Barbados: Establishing a Mutual Fund in Barbados

Last Updated: 24 February 2004
Article by Trena Kellman

Introduction

For the foreign investor, individual or institutional, diversification is always a major factor when it comes to investing. It generally reduces investment risk and provides the potential for better long-term returns. Thus, it is not surprising that the establishment of mutual funds in Barbados may become a consideration in the instance where the investor is exploring investment opportunities beyond its shores.

Regulation of Mutual Funds

Barbados has recently enacted Mutual Funds legislation in order to regulate, authorize and control mutual funds and their administration. The Mutual Funds Act 2002-22 is accompanied by subsidiary legislation, namely, the Mutual Fund Regulations, 2002 and the Mutual Fund (Fees) Regulations, 2000, the latter originally subsidiary to the Mutual Fund Act, 1998-45 now repealed and replaced by the 2002 Act.

Mutual funds are a popular investment opportunity because they produce a number of investment choices. Given the overwhelming interest in them of late this article is to inform the potential investor about establishing a mutual fund in Barbados.

Establishing the Mutual Fund in Barbados

Before the investor could even consider the extent of the returns he or she may earn from investing in mutual funds they usually consider a number of factors that may impact their investment. Likewise, with the establishment of a mutual fund a number of factors are to be considered. Some of them are listed and discussed below:

1. Form of the Mutual Fund

Under the Mutual Funds Act the mutual fund may either be a registered unit trust, a partnership, a society or a company (a popular form). The fund may not however be:

  • a person licensed under:
  1. Part II of the Financial Institutions Act, Cap. 324A other than a finance company;
  2. the Insurance Act, Cap. 310;
  3. the Exempt Insurance Act, Cap. 308A.
  • a friendly society within the meaning of the Friendly Societies Act, Cap. 379.
  • a society, credit union or association within the meaning of the Cooperative Societies Act, Cap. 378A.
  • any company or partnership, whether Barbadian or foreign, that is primarily engaged in any industrial, commercial or charitable enterprise.

The company, trust or partnership or society will not be considered a mutual fund notwithstanding that a portion of its activities involve the management of its investments. In cases of doubt an application may be made to the Securities Commission of Barbados to determine whether or not the applicant is a mutual fund.

2. Must carry on mutual fund business

The term mutual fund business means the holding of shares and the pooling of investment funds; the investment of pooled securities and the single or continuous issue or offer for issue of shares or units for sale.

3. Mutual fund business must be carried on in or from Barbados

A mutual fund is carrying on business in or from Barbados where it is incorporated, registered or established in Barbados to engage in mutual fund business or where it engages or proposes to engage in mutual fund business but regardless of where it is incorporated, registered or established, its management, the control of all or substantially all of its assets, or its administration is carried on in Barbados or it otherwise falls into a description of a mutual fund in Barbados.

Where the mutual fund is a company it shall be regarded as based in Barbados where either any of its profits, income or benefits arise from the operation of a company incorporated or registered in Barbados or having a place of business in Barbados or uses an address in Barbados; or the administrator, the investor adviser or the investment manager (whether individual or company) has a place of business in Barbados or uses an address in Barbados.

A Mutual fund may, upon application, be licensed to carry on business in or from Barbados where:

  • it is based in Barbados or has a registered office in Barbados;
  • it has applied for and has been granted a licence under the Mutual Act;
  • the equity interests are listed on a stock exchange including an "over-the-counter market" specified by the Securities Commission by notice in the Gazette; or
  • the minimum equity interest that may be purchased by a prospective investor in the fund is not less than $100 or its equivalent in any other currency.

4. Obtain a Mutual Fund licence

Whatever form the mutual fund may take it must acquire a mutual fund licence in order to operate as a mutual fund in Barbados. There are various licences and accompanying specific statutory requirements that are to be considered. These are addressed as follows:

  • Types of Mutual Fund Licences

The Act appears to make provision for generally three types of mutual fund licences:

  1. the mutual fund licence: this is a mutual fund licensed in Barbados;
  2. the exempt mutual fund licence: this is a mutual fund which is licensed in a foreign jurisdiction and has not suspended operation in that jurisdiction and has been approved by the Minister responsible for Finance in Barbados; and
  3. the limited investors licence: this is a mutual fund in which the equity interest are held not by more than 15 investors the majority of whom are capable of appointing or removing the operator of the fund and in the case where any of the investors is a corporation, that the corporation does not have more than 4 beneficial owners.
  • Qualifying for a Mutual Fund License

