Bahrain is a regional hub for financial services and is home to a sophisticated investor community. The country has lucrative opportunities for foreign investment firms looking to market their collective investment undertakings (“CIUs”) in Bahrain. Regulating CIUs aligns with Bahrain’s 2030 Vision to persuade the marketing of local and overseas domiciled funds while guarding investors’ rights. However, marketing overseas CIUs in Bahrain is subject to a complex regulatory framework requiring navigation. In this article, we will cover a brief overview of the regulatory landscape for overseas CIUs, covering key topics such as requirements for registration, authorization, listing, and distribution.
Overview of Regulatory Framework of CIU
The Central Bank of Bahrain (“CBB”) is the regulator for investment activities in Bahrain. Per Article (40) of the Central Bank of Bahrain and Financial Institutions Law No. 64 of 2006, as amended (“CBB Law”), no person may carry out ‘a services’ without being licensed by the CBB[i]. Module CIU (Rulebook 7) contains the CBB’s rules relating to overseas CIUs.
What is a CIU?
The CBB defines a CIU as an investment scheme where multiple investors pool their funds together to invest in a portfolio of assets collectively. CIUs allow investors to diversify their investments and earn higher returns, while a professional fund handles the investment decisions. The CBB regulates CIUs and placement agents managing investment schemes.
A CIU can be domiciled in Bahrain or overseas. The CBB allows the promotion of CIUs in Bahrain by a placement agent appropriately licensed by the CBB license as a bank or investment firm (category 1, 2, or 4).
Classification
There are two categories overseas domiciled CIUs can fall under:
Retail
Retail CIUs are CIUs which can be offered to all types of investors.
Reporting Requirements: Retail CIUs are subject to relatively detailed requirements, including restrictions on the types of financial instruments or other assets can be held in the CIU, to limit risks to the general investor.
Exempt
Exempt CIUs can only be offered to accredited investors. These are defined below.
Authorization/Notification Requirements
Overseas domiciled retail CIUs are subject to authorization by the CBB prior to being offered to investors in the Kingdom of Bahrain.
Overseas domiciled exempt CIUs may only be offered to investors following a notification in writing to the CBB in the prescribed template 5 days prior to offering the CIU to investors.
Distribution Requirements
An overseas-domiciled exempt CIU’s placement agent must be able to show each of its investors meets the criteria for an “accredited investor”. Accredited investors are defined as investors meeting the following criteria:
(a) Individuals who have a minimum net worth (or joint net worth with their spouse) of USD 1,000,000, excluding the person’s principal place of residence;
(b) Companies, partnerships, trusts or other commercial undertakings, which have financial assets available for investment of not less than USD 1,000,000; or
(c) Governments, supranational organisations, central banks or other national monetary authorities, and state organisations whose main activity is to invest in financial instruments (such as state pension funds).
Individuals and commercial undertakings may elect in writing to be treated as accredited investors subject to meeting at least two of the following conditions:
(a) The investor has carried out trading/investing transactions, in significant size (i.e. value of transactions aggregating USD 200,000) over the last 12-month period;
(b) The size of the investor’s financial assets portfolio including cash deposits and financial instruments is USD 500,000 or more; and/or
(c) The investor works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged (i.e. the position was professional in nature and held in a field which allowed the client to acquire knowledge of transactions or services have comparable features and a comparable level of complexity to the transactions or services envisaged).
Conclusion
In conclusion, Bahrain is an attractive destination for overseas domiciled CIUs. The country’s favorable tax regulatory framework and well-developed financial infrastructure have helped make it a desirable choice for fund managers and investors.
If you require assistance with CIUs, we are here to help. Our expert team has extensive experience advising clients on regulatory compliance and CBB rules on a case-by-case basis. Contact us today to learn how we can assist you with your CIU needs.
[i] https://cbben.thomsonreuters.com/rulebook/article-40-carrying-out-regulated-services#:~:text=(a)%20No%20person%20shall%20carry,approval%20of%20the%20Central%20Bank.
