The sovereign islands of The Bahamas have long been regarded as a premier tax-neutral offshore jurisdiction offering a wide array of financial services and investor-friendly legislation in a politically stable environment. In recent years, the legislative landscape of this archipelago has undergone a renaissance as regards legislation pertaining to the financial services sector. Over the past decade, Parliament has enacted the Fraudulent Dispositions Act, 1991; the Mutual Funds Act, 1995; and, the Trustee Act, 1998. However, it is the Securities Industry Act, 1999 (the "Act"), which forms the cornerstone of the Government's efforts to make The Bahamas the preeminent financial offshore centre. It is anticipated that the Act will come into force by the end of June, 1999.

The Act provides for the continuation of the existing Securities Board under the title of the Securities Commission of The Bahamas (the "Commission"); the registration and regulation of securities exchanges and supporting facilities; the licensing of broker dealers, traders and securities investment advisors; and, the regulation of the securities market. This article provides a brief overview of the Act and some of the notable highlights.

THE FUNCTION AND POWERS OF THE COMMISSION

Pursuant to Section 4 of the Act, the Commission is responsible for performing a number of functions including, inter alia, the formulation of principles to regulate and govern mutual funds, securities and capital markets and to create and promote conditions to ensure the orderly growth and development of the capital markets. It has been given broad powers to effect these functions, including the power to make regulations, carry out investigations, supervise securities exchanges and impose fines and penalties for any violations of the Act.

ESTABLISHMENT OF A SECURITIES EXCHANGE AND CLEARING AND SETTLEMENT FACILITIES

The Act provides for the registration of one or more securities exchanges, which will facilitate the listing of both domestic and international securities. Such exchanges will prove to be particularly beneficial to those international issuers who wish to simply operate offshore or reduce the cost of listing their securities on a major exchange and at the same time benefit from a structured capital market.

Institutions desiring to register as a securities exchange are required to submit an application in a form to be prescribed by the Commission; the prescribed application fee; certified copies of its Memorandum and Articles of Association; an arrangement acceptable to the Commission to establish a compensation fund for the protection of broker-dealers and customers of broker-dealers who may suffer losses as a result of the bankruptcy, insolvency or winding up of a broker dealer; and, such other documentation as the Commission may require.

A company desiring to provide clearing, settlement, depository, custody or other services which facilitate or are ancillary to the operations of a securities exchange is required to be approved and registered by the Commission. Each applicant must submit an application in a form prescribed by the Commission, the prescribed application fee, and certified copies of its Memorandum and Articles of Association.

REGISTRATION AND LICENSING OF BROKER DEALERS, STOCKBROKERS AND SECURITIES INVESTMENT ADVISORS

Persons engaging in offering or providing investment advice to the public, underwriting of securities offering, trading securities, dealing in securities or supervising any of the above activities are required to be licensed by the Commission as (1) a securities investment advisor or (2) a stockbroker, dealer or trader employed by a broker dealer. A broker-dealer is defined as a person providing the services of a "broker", "dealer" or a "broker and dealer". The term "broker" means a person employed by a broker-dealer or the broker-dealer itself who offers or provides securities investment advice to the public, including institutions for a fee or other reward, or trades or supervises any of the above activities. Whereas a "dealer" is a person employed by a broker-dealer or the broker-dealer itself who trades on a securities exchange for the account of or on behalf of such broker-dealer or deals in securities. Only a registered broker-dealer who is a member of a securities exchange may trade on such securities exchange.

Application for registration as a broker-dealer should be submitted to the Commission in the prescribed form accompanied by the prescribed application fee, together with evidence supporting the applicant's financial strength and experience. Upon registration, the broker-dealer may apply to become a member on a securities exchange.

It should be noted that an applicant for registration as a securities exchange or clearing and settlement facility must be a company incorporated under the Companies Act, 1992. Whereas a broker-dealer may be a company incorporated or a foreign company registered under the Companies Act. Additionally, individuals deemed non-residents for exchange control purposes are required to obtain the prior approval of The Central Bank of The Bahamas before they may own shares in a company incorporated under the Companies Act.

Persons interested in offering securities investment advice are required to be registered and licensed by the Commission as a securities investment advisor. A licensed securities investment advisor may give securities investment advice to the public, deal or trade in securities, or supervise any of these activities for a fee.

However, the following institutions are not required to be licensed as a securities investment advisor:

(1) financial institutions (including banks and trust companies) licensed under the Banks and Trust Companies Regulation Act and insurance companies registered under the Insurance Act;

(2) mutual fund administrators licensed or exempt under the provisions of the Mutual Funds Act;

(3) attorneys and accountants qualified to practice in The Bahamas; and

(4) publishers and writers of newspapers and other publications in general circulation who give advice only through such publications and have no interest either directly or indirectly in any of the securities upon which the advise is given and receive no commission or other consideration for giving such advice.

ISSUANCE OF SECURITIES

The Act also regulates the issuance of securities to the public. The term "securities" is broadly defined to include a variety of financial instruments with few exceptions. An issuer of securities is prohibited from publishing an invitation or issuing an application to the public for the subscription or purchase of securities, unless a prospectus in compliance with the Act has been lodged, approved and registered by the Commission.

The Act does exempt from the requirement of a prospectus (1) applications issued in connection with a bona fide invitation to enter into an underwriting agreement for a third party to offer the securities to the public, (2) private offerings by companies having less than 50 members where the offering will not result in the private company having more than 50 members, (3) government securities, (4) mutual funds regulated or exempted under the Mutual Funds Act, (4) securities quoted on and dealt in on a recognized foreign securities exchange, and (5) securities exempted by the Commission.

Publication of a prospectus prior to registration constitutes a criminal and civil offence and offenders are subject to significant liability and imprisonment on conviction. Similarly, an issuer, promoter and the directors and executive officers of an issuer of securities are subject to liability and imprisonment for any losses or damages sustained by subscribers of securities as a result of any untrue statement in the prospectus. The term "untrue statement" also includes omissions which render the statement untrue or misleading.

Every issuer of a security registered under the Act is required to file with the Commission such quarterly and annual reports as may be prescribed by the accompanying rules and regulations. An issuer registered on a securities exchange is required to file certified duplicate copies of such quarterly and annual reports with the appropriate securities exchange.

Also where a material change occurs or is likely to occur in the affairs of a public company, that company is required to immediately report such change to the Commission and publish notice of such change in a newspaper of general circulation in The Bahamas.

CONDUCT OF SECURITIES BUSINESS

In order to ensure the stability of the Bahamian capital market and investor confidence, the Act imposes stiff penalties on persons engaged in any of the following activities:

1. creating a false market in any security through market manipulation;

2. inducing purchasers to acquire shares by circulating information to the effect that the price of any such security will or is likely to rise or fall because of market operations by one or more persons conducted for the purpose of raising or depressing the price of such security;

3. employing deceptive devices;

4. disclosing confidential information regarding an issuer prior to the normal or arranged time for publication of that information by that issuer;

5. insider trading.

The Commission and each securities exchange will also publish additional rules to govern the conduct of securities transactions within the market.

While this article attempts to provide an overview of the various sections of the Act, it is by no means meant to be exhaustive and should not be relied on without further consultation with a Bahamian attorney.

This article also appears in the 'International Offshore and Financial Centres Handbook 1999/2000'. For further information about this highly informative guide to offshore centres, or to order your copy, please phone +44 (0) 207 820 7733 or send an email to iofch@mondaq.com