Paul Winder, ATC highlights the benefits of SMART funds and provides a compelling case for using the Bahamas for such investments.
A number of years ago, in order to further enhance the growing financial service sector in The Bahamas, which has contributed significantly to the country’s developmental progress, the government enacted legislation that would cater to the investment needs and interests of sophisticated investors interested in a stable economy. The proposed legislation was designed to allow considerable flexibility for its promoters but with an appropriate level of governance.
The platform, the Investment Fund Act 2003 (‘IFA’), created four classes of funds, including the Specific Mandate Alternative Regulatory Test Fund, hereinafter referred to as ‘SMART Funds’.
What are SMART Funds?
SMART Funds are defined in the IFA as an investment fund established by the Securities Commission of The Bahamas that “satisfies certain prescribed parameters and requirements of a category, class or type of investment fund previously approved by the Commission”.
However, in addition to such statutory definition, SMART Funds are also commonly described as a group of investment vehicles that provide for more straightforward and effective formation by limiting the documentation required. With this in mind, a term sheet would suffice as opposed to the submission of a prospectus, thus enabling innovative and adaptable structuring solutions, but without regulatory or financial drawbacks (as, for example, in the case of retail hedge funds).
What Purpose do SMART Funds Serve?
The main purpose of the IFA, as it relates to SMART Funds, is to grant authority to Unrestricted Fund Administrators (‘UFAs’) to establish funds which provide an alternative for accredited investors and intermediaries who do not fit into a specific classification, thus enabling an alternative mandate for their regime. However, it is critical to bear in mind that despite the accommodating nature of the licensing procedure, it is a fundamental requirement that the fund comply with the stipulations set out in its constitutive documents and the fund must remain compliant with Bahamian law, notably the Investment Funds Act and the relevant Anti-Money Laundering legislation.
SMART Funds were established to provide a beneficial regime, particularly for those clients who normally wouldn’t fit into a category of Professional, Standard and Recognised Foreign Funds. In addition, the establishment of this type of fund has enabled The Bahamas to manage and regulate new and existing investments held by clients in other jurisdictions.
Why SMART Funds……and why The Bahamas?
The advantages of SMART Funds are that they provide a high degree of comfort to clients when deciding to invest, as well as welcoming single and multi-family offices (which can be considered as small groups of qualified investors); that is not the situation with many other investments funds regimes.
Despite the requirement of a Bahamian fund administrator, once funds are domiciled in The Bahamas there is still a degree of flexibility which allows for certain functions to be delegated to other licensed financial institutions. This has proven to be beneficial and useful to clients who have already established professional relationships with financial institutions domiciled in their home country, which they prefer to maintain.
There are six models of SMART Fund, which have been pre-approved by the Securities Commission of The Bahamas and cater to the varying needs and expectations of clients. In addition, and as a direct result of the ease of establishment, the cost of maintaining the fund is considerably less than that of other mutual funds. SMART Funds allow directors to retain their investment management functions, thereby promoting efficiency while reducing cost. There is also no requirement that the directors be of Bahamian nationality (though there is a requirement of a minimum of two directors).
Is there an Audit Requirement?
Uniquely, SMART Funds do not require an audit to be conducted, however, that is within the discretion of the investors and can be waived accordingly.
Is the SMART Fund Flexible?
The establishment of SMART Funds has created a more secure option for advisors and their clients, in that capital will be held in an investment fund, as opposed to an unregulated company, where assets can be easily depleted. This structure, as stated previously, promotes wealth and asset management, and in some cases can be considered as a hybrid between a Private Holding Company and an Investment Fund. In addition, through the management of unequal shareholding and asset allocations, this fund lends itself to family investment portfolios and can be structured through a Segregated Account Company (‘SAC’), thus legally separating the risk inherent in multi asset funds; for example it could hold a private company, a portfolio and antiques in three separate cells under the same fund, with each asset being legally distinct and separate from the other.
The very existence of the fund which is, as previously noted, regulated by the Securities Commission of The Bahamas ensures an additional level of comfort for sophisticated investors; this form of structure provides for checks and balances, which are missing in the case of unregulated entities. In addition, the relative simplicity of establishment and maintenance lends itself to a more hands-on approach that can be considered investor friendly (in that the structure as it relates to the holdings and value is indeed easier to understand).
The fund can also be listed on The Bahamas and/or other international stock exchanges, such as BISX, AIM, etc, thus formalising the investment and personal holding structure.
Does it Provide Opportunities?
There are opportunities for both the investment manager and investor in SMART Funds. The investment managers have the opportunity to expand their scope of involvement in a diverse investment fund and through that develop their performance, and for the investor the opportunity for them to convert and structure their personal investments as a fund lends itself to the idea of entrepreneurial structuring and increased involvement. The ability to hold personal effects for investment purposes in various different forms, including fine art, etc, within the fund creates a platform to structure all of their investments in a regulated entity for the preservation of wealth.
Is it Accountable?
The onus is placed on the fund administrators to ensure that performance is exceptional; that again demonstrates that the regulatory bodies are concerned about the investors’ level of reassurance as well as the credibility this structure will provide.
The investment fund market, prior to the invention and introduction of the SMART Funds, was somewhat segregated (who could invest, what could be invested and so on). However, the approach of The Bahamas to this issue not only considered the liquid asset that an investor may want to preserve as part of his portfolio, but also the tangibles that are often also very valuable. As a result, the SMART Fund was established to promote wealth and asset management, with the idea of putting the interests of investors at the forefront. The investor, through the SMART Fund, has a flexible, credible, straightforward and cost effective solution. With that in mind, why not The Bahamas?
Paul Winder, Managing Director, ATC, The Bahamas