Niche Products Help Differentiate The Bahamas

The Bahamas, which marked 40 years of independence in 2013 and has been providing financial services to the global community for more than 80 years, may be one of the world’s most established international financial centres but it remains one of the most agile when it comes to responding to changing client needs and creating new solutions for wealth management.

Market responsiveness has long been a part of The Bahamas’ DNA as a forward thinking IFC, and has been the basis of legislation creating client-centric products and services in a modern, compliant regulatory regime.

The mature approach by The Bahamas to enhancing its business environment in response to market conditions and opportunities has been evident in the past year– the former a demonstration of specific product evolution and the latter a reflection of broad sweeping product enhancement and innovation.                                                        

Broad Brush Responsiveness

At the end of 2011, following the uncertainty created by the global financial crisis, The Bahamas, in its characteristically purposeful and thoughtful manner, implemented a raft of legislative amendments aimed at bolstering the competitiveness of the financial services industry. No less than 15 new financial services related Bills were passed, accomplishing a number of very important objectives:

1. Fortifying The Bahamas’ position as a leader in private wealth management by removing barriers to dynastic planning;

2. Aligning the regulatory regime governing securities activities with international best practices;

3. Modernising the insolvency framework for domestic and international business companies;

4. Complying, in a responsible and focused manner, with international standards set for accounting records and retention of records.

Among the amendments were:

• The Rule Against Perpetuities (Abolition) Act, 2011 which removed one of the few remaining obstacles to truly long term dynastic planning for settlors and testators of Bahamian trusts and wills.

• The Purpose Trust (Amendment) Act, 2011 which clarified provisions relating to the validity of a purpose trust and the definition of the rule against perpetuities.

• The Trustee (Amendment) Act, 2011, which further enhanced the value proposition of the Bahamas Trustee Act, 1998, by introducing both substantive and minor amendments with respect to Settlor Directed Investments and the Arbitration of Trust Disputes.

• The Securities Industry Act, 2011, which repealed and replaced the Securities Industry Act, 1999. The legislation was designed with a view to meeting the standards outlined by the 30 Principles and Objectives of Securities Regulation of the International Organisation of Securities Commissions (IOSCO).

Ground-breaking Product

The Bahamas Executive Entities Act was brought into force in April 2012.   This new legislation created the unique and ground breaking Bahamas Executive Entity (BEE), designed specifically to resolve complex governance issues in fiduciary and wealth management structures. The BEE may act as a power holder in wealth management and estate planning structures, or in any other executive, fiduciary or office holding role; indeed, the BEE is constrained from acting for any other purpose other than the carrying out of executive functions, which include acting as a shareholder of a private trust company (PTC) or as a protector, enforcer, advisory board or corporate director.

In addition to its flexible capital structure the BEE has other distinguishing features:

• It may hold shares, securities or other ownership interests in a legal person whose business is to carry out executive functions;

• Its executive functions may be performed only in relation to entities, trusts or other arrangements that are domiciled in or regulated by the laws of The Bahamas or a jurisdiction specified in the First Schedule to the Financial Transactions Reporting Act; and

• The Executive Entities Act itself contains similar anti-forced heirship provisions as are contained in the Bahamas Trustee and Foundations Acts.

Since the introduction of the BEE, registrations have increased steadily as knowledge and awareness of the product and the advantages of incorporating it into any wealth structure are spread by ongoing promotional efforts. These advantages lie in the BEE’s singular ability to remove unnecessary layers of ownership at the top level of wealth structures, concentrating control with the right people who have the assurance of limited liability and to generally facilitate proper governance to avoid the risk of family conflict damaging the family wealth. Wealth generators, particularly with family businesses, are ever more cognizant of the need to put in place proper corporate governance style processes. The executive entity lends itself particularly well to this purpose while giving clients a cost effective and flexible vehicle for structuring.

