Christina Rolle of the Securities Commission of The Bahamas explores the new and evolving securities and investment environment in the country.
The Digital Assets and Registered Exchanges Act, 2020 (DARE Act/DARE) and the Investment Funds Act, 2019 (the IFA/the IFA, 2019) have gained international acclaim for their innovative, pragmatic responses to vexing regulatory concerns. Legislative initiatives are opportunities to solve problems but they are also opportunities to innovate. We approach them as such, with the view that what will distinguish the Securities Commission of The Bahamas (SCB) is our deep commitment to providing pragmatic solutions in response to regulatory risk.
To illustrate this, the investment funds legal framework, prior to the promulgation of the 2019 legislation, had not kept pace with international best practices and standards. It had supported The Bahamas' wealth management industry at the start of the millennium, but by the time The Bahamas underwent its peer review under the International Monetary Funds' Financial Sector Assessment Programme in 2012, the framework was found deficient in several key areas. As for the digital assets space, despite its growing importance to investors and wealth managers, there was no legal framework in place to provide much sought-after legal and regulatory clarity. In both instances, the SCB found itself positioned to demonstrate its innovative prowess, as it set out to update or develop the respective legislation.
The Commission's approach to these initiatives can be simplified into developing a practical understanding of regulatory concerns as well as stakeholder needs (the problems to be solved), prioritising those needs, and determining and implementing pragmatic, sustainable, best-in-class regulatory solutions.
Need: Pragmatic licensing triggers for regulating investment funds
Under the IFA, 2019, an investment fund that carries on/attempts to carry on business in or from The Bahamas must be licensed as a Standard, Professional, or Specific Mandate Alternative Regulatory Test (SMART). "Carrying on business" in this context now applies to an investment fund that is incorporated in The Bahamas, or offered for sale to non-accredited investors in The Bahamas. Therefore, investment funds are eligible for licensing based on the activity they conduct or intend to conduct, and who will be impacted by those activities, rather than whether or not certain service providers to the fund are located or licensed in The Bahamas.
Need: Righting regulatory responsibility among related parties
Absent of a framework for the regulation of investment managers, the previous investment funds legislation consequently burdened the investment fund administrator with all responsibilities for a Bahamas licensed investment fund. This may have met the needs of the primary users of investment funds in the early 2000s - private banks and trust companies servicing their clients - but as the funds industry evolved, this misalignment of responsibilities became too onerous for administrators and did not address the lacuna of fiduciary duties that should be the responsibility of the investment manager. It also meant that administrators licensed in The Bahamas were at a disadvantage to administrators licensed in other jurisdictions where they may not be saddled with fiduciary responsibilities.
Funds needed flexibility in selecting administrators, and non-accredited investors expected vetted and licensed investment managers. By developing a framework for the licensing and supervision of investment managers, the IFA framework now answers the call in both areas.
Administrators from any prescribed jurisdiction
A Bahamas-based fund is no longer required to appoint an investment fund administrator in The Bahamas to provide its principal office. Investment fund administrators for Bahamian investment funds may be licensed under the Investment Funds Act, or licensed and operating in any prescribed jurisdiction anywhere in the world. This approach opens the door for international administrators to license funds under the Act.
Appointment of investment fund managers
Under the IFA, funds must appoint an investment fund manager, except in some very specific circumstances. The investment manager must be licensed if the fund is sold to non-accredited investors but does not need to be licensed if the fund is being sold to accredited investors only. Importantly, investment funds may appoint investment managers licensed or registered in prescribed jurisdictions without the need for licensing of the investment manager in The Bahamas. In such cases there is a simple registration process.
Custodians and operators
Funds must appoint a custodian, who must be independent of the administrator, manager, and operator of the investment fund, and is obliged to segregate the cash and other assets of the fund from those of the custodian itself. Funds are also required to appoint operators, based on how the fund is structured. Operators have responsibility for the operation of the fund in compliance with the IFA, and the fund's constitutive documents. They are subject to fit and proper assessment, and must be independent of the administrator unless exempted from this requirement, or structured as an investment condominium.
EU markets access
Finally, the IFA, 2019 is also compliant with the European Union's Alternative Investment Fund Managers Directive, or AIFMD. This allows The Bahamas to qualify for passporting under the Directive. The framework grants a distinct license for managers operating in the European Union or managing funds from the EU. The IFA, 2019 also addresses the EU's standards for investment funds regarding the regulation of auditors. Under the framework, all funds that do not submit to a full annual audit are required to receive a certification, every three years, from a qualified accountant that its books are being maintained within IFRS or US GAAP standards. Auditors must be approved by the Commission to act on behalf of regulated persons.
Need: Legal certainty regarding digital assets business
The SCB's primary objective in developing the DARE Act was to bring regulatory certainty to the dynamic, fast-paced and evolving crypto space. The Commission had observed the potential the space represented for The Bahamas' wealth management industry with increasing investor interest in fintech and crypto assets globally. The SCB fielded interest from international fintech operators seeking to operate in a well-regulated, compliant jurisdiction. Enveloping these opportunities, the government of The Bahamas had also made clear its intention to transform the jurisdiction into a regional fintech hub.
