Sand, sea and securities

Recent legislation has made The Bahamas more amenable to hedge funds. The beaches aren't bad either.

The Bahamas is not only an extraordinarily pleasant location for a relaxed board meeting for those overseeing hedge funds. It is also a responsive, well-regulated and politically stable centre for domiciling portfolios, according to those involved with Bahamian located funds.

Nicola Thompson, vice-president and treasurer in fund administrator DPM's Nassau office, says while historically The Bahamas has been more focused on private wealth, legislative developments including the passing of the Investment Funds Act 2003 have made it a more comfortable jurisdiction in which fund and hedge fund managers can domicile their portfolios.

The Investment Funds Act 2003, which replaced the Mutual Funds Act 1995, recognised no single category could cover all types of mutual funds. The 2003 Act, therefore, has four.

There is the standard fund category, the Recognised Foreign Fund (for funds registered in other jurisdictions but which, by virtue of their service provider, are also in The Bahamas), the Professional Fund for accredited investors, and the newly created SMART Fund.

Wendy Warren, CEO of the Bahamas Financial Services Board, notes: "The SMART fund's key feature is the sponsor's ability to propose to the Securities Commission new structures for funds and, if deemed appropriate, the Securities Commission will assign a risk-based regulatory environment."

The structure may be especially attractive to start-up managers, Thompson says, who may not want to follow all the rules of standard funds. "You can create whatever template you want and register it with the Securities Commission," Thompson says. "Once they have approved the template you can run your fund accordingly." A fact sheet may replace an offering memorandum, for example, or an audit waiver agreed to by all investors.

Most hedge funds will be established as professional funds, Thompson says, for which investors must be accredited and confirm they have at least $BSD1m net worth for a couple ($1m), or income of $200,000.

For companies investing net worth must be at least $5m. The fund must be licensed by the Securities Commission, Thompson says, or by an equivalent regulator in another jurisdiction.

Alongside this flexibility in establishing funds, Wendy Warren says a key attraction is The Bahamas' heritage as a centre for international financial services, for more than 60 years.

Its Monetary Authority has been regulating banks and trust companies since the 1960s - powers assumed by the Central Bank in 1974, after the Bahamas's 1973 independence. It was the first international financial centre to criminalise money laundering in 1996, she adds, and established the Securities Commission of The Bahamas in 1995.

The Bahamas has undertaken an intensive review of all policies and legislation relating to the financial sector and the FATF has confirmed it has complied with the 40 recommendations relevant to the fight against money laundering. The IMF has confirmed: "The Bahamas has made very substantial progress towards the development of an effective regulatory regime in The Bahamas over the past two years. This has been reflected not only in the body of legislation that was enacted in December 2000, but also in the structural and operational arrangements put in place by the agencies that have been entrusted with supervisory responsibilities."

However, as it relates to the exchange of information with regard to tax matters, The Bahamas is "insisting on a process that is fair and transparent, The Bahamas held - and continues to hold - the position that there should be a common standard adopted by all co-operating onshore and offshore centres, including those located in G7 and OECD countries," Warren says.

While an important impact of the legislative changes was to reduce opportunities for anonymous use and/or abuse of Bahamian entities for unauthorised purposes either within The Bahamas or internationally, a continued strong respect for the right of the individual to personal privacy remains intact," she adds.

On the funds front, Warren notes: "where investment funds are essentially private arrangements, they will now enjoy a supervisory environment appropriate for the limited, specific nature of the project and will not suffer the 'broad-brush' regulatory approach, which is often unavoidable elsewhere."

Registering a fund through 'unrestricted investment fund administrators', which have powers delegated by the Securities Commission to license funds themselves, takes as little as 24 hours if all the due diligence and compliance with the Act is in order. Going through a 'restricted' administrator, which must submit applications and supporting papers to the Commission, can take from around two weeks.

DPM plans to apply to become an unrestricted administrator in 2005 will apply to become an unrestricted administrator in 2005.

The application fee for all but the Recognised Foreign Fund (RFF) is around $BSD750 with an annual fee of $BSD950-$BSD1000. An RFF costs about $BSD100 to register.

Thompson says a key advantage of The Bahamas - in contrast to the Cayman Islands, for example - is the Bahamas's Securities Commission is an IOSCO member.

"With The Bahamas Securities Commission as a regulator being subject to IOSCO guidelines we have a higher level of accountability," Thompson says. "We have opened up the books of the country to organisations like the Financial Action Taskforce (FATF) and US Treasury Department. "They have given sign-offs we are following the regulation guidelines they would like to see us follow, so we don't have rogue operators in the Bahamas."

For funds setting up in The Bahamas, it is worth noting your lawyer will have to have a base in The Bahamas, but your auditors won't. Fund documents can be produced outside The Bahamas with the attorney or administrator issuing a compliance certificate. Service provision will not be difficult to find, Thompson adds, as Citco, KPMG, PricewaterhouseCoopers and Deloitte & Touche are among service providers in The Bahamas. The jurisdiction's tax neutrality, along with many of its competing Caribbean centres, also makes The Bahamas attractive.

biography: nicola thompson

Nicola Thompson was appointed vice-president and treasurer commensurate with the opening of DPM Bahamas' office in Nassau in October 2002 and previously held senior management positions with several fund administrators in the Bahamas including Fortis Fund Services, Euro-Dutch Trust Company and The Deltec Banking Corporation Limited. She also specialised in auditing banks and trust companies while Deloitte & Touche.

Contact Alan Tooker, managing director, DPM (in London), on + 44 (0) 20 7661 9464 ([e-mail]), or Nicola Thompson, managing director, DPM (in Bahamas), on [phone] ([e-mail]).