New Collective Investment Undertaking Rules - Bahrain

In March 2022, the Central Bank of Bahrain (the “CBB”) amended and updated Volume 7 of its rulebook in relation to collective investment undertakings ("CIU") and introduced the CIU Module ("CIU Module") which replaces all former Modules under Volume 7 of the CBB Rulebook (“Volume 7”). The amendments to Volume 7 are part of CBB’s wider strategy to conduct a comprehensive review to the whole financial sector regulatory framework. 

The amendments to the CIU Module apply to CBB's regulatory framework governing CIUs that are domiciled in Bahrain as well as CIUs that are domiciled in an overseas jurisdiction and offered to investors within or from Bahrain.  

Amendments to Volume 7 provide a more comprehensive definition of CIUs. Under the CIU Module a CIU is defined as a scheme or arrangement, the sole object of which is the collective investment of funds raised from the public or through private placements in accordance with a defined investment policy, the purpose or effect of which is to enable the participants to receive profits or income out of the investments. The CIUs includes closed-ended funds as well as open-ended funds.

CIU Module provides for two (2) types of CIUs which are classified as retail CIUs, which may be offered to all types of investors, and exempt CIUs, which may only be offered to accredited investors. The CIUs targeting retail investors provide for low-risk investments with proper diversification and risk management, while CIUs targeted towards accredited investors contain high risk investments with the aim of delivering high returns. The category of expert CIUs which was available under the former CIU regime is no longer available.  

The definition of accredited investors has been amended under the CIU Module providing flexibility for investors to fall within the purview of 'accredited investor' category by virtue of their experience in the financial services sector and no longer stringent upon meeting financial thresholds. Accredited investors are now defined as investors meeting the following criteria:

1. Individuals who have a minimum net worth (or joint net worth with their spouse) of one million dollars (USD 1,000,000), excluding that person’s principal place of residence;
2. Companies, partnerships, trusts or other commercial undertakings, which have financial assets available for investment of not less than one million dollars (USD 1,000,000); or
3. 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 (2) of the following conditions:

1. The investor has carried out trading/investing transactions, in significant size (i.e. value of transactions aggregating two hundred thousand dollars (USD 200,000)) over the last twelve (12) month period;
2. The size of the investor's financial assets portfolio including cash deposits and financial instruments is five hundred thousand dollars (USD 500,000) or more; and/or
3. The investor works or has worked in the financial sector for at least one (1) 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 that allowed the client to acquire knowledge of transactions or services that have comparable features and a comparable level of complexity to the transactions or services envisaged).  

In respect of exempt CIUs, the CIU operator is required to disclose to the CIU participants that the CIU is only suitable for those who are treated as accredited investors and, as such, are not subject to the CBB requirements otherwise applicable to CIUs offered to retail investors. The operator is also required to notify the investors that the exempt CIUs are not subject to the CBB’s on-going supervision and obtain a written statement (either at the time of onboarding the client or at the time of offering the CIU) from the investor confirming that they fall within the purview of accredited investors and acknowledging that they understand the risks associated with their investment.    

The operator of a Bahrain domiciled exempt CIU may enter into arrangements with unregulated third-party sponsors/originators/promoters on whose behalf the CIU is established. Such arrangements may include ability of the third-party to participate in decisions in relation to investment management. In all such circumstances, a CBB licensed CIU operator or placement agent is required to take responsibility for compliance with the requirements in the CIU Module and the relevant requirements under the CBB Rulebook.

In respect of retail CIUs, the assets of a Bahrain domiciled retail CIU must comprise only one or more of the following:

1. Securities traded on the licensed exchanges:
   1. Shares in companies and other securities equivalent to shares in companies, partnerships or other entities, and depositary receipts in respect of shares;
   2. Bonds or other forms of securitised debt, sukuk including depositary receipts in respect of such securities; and
   3. Any other securities, including accepted crypto-assets traded actively on recognised exchanges (to be demonstrated to the CBB by the CIU operator) giving the right to acquire or sell any such securities or giving rise to a cash settlement determined by reference to such securities, currencies, interest rates or yields, commodities or other indices or measures.
2. Money market instruments listed on a regulated market;
3. Sovereign securities such as treasury bonds and sukuk;
4. Units of other Bahrain domiciled CIUs or overseas domiciled retail CIUs investing in liquid investments;
5. Bank deposits which are repayable on demand or maturing in no more than twelve (12) months;
6. Financial derivative instruments, including equivalent cash- settled instruments, listed on a regulated market;
7. Over the Counter (OTC) financial derivative, provided that
   1. The underlying consists of instruments such as financial indices, interest rates, foreign exchange rates or currencies, in which the retail CIU may invest according to its investment objectives;
   2. The counterparties to OTC derivative transactions are institutions subject to prudential supervision; and
   3. The OTC derivatives are subject to reliable and verifiable valuation on a daily basis and can be sold, liquidated or closed by an offsetting transaction at any time at their fair value at the operator’s initiative.
8. Real estate in the case of Real Estate Investments Trusts (REITs) provided they are established under the Trust Law and meet the following conditions:
   1. Unless otherwise agreed with the CBB, the REIT must hold a minimum of 2 real estate properties, comprising of at least 80% of the REIT’s NAV;
   2. A maximum of 20% of the REIT’s NAV may be invested in the development of existing owned property;
   3. A maximum of 20% of the REIT’s NAV may be invested in other REITs, subject to 10% investment per REIT;
   4. Other assets of the REIT must be held in cash and cash equivalents;
   5. Invest in undeveloped land and mortgages is not permitted; and
   6. Leverage is limited to a maximum of 50% of its NAV for investment purposes.