Need: Regulatory flexibility as the space develops
Given that the digital assets or crypto space was (and is) still in its infancy, or in any event far from maturity, it was clear to the Commission that it needed to establish a legislative framework that was not overly prescriptive. This allows the jurisdiction to be nimble and able to react to new risk trends, or market development opportunities, as the evolving landscape demands.
To develop the legislation, the Securities Commission initially conducted a benchmarking exercise of 13 select jurisdictions, honing-in on regulatory approaches, global standards and best practices in the digital or virtual assets space. The Commission reached out to other regulators with relevant experience, and consulted with industry and other stakeholders to develop the legal framework.
The DARE Act came into effect on 14 December 2020. The legislation provided sought-after clarity, and successfully established a Bahamian legal and regulatory framework for the registration of digital token exchanges and for the issuance of digital tokens via initial token offerings.
DARE provides key legal definitions for salient terms including digital asset business, digital assets service provider, digital token, non-fungible token, utility token and virtual currency token, among others. It intentionally does not set out to answer the question of whether a digital asset is a security or not. Throughout the Act, although various types of digital assets are clearly defined and the legislation is clear about what is in scope for regulation, digital assets or crypto are recognised as their own asset class and by giving the space its own regulatory regime, The Bahamas has removed the narrow question, and its inherent uncertainty, of whether a crypto is a security and instead provided a framework whereby digital assets can be addressed holistically.
Need: Compliance with AML/CFT/PF Standards
How DARE addresses global anti-money laundering and countering the financing or terrorism and proliferation of weapons of mass destruction (AML/CFT/PF) standards is vitally important. The Commission continues to hone in on the Financial Action Task Force's Recommendation 15, and its evolving explanatory/interpretative notes. In keeping with the principles, under DARE, digital assets business is subjected to the primary national AML/CFT/PF legislation, including the Proceeds of Crime Act, 2018, the Anti-Terrorism Act, 2019 and the Financial Transactions Reporting Act, 2018. In keeping with the FATF Recommendations, DARE focuses AML/CFT supervision and oversight on the digital asset service provider, rather than the new technologies themselves.
The term ‘beneficial owner' in DARE is assigned the same meaning as in The Bahamas' Proceeds of Crime Act, harmonising the definition with this key legislation. DARE requires financial institutions to perform initial risk assessments prior to launch. The Act requires digital assets businesses to have systems in place to prevent, detect and disclose money laundering, terrorist financing and suspicious transactions. They must also comply with the Commission's rules, polices, and guidelines on risk management and the prevention of money laundering and terrorist financing.
On 16 March 2022 the Commission published its AML/CFT/PF Rules for DARE. These Rules are based on FATF's Recommendation 15 and its interpretative notes and provides specific requirements for the digital assets space. They are supplementary to DARE and are also expected to evolve as the space evolves.
Conclusion
Pragmatism is a key consideration in The Bahamas' approach to regulation, and the jurisdiction continues to watch as trends indicate a move toward securities and other asset classes becoming tokenised. We are also mindful of recent emerging risks that came to the fore in the aftermath of the great ‘crypto winter'. These risks must now be addressed in the regulatory framework and clear best practices must be established to protect investors.
If you know anything about The Bahamas, you know we do not view our size as a handicap, but a reality we can leverage to our benefit. The access that we as regulators have to industry players and regulatory addressees, policy makers, and the consumers and investors we aim to protect, allows us to identify and act on urgent matters, and to be innovative in providing pragmatic solutions to regulatory concerns.
Ms Christina R Rolle is the executive director of the Securities Commission of The Bahamas, having been appointed effective 26 January 2015.
Ms. Rolle has over 25 years of experience in the financial services industry. Prior to her appointment as Executive Director, Ms. Rolle has acted as Director and Deputy CEO for a prominent international private bank and held various senior managerial positions with local and other international institutions including Head of Trust and Fiduciary, Head of Risk, Compliance and Corporate Governance and Manager of Banking Services.
Ms. Rolle was a member of the FATCA advisory group for the Government of The Bahamas and has served on the Board of Directors of The Bahamas Financial Services Board (2009 - 2012) and the Society of Trust and Estate Practitioners (STEP), Bahamas branch (2003 - 2005).
In March 2020, Ms. Rolle was elected Vice Chair of the Inter American Regional Committee (IARC) of the International Organization of Securities Commissions (IOSCO), for a two-year term. As Vice Chair of IARC, Ms. Rolle is a member of the Board of Directors of IOSCO.
In April 2020, Ms. Rolle was appointed to The Bahamas' Economic Recovery Committee by Prime Minster the Most Hon. Dr. Hubert Minnis, to make recommendations to the Cabinet on the long-term economic recovery of The Bahamas economy, including job-creation and stimulating small business recovery and development in response to COVID-19.
Ms Rolle holds an MBA from Kellogg School of Management, Northwestern University and is an alumni of Harvard Business School.
The full Bahamas Special Report 2022 ezine with a comprehensive list of features and videos is available to view/read here.
