There is a saying, “Imitation is the sincerest form of flattery”[1]. Indeed, private client hubs around the world have beencopying each other’s products for years, though with the best intent, to provide clients with a holistic set of tools to achieve their objectives. One might not call this innovative, but innovation can be found in even the minutest of changes, for example minor amendments to legislation or policy which can give afinancial center a competitive edge. Innovation also can be found in adapting an old idea in an innovative way, repurposing it for the benefit of the financial center’s clientele.
The ICON, the newest product to be introduced by The Bahamas, “imitates” the Brazilian condominium, which is the only structure of Brazil’s over 30,000 domestic hedge funds. The Investment Condominium Act was passed into law by The Bahamas in October 2014. The Act establishes a new registered structure under Bahamian law called the Investment Condominium (“ICON”).The first ICON was registered in December of 2014,and since then there has been keen interest in this new structurefrom both clients and advisors because of its unique attributes.
The ICON is an alternative to the standard corporate vehicle which always has been an attractive legal structure for the formation and licensing of investment funds. Typically the promoter or sponsor of the fund will cause a company to be incorporated and license it as an investment fund in one of the regulatory categories: professional fund[2], SMART Fund[3] or Standard Fund[4]. In The Bahamas, it is also possible to structure a fund as a segregated accounts company, unit trust or limited partnership.
Companies and segregated accounts companies possess legal personalities separate and apart from shareholders and directors. A sponsor or promoter may cause a company to be incorporated to do anything that is not against the law or contrary to public policy. The ICON, on the other hand, is a single purpose structure: a contractual relationship that subsists between investors, referred to as “participants”, who agree to form the relationship for the purpose of collectively investing. The ICON possesses no legal personality and acts through an Administrator that is licensed and regulated in The Bahamas. By the terms of the law, however, the ICON structure is deemed to own assets in its own name and may sue and be sued.
The ICON is also required to be licensed as an investment fund which is done either by an Unrestricted Fund Administrator under delegated authority by the Securities Commission of The Bahamas, or the Securities Commission of The Bahamas itself, an IOSCO “A” rated regulator. The ICON must have both a “governing administrator” and a “general administrator”the roles of which can be served by one entity or two entities. A governing administrator is very similar to the board of directors of a fund in terms of function and liability, while a general administrator conducts the administrative functions of the fund such as calculating the Net Asset Value, acting as Registrar and Transfer Agent, ensuring compliance with the investment fund laws, appointing service providers and acting as liaison with the Securities Commission.
Some advisors have queried whether the ICON is, in reality, a trust.An ICON is very different from the trust – the Administrator, unlike a Trustee, does not hold title to the assets; it is the ICON which holds title represented in all contractual matters by its Administrator. This is made possible by the extremely clear terms of the statute and,of course, the sovereignty of The Bahamas and its Parliament to implement laws that are binding. This is the reason, for instance, that in 2003 The Bahamas was able to adapt by statute an entity previously unknown under common law –i.e. the “civil law” foundation.
A unique feature of the ICON Act is the provision for other types of entities (for example companies, unit trusts and exempted limited partnerships) established under the laws of The Bahamas, or re-domiciled to The Bahamas, to convert to an ICON by following a defined procedure. The intent and the effect of the provision is to provide for “conversion” of the entity by operation of law without the need for winding up or dissolution or any transfer, redemption or reissue of shares, trust units or partnership interests. How is this possible? Because our statute quite clearly provides for it and further requires that the Administrator confirms the basis upon which shares, partnership interests, and units have been converted into participation interests.The entire function is according to contract, agreement and law and executed in a seamless transaction.
The ICON was inspired, as many a great art piece, by the life and world around it. The ancient Greek Philosopher Plotinus wrote, “If somebody does not esteem the arts because they imitate nature, it should be said first that nature herself imitates. Then it should be borne in mind that the arts do not simply copy the visible things but draw from the principles that constitute the source of nature.”As Plotinus sagely observed, there is innovation in imitation – and beauty too.
[1] Attributed to Charles Caleb Colton.
[2] A professional fund may be offered to “qualified” investors on net-worth basis and may be offered to individuals and institutions that meet such criteria.
[3] A SMART Fund stands for Specific Mandate Alternative Regulatory Test Fund. There presently are seven templates which have common features like the ability for the investors to unanimously waive the audit in favour of the production of semi-annual performance reports, and the ability to produce a streamlined term sheet. Templates are not closed and new templates are approved by the Securities Commission of The Bahamas on presentation of a business case which justifies an alternative regulatory framework.
[4] A Standard Fund is a retail fund which must be licensed by the Securities Commission of The Bahamas. The regulatory framework around this fund is thus very much concerned with investor protection.
Aliya Allen is the CEO and Executive Director of BFSB, having taken up the post in January 2012. Prior to this she was a partner in top tier Bahamas law firm, Graham Thompson, specializing in financial services and general corporate law. She was listed in Chambers Global 2012 as an up and coming leading lawyer. Prior to this, she was counsel to the Office of the Attorney General in international cooperation and civil matters.
She holds a LLB (Hons) from the University of Buckingham and completed the Bar Vocational Course at Manchester University. She is admitted to the English and Bahamas Bars and is a member of the Honourable Society of Gray's Inn.
