurisdiction of the Act.

 

Under the present legislation references to ‘Mutual funds’ in many international jurisdictions would exclude the applicability of the Act to such products as ‘hedge funds’ that are not defined as ‘mutual funds’ in those jurisdictions.

 

2.     Definitions of Bahamas and Non-Bahamas Funds

 

(i)                Bahamas-Based Funds  - The definition has been simplified and clarified.  This was accomplished by deleting any links to “carrying on business in or from The Bahamas” with the definition of a Bahamas-based fund.  Thus “Any Bahamas-Based fund” must now be licensed or registered.

 

In the present legislation the requirement for licensing is based on the fund carrying on or attempting to carry on business in or from The Bahamas.  The explanation of carrying on business in linked to the definition of Bahamas-based fund.  This structure proved to be convoluted and often resulted in the definition of ‘carrying on business’ being too broad, and creating an atmosphere of over-regulation.  As even a fund with an indirect connection to The Bahamas was considered Bahamas-based and thus was required to be licensed and subject to full regulation under the Mutual Funds Act, 1995.

 

(ii)             Non-Bahamas based funds –

Presently, all non-Bahamas based funds are required to appoint a representative, irrespective of what their relationship to The Bahamas.  Regulators and those who operate from The Bahamas felt that this should be changed.

 

a.     A definition of non-Bahamas based funds is provided in the Bill.  There is no such definition in the present legislation, although there are regulations.

 

b.     Various levels of regulation are provided in accordance with the nature of the non-Bahamas based funds connection to The Bahamas.

 

e.g. some need only appoint a representative; all others only have to notify the Commission.

 

3.     Categorization of Funds:

 

(i)      BILL                                                 1995, ACT

 

          Professional                                       Licensed

          SMART                                                      Authorized

          Standard                                                      Exempt

          Recognized Foreign Funds (RFF)

 

(i)                All funds have been recategorized;

(ii)              Exempt Funds have been eradicated;

(iii)            All funds have to be licensed under the Bill, except for RFFs which are to be registered;

(iv)            Distinct regulatory requirements are provided for each category of funds. In present Act licensed and authorized funds are subject to the same regulatory regime.  Exempt funds are subject to no regulation.

 

(ii)             Creation of SMART Funds:

 

The Bill creates a new product i.e. the SMART Fund (Specific Mandate Alternative Regulatory Test fund) that allows for flexibility within industry but preserves regulatory integrity of jurisdiction.

 

i.e. Industry can create any structure of fund – and a specific regulatory regime will be created to match that specific structure.

This innovation, only available in The Bahamas, puts The Bahamas on the cutting edge of the funds industry.

 

(iii)           Licensing of retail funds

 

While present legislation allows ‘retail’ funds to be licensed by either the Commission or an Unrestricted Mutual Funds Administrator the Bill only allows the Commission to license ‘retail funds’.

 

4.     Penalty for failure to file licensed fund

 

 

The present legislation does not provide penalties for lapses in duties set out in the Act.  The Bill provides for specific automatic penalties for the failure to file a fund it has licensed with the Commission and other lapses of duty.

 

5.     Specific Regulatory Requirements

 

The present legislation is silent as to any regulatory reporting requirements or procedures in the following cases:

 

a.      Surrender of a fund’s licensing or registration;

b.     Transfer of a fund to or from another jurisdiction;

c.     Termination of a fund’s administration agreement;

d.     Transfer of fund from one administrator to another;

e.      Dormant funds (i.e. funds that cease trading without formally liquidating);

f.       Winding up or dissolution of a fund; and

g.     Annual status declaration.

 

The Bill provides various reporting requirements and procedures in the event of any of the above occurrences.

 

6.     Fees

 

7.     The Bill clarifies the provisions relating to the application of fees. In certain categories of funds, while fees are paid, it could be argued that there is no legal basis for the imposition of a fee. The Bill expressly provides that the fees are payable to the Commission and references to fees are more specific.

 

8.      IBC’s can be licensed as Unrestricted Investment Fund Administrator

 

The provisions in the present legislation provide that an IBC can be licensed as an administrator only where it acts as an administrator outside of The Bahamas.

 

The Bill provides that an IBC may be licensed to operate as an administrator without any limitation on where it operates (provided the IBC meets all qualifications for licensing).

 

I am advised that the Forum will be proposing that it should be made clear that IBCs can also be used as Investment Fund Managers.

 

9.     Standard duties of an administrator

 

The present legislation provides that statutory duties are imposed at a strict liability standard.

 

The Bill expressly provides that the various duties imposed on an administrator by the Act, are applied at a reasonable standard.  Thus the administrator has to “take all reasonable steps to ensure….”