Members of the Bahamas Financial Services Board (BFSB) are effusive about the BEE and how it provides The Bahamas with a competitive advantage. One member has described the BEE as an exotic animal which has myriad uses for private clients while another believes it has the capability to transform the way in which wealth is managed across the globe.

The introduction of BEE legislation in and of itself is testament to the client-centric approach of the jurisdiction. The BEE was created after the private client team at Lawrence Graham (UK) decided to tackle the long-recognised and non-jurisdiction specific problem of utilising the standard approach to shareholding of a private trust company.  The BEE was developed by the firm and a team of Bahamas professionals, and pushed through the legislature by the public private partnership embodied by the BFSB and the Government of The Bahamas.

Commenting on the BEE, Rose Chamberlain from Lawrence Graham said: “Innovations should address real issues and not be introduced simply to attract business.  The Executive Entity achieves this goal, having been designed specifically to carry out roles within best practice wealth structures, whilst simultaneously preserving confidentiality, facilitating control and promoting good governance.”

A “SMART” Niche

Ten years ago The Bahamas introduced the SMART fund, a fund product that found a niche in its early development as a regulated investment vehicle largely for families and private clients.  Later ‘models’ were introduced to accommodate larger families and institutional investors. The SMART Fund is regulated in a risk based and flexible manner, innovative and unencumbered by comparison with anything that had come before. The SMART fund programme introduced a radical new concept: the ability to design a customised structure to take into account client specific, regulatory specific or macro-specific needs.  For instance, SMART 6 was created as a side-pocket fund to hold illiquid assets.  SMART 4 was designed as a private investment vehicle for a family or family office.  Whilst the requirements for qualification for a standard or professional fund are clearly defined within the law, the specific requirements for SMART Fund models are designed by means of regulator-approved templates, each of which creates a new SMART fund model.  Any institution or person with a business case can submit a template for approval.

The number and type of SMART funds remains an open opportunity, effectively creating a mechanism for promoters to approach the regulator for approval of a specific style of fund and for that fund, if approved, to be allocated a risk based licensing and supervisory regime tailored for its sole use.

The past year has brought the introduction of the seventh Bahamian SMART Fund template, dubbed the ‘Super Qualified Investor Fund’ (SFM007). While all the other SMART Fund models had a relatively small investor base, a maximum of 10 or 15 investors, SFM007 significantly expands the possibilities for using SMART Funds more broadly.  However, the new SFM007 was specifically designed with a country-specific solution in mind.  It mirrors the investor qualifications of the Brazilian Multimercado Fund which may invest up to 100 per cent of its assets through an offshore fund vehicle.  It may be offered on a private placement basis to up to 50 ‘super qualified’ investors who must make a minimum initial investment of US$500,000. This investor-centric fund model is designed more precisely to accommodate professional asset managers, institutional investors and ultra-high net worth individuals, all of whom stand to benefit from the risk-based approach to structuring and operating private placement funds available in The Bahamas.

For local and international asset managers, the SFM007 offers an effective way to create alternative investment products. For qualified investors, it expands their investment universe and raises their investment profile. And for the funds industry at large, it strikes the optimal balance between delivering bespoke wealth management solutions to sophisticated clientele, while adhering to appropriate regulatory requirements within a risk-based supervisory environment.

In a nutshell, using a SMART Fund to structure a well-developed alternative investment strategy takes you beyond the limitations of traditional investment vehicles, via a transparent and cost-effective platform.

The Bahamas Advantage Reinforced

‘The Bahamas Advantage’ is the branding that has been embraced by the country’s financial services industry. It is more than just a slogan; it accurately reflects the dynamic character of the jurisdiction which enjoys and fosters a close partnership between the public and private sectors, leading to innovative wealth management products such as BEE and SMART Funds.

What should be evident by the ongoing evolution of the Bahamas business environment is that the country remains a responsive and innovative jurisdiction, committed to increasing its value proposition to clients. 

Aliya Allen
Partner, Graham Thompson, Bahamas