Cayman Islands
Answer ... The Cayman Islands has been an important jurisdiction for the establishment of offshore alternative fund structures for over three decades. Its utility is founded on a particular legal and regulatory framework which pays specific regard to the needs of sophisticated fund managers and investors.
The principal law regulating Cayman Islands open-ended funds is the Mutual Funds Act, which dates from 1993. The Mutual Funds Act requires that Cayman Islands funds (and their associated master funds) which offer redeemable equity interests, whether formed as companies, limited partnerships or unit trusts, to be regulated by the Cayman Islands Monetary Authority (CIMA) (see further question 1.2). In addition, since August 2020, many closed-ended funds now fall to be regulated by CIMA under the Private Funds Act.
The Anti-Money Laundering Regulations, the Foreign Account Tax Compliance Act (FATCA) Regulations and Common Reporting Standard (CRS) Regulations, various sanctions orders and the Data Protection Act generally apply to all funds, although their incremental impact is minimal relative to ordinary compliance processes. Directors to corporate funds regulated under the Mutual Funds Act must be registered with (or, as needs be, licensed by) CIMA under the Director Registration and Licensing Act.
Cayman Islands
Answer ... Open-ended funds: The Mutual Funds Act regulates open-ended funds and their associated master funds. An open-ended fund is a fund which issues redeemable shares, interests or units. There are three methods of regulation:
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Fast-track registration method: Here the minimum investment level is at least US$100,000 per investor (unless the interests are listed or there are fewer than 15 investors with power to change the directors or general partner). Registration is achieved upon filing the relevant forms, consent letters, placement memorandum and supporting documentation, and paying the relevant fees. Registration is automatic and without review or approval by CIMA. This is the typical method of registration.
- Local administrator registration method: In this case regulation is achieved by appointing a local administrator as the fund’s ‘principal office’, filing similar documentation and paying the fees. Under this method, the local administrator assumes supervisory responsibility over the fund. This route is less common, though it has the advantage of there being no minimum investment level.
- CIMA licensing method: Here regulation can be achieved by direct licensing from CIMA. In this case, there is no minimum investment level and CIMA will conduct a substantive assessment of the fund. Given the flexibility of the fast-track method, this method is seldom used. CIMA may apply licence conditions.
Closed-ended funds: The Private Funds Act brought closed-ended funds under a registration regime with effect from 7 August 2020, though the statute and an associated statement of guidance set out 25 ‘non-fund arrangements’ which are exempt from the regime. An in-scope closed-ended fund must apply to register with CIMA within 21 days following the fund accepting capital commitments from investors and must complete the registration process prior to accepting capital contributions. Registration is similar to fast-track registration under the Mutual Funds Act; however, there is no minimum investment level for investors and no need to file a full placement memorandum.
CIMA Rules affecting open-ended and closed-ended funds: In 2020, CIMA promulgated various rules in respect of open-ended and closed–ended funds relating to the calculation of asset values, the safekeeping and segregation of assets and certain mandatory disclosures to investors. In general terms, these rules make no substantive change to the typical disclosure and operating standards of Cayman Islands funds.
The exempted limited partnership is based on the Delaware model; although, while a legal entity, it is without separate legal personality. The general partner has control of the partnership, is liable for its debts and engages service providers as necessary. At least one general partner, who may be an individual, must be resident, formed or, if formed elsewhere, registered in the Cayman Islands. There are proposals to introduce a segregated portfolio regime for exempted limited partnerships.
A unit trust is an investment vehicle organised as a common law trust. As in the United Kingdom, the trustee of the trust has legal ownership and control of the trust assets, although powers may be reserved and it will typically delegate functions to service providers. The trust, as a creature of common law, provides a structure that is flexible. A unit trust will typically, for reasons relating to conflict of laws, have a licensed trustee based in the Cayman Islands.
Cayman Islands
Answer ... The Mutual Funds Act and Private Funds Act apply to open-ended and closed-ended funds carrying on or attempting to carry on business in or from the Cayman Islands, including funds incorporated or established in the Cayman Islands and foreign funds that make an offer of their equity interests to the public in the Cayman Islands. There is a carve-out for foreign funds listed or regulated overseas that effect a public offer through a local distributor licensed under the Securities Investment Business Act. A fund regulated under the Mutual Funds Act or Private Funds Act is subject to that law, and CIMA supervision, in respect of its activities anywhere in the world.
Cayman Islands law does not regulate offerings of equity interests by foreign funds outside of the Cayman Islands, irrespective of whether an offering is made to a Cayman Islands person.
Cayman Islands
Answer ... The Cayman Islands has entered into 36 bilateral tax information exchange and disclosure agreements with foreign jurisdictions. Historically, such intergovernmental agreements typically related to the provision of information upon a specific request by a foreign tax authority. However, more recently, intergovernmental agreements have been entered into by the Cayman Islands which provide for the automatic collection and disclosure to foreign tax authorities of financial information relating to investors. In particular, the Cayman Islands has entered into and implemented an intergovernmental agreement with the United States (ie, FATCA), and has also entered into and implemented similar arrangements pursuant to the Organisation for Economic Co-operation and Development’s Standard for Automatic Exchange of Financial Information in Tax Matters (commonly known as the CRS) with currently more than 100 jurisdictions, which provides for the collection and automatic disclosure to the tax authorities in the jurisdiction of tax residence of the investor of the investment amount of that investor in the Cayman Islands fund and distributions paid.
Please see further question 8.4 as to the practical application of FATCA and CRS to Cayman Islands funds and question 1.6 as to other intergovernmental arrangements.
Cayman Islands
Answer ... Funds regulated under the Mutual Funds Act or Private Funds Act must file annual audited accounts with CIMA, and CIMA may require a fund to provide such other information or explanation as it may reasonably request in order to carry out its duties. A regulated fund must give CIMA access on request to, or provide at any reasonable time, all records relating to the fund. CIMA may take a confidential copy of a record to which it is given access. Failure to comply with these requests may result in substantial fines or in CIMA applying to court to have the fund wound up.
CIMA is authorised to take supervisory action in a range of circumstances, including where it is satisfied that a fund registered under the Mutual Funds Act or Private Funds Act is or is likely to become unable to meet its obligations as they fall due, or is carrying on or is attempting to carry on business or is winding up its business voluntarily in a manner that is prejudicial to its investors or creditors. The powers of CIMA include the power to:
- require substitution of the operators of the fund;
- appoint a person to advise the fund on its affairs; and
- appoint a person to assume control of the fund.
Other remedies are also available to CIMA, including the ability to apply to court for approval of other actions.
Unless the fund is directly licensed by CIMA under the Mutual Funds Act, regulation of a fund under the Mutual Funds Act or the Private Funds Act does not imply that CIMA has passed upon or approved the fund or the offering of its equity interests.
Cayman Islands
Answer ... Cooperation with regulatory counterparts is a statutory function of CIMA and it has established memoranda of understanding and other cooperation channels with foreign regulators to facilitate this function.