For overseas domiciled retail CIUs, the following requirements apply:

1. The operator of the CIU must be regulated in a jurisdiction acceptable to the CBB and the CIU must be capable of being sold to retail investors in the home jurisdiction;
2. Laws and practices of the jurisdiction which govern the CIU provide safeguards to investors in a manner acceptable to the CBB; and
3. The CBB is satisfied that the terms and conditions contained in the offering documents, and the roles, responsibilities and compliance obligations of the overseas fund manager or operators provide safeguards to investors in a manner acceptable to the CBB.

Under the CIU Module, retail CIUs are required to be authorised by the CBB and exempt CIUs are required to be notified to the CBB prior to being offered to investors.  The authorisation process involves a review of the application and the related documentation by the CBB.  Notification involves submission of information/documents required by the CBB for the purpose of CBB’s monitoring.  Exempt CIUs may be offered to investors five (5) days following a notification in writing to the CBB in the prescribed template.

In case a Bahrain domiciled CIU does not deploy funds raised in accordance with the investment objectives within six (6) months from the date of its authorisation/notification, the CIU operator must inform the CBB in writing the reasons for non-deployment of funds. The CBB may require the CIU operator to return any monies collected from CIU participants together with any subscription fees charged.

Bahrain domiciled CIUs have the flexibility to choose an applicable law of an overseas jurisdiction. A Bahrain domiciled CIU may be established under the various legal forms which may include the following:

1. A CIU established by way of a contract between the operator and the investors; or
2. A trust established under the Legislative Decree No. 23 of 2016 in Respect of Trusts; or
3. A cell within a Protected Cells Company established pursuant to Legislative Decree No. 22 of 2016 in respect to Protected Cells Companies; or
4. Investment Limited Partnership established pursuant to Law No. 18 of 2016 in Respect to Investment Limited Partnerships; or
5. A Bahraini Shareholding Company (closed) established under the Bahrain Commercial Companies Law.

The operators of CIUs, or where relevant, the placement agents offering CIUs in Bahrain, must ensure the following:

1. The CIU is offered by qualified individuals who possess the ability to explain the nature, structure, investment objectives and the risks associated with investing in the CIU to investors in a manner that is clear, fair and not misleading;
2. The investor’s profile and suitability assessments have been undertaken in determining if he is eligible to invest in the CIU being offered;
3. The investors submit a declaration stating that they have read the offering documents, understand the investment objectives and are familiar with associated risks;
4. The investors have access to the periodic reports specified in the offering documents in a timely manner;
5. Any client complaints and/or enquiries from investors are addressed including the provision of information to investors as may reasonably be required in accordance with the terms of the offering memorandum; and
6. They comply at all times with the laws of Bahrain and the regulations of the CBB, including those related to AML/CFT.

A relevant person (includes operator, custodian, fund administrator and placement agent) of a Bahrain domiciled CIU shall be liable for losses suffered by a CIU participant because of that relevant person’s unjustifiable failure to perform its obligations required under the CBB Law or the CBB Rulebook. The CBB does not permit relevant persons to rely on disclaimers (written or otherwise) that have the effect of restricting their liability beyond an amount considered to be reasonable and customary in the fund management industry. Accordingly, relevant persons are required to ensure that the contractual arrangements reflect this.

The operator of a Bahrain domiciled CIU is ultimately held accountable for conducting the operations diligently and for governance, internal control and compliance arrangements in relation to the CIU. The operator is required to ensure that if any roles are delegated, the arrangements ensure full compliance with the CBB requirements.

Operators of retail CIUs are required to distribute audited annual financial statements of the CIU within four (4) months of the year-end and reviewed semi-annual financial statements within two (2) months of the period-end. Operators of exempt CIUs are required to distribute an annual report within four (4) months of the year-end.

The operators of Bahrain domiciled retail CIUs must appoint:

1. An independent CBB licensed custodian (the role of the fund administrator may, however, be combined with that of a CBB licensed custodian);
2. An independent CBB licensed fund administrator; and
3. An independent Bahrain based external auditor.

The operators of Bahrain domiciled exempt CIUs that are not established as contractual CIUs are required to comply with the following requirements:

1. Appoint an independent CBB licensed custodian for open-ended CIUs;
2. The fund administration activity must be carried out in Bahrain, either by the operator or by a custodian authorised to provide fund administration services; and
3. Appoint an independent Bahrain based external auditor.