A Mutual fund licence will not be granted unless the following statutory requirements are satisfied:

  • the promoter appointed by or associated with the mutual fund is of sound reputation. The promoter is a person whether inside or outside of Barbados who causes the preparation or distribution of an offering document in respect of the mutual fund or proposed mutual fund. The offering document is a document or series of documents on the basis of which equity interests in the mutual fund are offered for sale or where persons are invited to subscribe for or purchase the said equity interests.
  • The administration of the mutual fund will be undertaken by persons of sufficient expertise to administer the fund and are of sound reputation. The mutual fund administrator is a person who conducts the administration of the mutual fund in or from Barbados. It may be a locally incorporated company, an external company in Barbados, a partnership, a society or an international business company once the extent of the conduct of its administration falls within the International Business companies Act, Cap. 77.

    Further, a person can only carry on a business as a mutual fund administrator once that person holds an administration licence.

    The mutual fund administrator may hold either a General Administration licence; or a Restricted Administration licence.

    The holder of a General Administration licence is authorized to act or carry on business as a mutual fund administrator in respect of an unlimited number of mutual funds. Whilst the holder of the Restricted Administration licence is authorized to act or carry on business as a mutual fund administrator soley in respect of the mutual funds specified in the licence.
  • The business of the mutual fund and any offer of equity interest in it will be carried out in a proper manner.
  • There is an operator of the fund (e.g. this would be a director if the fund is in the form of a company) who would ensure that when carrying on business in or from Barbados the mutual fund complies with all conditions of its licence.
  • If the mutual fund is not incorporated in Barbados it must have:
    1. a place that will be its principal office in Barbados and
    2. appointed a person who is resident in Barbados and who has been approved by the Securities Commission as its agent.
  • How to Apply for the Mutual Fund Licence

Regardless of the type of mutual fund licence the method of application is the same. The following procedure is to be observed:

  • the application is to be made by completing the prescribed form.
  • this application is accompanied by:
  1. the constitutive document of the fund
  2. the offering document, in the appropriate case (e.g. where fund is a company offering for sale equity interests in the fund)
  3. the necessary details that the applicant has satisfied the statutory description of either one of the three types of mutual fund licences
  4. the necessary details that the applicant qualifies under statute for obtaining a mutual fund licence
  5. the prescribed application fee.
  • Revocation of the Mutual Fund Licence

A list of the circumstances in which the mutual fund licence shall be revoked are as follows:

  • where the mutual fund ceases to engage in mutual fund business;
  • where the holder of the licence is placed in liquidation or is dissolved; and
  • where the payment of the licence fee is in arrears and either the licensee has failed to repay after the expiration of one month’s notice in writing or the licensee has failed within the notification to show good cause why the licence should not be revoked.

Note also that generally the licence may be revoked where the licensee fails to comply with:

  • the requirements of the Mutual Funds Act or its regulations and
  • any direction of the Securities Commission.

Summary

In order to establish a mutual fund four basic requirements must be satisfied:

  1. the mutual fund must be in one of the acceptable forms;
  2. it must obtain a mutual fund licence;
  3. it must engage in mutual fund business; and
  4. it must carry on business in or from Barbados.

Other Considerations

  • Taxation of the Mutual Fund

By section 55 of the Mutual Funds Act 2002-22 the mutual fund authorized to carry on business under the Act is exempt from paying stamp duty and property transfer tax with respect to transactions concerning the acquisition or transfer of shares in mutual funds.

Additionally, there is a withholding tax on income from mutual funds. By section 64F of the Income Tax Act, Cap. 73 every resident mutual fund is allowed to withhold or deduct from the amount it distributes in respect of a unit, share or other equity interest held in it, to a resident individual, an amount equal to 12.5% thereof and pay the said amount withheld or deducted as payment in full of the tax in respect of the income of the resident individual arising from that unit, share or other equity interest.

  • Fees Payable on Application for licences

Cost is always a factor when the investor is considering establishing a mutual fund. Excluding legal fees, government fees and accompanying expenses the Mutual Funds (Fees) Regulations of 2000 provides for the fees payable for the various applications for licences. These are listed as follows:

Matters

Fees

1. Application for the Mutual Fund licence

10,000

2. Application for an annual licence

5,000

3. Application for general administration licence

10,000

4. Application for restricted administration licence

5,000

5. Application for annual general administration licence

5,000

6. Application for an annual restricted administration licence

2,500

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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