Bahamas: A Summary Of The Mutual Funds Act, 1995

The Mutual Funds Act, 1995 ("the Act") and Mutual Funds Regulations, 1995 ("the Regulations") seek to regulate the mutual fund industry in The Bahamas through oversight and supervision by a Securities Board 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 Securities Board (established under the Securities Board Act, 1995, and subsequently renamed the Securities Commission under the Securities Industries Act 1999) is comprised to a large degree of industry representatives and licensed administrators are empowered to grant licences to mutual funds.

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.

This is intended to be a guide to the more important provisions contained in the Act and Regulations and advice from legal counsel should be sought with regard to this legislation by any interested party.

The Act may be sighted as the "Mutual Funds Act, 1995".

This section contains a number of relevant definitions, the most important of which is the definition of the Mutual Fund as follows:

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"

Also important is the definition of a Licensor, which is as follows:

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

Finally, any reference to "the Commission" relates to the Securities Commission established by the Securities Industries Act, 1999.

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 have investment advisers, managers or administrators located in The Bahamas or using an address in The Bahamas.

Offering documents (See Regulations - First Schedule) shall describe the equity interests in all material respects and contain such information necessary to enable a prospective investor to make an informed decision as to whether or not to invest. A mutual fund is not considered to be in compliance with the filing of its offering document or the prescribed details (for authorised funds) if material changes impacting material information therein has not been updated and filed with the Commission within 21 days of the operator becoming so aware. Amendments may be in the form of a sticker or supplement.

A mutual fund is not considered to be in compliance with its licensing requirements if it has changed its registered or principal office or administrator and failed to inform the Commission of the change.

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 (see Regulations - Third Schedule) 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.

The Licensor may refuse to grant a Mutual Fund Licence if the fund's name is identical with that of other entities or is likely to suggest falsely patronage of or connection with other parties or a special status in relation to or derived from the Government. The Licensor may direct a fund to change its name subsequent to granting a licence if it discovers later that it would have refused the name.

A person other than regulated or exempt mutual funds shall not represent in any way that he is carrying on business in or from The Bahamas as a mutual fund.

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.

Licensed mutual funds shall pay the prescribed annual licence fee on or before 31st January in each year. An authorised fund shall pay the prescribed annual registration fee by the same date. A late payment penalty will be levied unless waived for good cause by the Commission.

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.

A application for a Mutual Fund Administrator's Licence shall be made to the Commission in the prescribed form (see regulations - fourth schedule) 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 must have a place which will be its principal office 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 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.

The Commission may refuse to grant a Mutual Fund Administrator's Licence if the administrator's name is identical with that of other entities or is likely to suggest falsely patronage of or connection with other parties or a special status in relation to or derived from the Government. The Commission may direct an administrator to change its name subsequent to granting a licence if it discovers later that it would have refused the name.

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.

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.

Except for licensed Bahamian banks or trust companies, any change in directors or similar senior officers or general partners of a licensed administrator must be approved in advance by the Commission unless the obligation to do so was waived.

Except for licensed Bahamian banks or trust companies, a licensed corporate administrator shall at all times have at least two directors approved by the Commission.

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 Inspector, the promoter or operator of a regulated fund shall give the Inspector access to, or provide at any reasonable time all records relating to the fund. The Inspector 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 may at any time instruct a licensed administrator to have its accounts audited and submit them in a specified time.

If requested to do so by the Commission, a licensed administrator 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 Inspector, a licensed administrator shall give the Inspector access to, or provide at any reasonable time the records of the administrator and any records under its control. The Inspector 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 administrator 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 person is acting or carrying on business as a mutual fund administrator 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 assets of investors or to protect the interests of the creditors in any mutual fund being administered by that person.

It is the duty of the Securities Commission to administer the Mutual Funds Act, 1995.

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; 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 Inspector 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.

Similar to 33 above, the Inspector shall immediately enquire into and ascertain the reason for any failure of a fund administrator to comply with the various requirements under the Act.

A person shall not hinder the Commission or the Inspector in the exercise of any of their powers under this Act.

The Commission, the Inspector, 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.

A person aggrieved by any action taken by the Commission has a right of appeal to the Court but the Commission's decision on any matter of a purely administrative matter shall be final.

The auditor of a fund or fund administrator should give immediate notice to the Commission giving reason if he becomes aware or has reason to believe that the fund or administrator is not keeping sufficient accounting records to allow its accounts to be properly audited or is carrying on or attempting to carry on or winding up its business in a manner that is prejudicial to its investors or creditors.

This section lays out the penalties for willful contravention of the various requirements under the Act.

The Minister, after consultation with the Commission, may make regulations for carrying out the purposes of the Act. The Minister may also grant exemptions to funds or fund administrators from some or all the regulations made.

Provided application to be licensed is made within four months after commencement of the Act an existing fund may carry on business without being a regulated mutual fund for fifteen months after commencement. Similarly, the time frame is two and six months, respectively for an administrator. Upon application, the Commission may grant an extension as it sees fit.

The Securities Act is repealed.

The information contained in this booklet 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.