The operators of Bahrain domiciled exempt CIUs that are not established as contractual CIUs are required to comply with the following requirements:

1. Appoint an independent CBB licensed custodian for open-ended CIUs;
2. The fund administration activity must be carried out in Bahrain, either by the operator or by a custodian authorised to provide fund administration services; and
3. Appoint an independent Bahrain based external auditor.

The CBB may also allow ‘hub and spoke’ arrangements with regards to custody, provided that:

1. A suitably licensed office is maintained in Bahrain, through which the CBB can access the CIU’s records;
2. The overseas office belongs to the same group as the Bahrain custodian, and regulated by a reputable regulatory authority acceptable to the CBB;
3. The custodian retains ultimate responsibility for the CIU’s assets; and
4. Suitable outsourcing arrangements have been put in place.

The operator is required to adhere to the investment strategies and risk limits disclosed in the offering documents and agreed with the CIU participants. The operator must implement adequate risk management systems and processes in order to identify, manage and monitor the risks relevant to each CIU.

The CIU operator has the flexibility to appoint another entity to act as investment manager of the CIU, provided there are no conflicts of interests. The CBB as a matter of principle has no objection to such an arrangement provided that the operator has the ability to terminate the arrangement and also ensures that such arrangements are legally binding on the parties involved. In particular, the CIU operator must confirm to the CBB that:

1. The operator can demonstrate that the investment manager has the capabilities and resources to carry out its functions;
2. The arrangement does not prevent the CBB from effective supervision or access to the operator;
3. The arrangement does not prevent the operator from acting, or the CIU from being managed, in the best interests of the CIU participants;
4. In case of retail CIUs, the investment managers must be authorised to undertake asset management whether in Bahrain or in overseas jurisdictions;
5. Where the CIU requires a custodian or a fund administrator who is independent of the operator of the CIU, such person (i.e. custodian or fund administrator) must not also act as the investment manager for that CIU.

The CIU Module also covers Private Investment Undertakings ("PIU"). PIUs are CIUs that are offered only to ultra-high net worth investors who are defined as investors meeting the following criteria:

1. Individuals who have a minimum net worth (or joint net worth with their spouse) of twenty five million dollars (USD 25,000,000) or more;
2. Companies, partnerships, trusts or other commercial undertakings, which have financial assets available for investment of not less than twenty five million dollars (USD 25,000,000); or
3. 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).

The operator of a Bahrain domiciled PIU must be a CBB licensee (who is authorised to undertake the regulated activity of acting as a CIU operator) or an overseas operator/fund manager regulated in a reputable jurisdiction and in a manner acceptable to the CBB. Overseas domiciled PIUs may only be marketed by a Bahrain based placement agent who is authorised by the CBB to undertake such activity and has the necessary legally binding arrangements with the overseas operator/fund manager. 

The operator of a Bahrain domiciled PIU is required to establish a structure for the PIU which ensures safeguards for the CIU participants with regards to governance, investment management, custody arrangements, administration and disclosures to CIU participants.

The operator of a PIU (or where relevant, the placement agent) is required to report to the CBB, thirty (30) calendar days of each quarter end, the total net asset value of the PIU with details as follows:

1. Resident institutions;
2. Resident individuals;
3. Non-resident institutions; and
4. Non-resident individuals. 

The following are excluded from the definition of CIUs under the CIU Module:

1. A contract of insurance, insurance linked investment products or investments managed as part of a takaful contract;
2. Unrestricted investment accounts offered by Islamic bank licensed by the CBB;
3. Unilateral arrangements for a CBB licensee to hold or manage assets on a discretionary or non-discretionary basis;
4. Arrangements entirely between bodies corporate who are members of the same group, or entirely between family members or between the corporate body and its own shareholders;
5. Pension, annuity and other employee benefit schemes organised and managed for the benefit of employees or for another corporate body;
6. Structured products which do not represent collective pooling interests under a pre-defined investment policy;
7. Cash savings schemes;
8. Exchange traded funds which are listed securities offered through brokers /broker platforms;
9. Equity-based and financing-based crowdfunding offers;
10. Securities issued by special purpose vehicles in connection with direct participation of CIU participants into private equity;
11. Securities issuance by special purpose vehicles as part of a securitisation of structure including sukuk; and
12. The issue of securities and raising of capital by companies publicly or through private placements for the purpose of raising capital for financing the operations of the company which fall under the Offering of Securities Module (Module OFS) of Volume 6 of the CBB Rulebook.

The issue of securities and raising of capital by companies publicly or through private placements for the purpose of raising capital for financing the operations of the company fall under the Offering of Securities Module (Module OFS) of Volume 6 of the CBB Rulebook.

The amended and updated Volume 7 reflects CBB’s approach to simplify the CIU set up and offering regime in Bahrain. The amendments appear to cater to the diversity and growing needs of the financial markets and maintain CBB's reputation as one of the most pragmatic financial services regulators in the region.