 

The Bill provides:

“The administrator of an investment fund shall use reasonable efforts to ensure that the investment fund does not carry on or attempt to carry on business as an investment fund contrary to provisions of this Act.”

         

Industry has commented extensively on this section and it was mentioned at the seminar.  There was an issue about the extent of responsibility/liability being placed on the administrator.  Industry is satisfied with the wording in the Bill “use reasonable efforts to ensure” and the Forum and the Securities Commission too are happy with this wording.

 

 

10.                        Approved Auditors

 

The Bill expressly provides that auditors be approved by the Commission as well as imposes certain reporting obligations on auditors. 

 

Members will also recall the presentation and my comments on this issue.  All funds must have an auditor approved by the Securities Commission.  An auditor is defined as a professionally qualified accountant as well as someone licensed to practice under the Public Accountants Act i.e. theoretically a non Bahamian could audit a Bahamas based fund.  As was explained, there are many funds that are set up in The Bahamas as mirrors to funds located and administered elsewhere.  All the day to day administration is done in the other jurisdiction.  The cost of a complete audit of that fund would make it unattractive for it to have any connection with The Bahamas.  In those circumstances, the Securities Commission may accept an audit on that fund from a person professionally qualified as an accountant from that jurisdiction.  It was also pointed out that to catch up, while we maintain a string regulatory regime, we ought not to impose restrictions that price us out of the market.

 

The present legislation merely requires that a fund or administrator have its accounts audited annually by an auditor approved by the Commission.

 

11.                        On-Site and Off-Site Examinations

 

Express provisions are provided in the Bill giving the Commission authority to conduct both on-site and off-site examinations.

 

On-site examinations are presently conducted by the Commission on the basis of the Commission’s general authority under Section 28 of the Mutual Funds Act, 1995 to require access to any records or information of a fund.

 

12.                        Supervisory Investigative and Disciplinary Authority of the Commission

 

(i)                The Bill clearly sets out the Commission’s authority to investigate and conduct regulatory hearing regarding breaches by any licensee or registrant of the Commission.

 

(ii)              The Bill provides specific administrative sanctions that the Commission is authorized to impose.

 

(iii)            The Commission’s authority regarding ‘unregulated’ funds or administrators is expressly provided to be the same as regards to a ‘regulated’ fund or administrator.

 

 

e.g. The Commission has express authority to petition the Court to wind up

an unregulated fund operating in The Bahamas, in the Bill.

 

The present legislation was found by the Court not to empower the Commission to file such a petition where funds are operating without being licensed.

 

The present legislation only provides minimal administrative authority to the Commission. The present authority of the Commission has been retained and expanded.

 

In summary, the present legislation empowers the Securities Commission to regulate mutual funds and to license mutual funds Administrators that operate within or from The Bahamas. The proposed new legislation, upon enactment, will enhance the present regulatory framework, providing for greater market efficiency, transparency and investor protection. It covers all aspects of the application, administration and supervision of Mutual Funds, set boundaries for acceptable practice and itemizes fees and penalties for participants.  Major features included are:

§        Strengthens the regulatory powers of the Securities Commission;

§        Updates the definition and class of Mutual Fund that may be recognized locally;

§        Creates a new style of Fund, a SMART Fund, to which The Bahamas ‘Brand’ may be affixed;

§        Mandates additional and increased fees according to the new classifications of investment funds.

 

The Next Steps

 

1.     Templates and regulations will soon be promulgated. The Forum continues to work with the sector and the Commission. It is our intention that the Act, The Regulations and the Templates should all come into effect at the same time.

2.     Streamline the regulatory regime.

§        Big problem

§        Most significant complaint

§        Forum actively meeting on this now

§        Want to get it right

3.     Service excellence at Registrar General.

§        Companies formed in minutes

§        Certified copies in days

§        Not good enough

§        Almost renders pointless the effort and cost to be on the cutting edge

4.     Excellence in service across the board.

§        Service industry

§        Productivity

§        Investors have many other options

5.     Areas for Bahamian opportunities.

§        Foreign languages. From secretaries to the General Manager

§        IT

§        Accountants (external and internal)

§        Administrators (trading, administration, reporting- trend to real time today- need to get there)

§        Compliance

§        Lawyers

§        In all other areas of service sector – success of industry is success of Bahamas – real estate, doctors, etc. (all service sectors)

§        Note that the US manufacturing sector is moving to areas where labour is cheap – US market is more service based.  We are competing directly with these professionals. Emphasize need to quality (raise education standards) and attitude.

 

Nay Sayers to be ignored.  Fact is there is a new day in The Bahamas.