This year saw further significant legislation enacted in the Cayman Islands to enhance its financial services industry. The establishment of the Cayman Islands Stock Exchange and other principal developments are discussed below.
The Year In Review
With the Cayman Islands Stock Exchange becoming operational on 2nd January 1997, the Cayman Islands can now offer investors, in addition to other wide-ranging financial services, its own stock exchange. Another significant development is new trusts legislation expected to be enacted before the end of this year which will not only permit the creation of non-charitable purpose trusts but will provide an alternative regime under which trusts of any kind may be created. This year also began with the recent enactment of significant legislation designed to combat "money-laundering" and to make provision for asset freezing and forfeiture of criminal proceeds; legislation of this kind now being considered as essential if an offshore jurisdiction is to be accepted as part of the international financial community . Each of these developments are expected to add further weight to the Cayman Islands' status as a leading offshore financial centre.
The Cayman Islands Stock Exchange
The Cayman Islands Stock Exchange ("CSX") offers the opportunity of:
- listing mutual funds;
- listing debt securities, in particular the securities of special purpose vehicles; and
- obtaining a secondary listing for securities already listed on a recognised exchange.
The CSX is especially suited for mutual funds and structured financing vehicles, for which the Cayman Islands have become famous. The majority of funds listed on the CSX are expected to be open-ended investment companies. The Cayman Islands are currently home to over 1,200 regulated offshore mutual funds with almost US$100 billion in assets. However, in the absence of a local exchange until this year, many of these mutual funds were listed elsewhere. For instance, over 80 Cayman Islands mutual funds were listed on the Irish Stock Exchange by 1996. These mutual funds now have the opportunity of listing on the CSX. The CSX is also open to listings by mutual funds not incorporated or established in the Cayman Islands.
In keeping with the Cayman Islands' policy of a free economy governed largely by self-regulation, the listing requirements and procedures of the CSX are more flexible and less onerous than other exchanges. For instance:
- the CSX will list retail funds incorporated in a wide range of designated countries and is likely to accept funds from any other jurisdiction if investment is restricted to qualified investors with a minimum subscription level of at least US$50,000;
- the CSX imposes no minimum capital requirements;
- mutual funds are largely free to choose and change their investment policies;
- the CSX does not insist on a prescribed degree of investment diversification allowing funds with highly focused investment strategies to be listed;
- the CSX is committed to competitive listing fees and expediting the listing process.
Listing on the CSX will:-
- allow wider distribution of an issuer's securities;
- add credibility and investor comfort;
- allow investment by certain types of investors who may only legally invest in listed securities;
- add liquidity.
Listing on the CSX is governed by the listing rules. These contain general rules applying to all issuers and specific sections applicable to the kind of securities for which listing is sought, i.e. mutual fund securities, debt securities, secondary listings. The listing rules seek to achieve a sound balance between (a) providing appropriate issuers with access to the capital market at the earliest possible opportunity, while (b) providing investors with certain safeguards and with sufficient and timely information to enable them to make informed decisions as to the value and merits of the listed securities.
Mutual fund issuers must appoint an approved listing agent who will ensure that the listing rules are followed and that the necessary documents are filed with the CSX. Issuers of debt securities or those seeking a secondary listing are not required to appoint a listing agent.
The most important document that needs to be prepared as part of the listing process is the listing document. The over-riding principle is that this must contain all information which is necessary for an investor to make an informed assessment:
- as regards the issuer, of its activities, assets, liabilities, financial position, management and prospects and profits and losses;
- as regards the securities, of their rights, powers and privileges.
The directors or "other operators" of the issuer are responsible for the matters contained in the listing document and there will need to be a responsibility statement to this effect on the front cover of the listing document.
Trading on the CSX is conducted electronically through the Bloomberg network and there is no physical trading floor. As would be expected in the Cayman Islands, being a zero tax jurisdiction, there are no taxes or stamp duties on transactions effected through the Exchange.
Proceeds of Criminal Conduct Law
The Proceeds of Criminal Conduct Law came into force on 23rd December 1996. This law has created various new "money-laundering" offences as well as broadening the enforcement powers of the courts. In particular, the courts will be able to make confiscation orders requiring offenders to pay to the court the financial proceeds or profits of crime and provision is also made for the enforcement in the Cayman Islands of confiscation orders made in the courts of other countries. This law is a further indication of the Cayman Islands continuing commitment to promoting the quality and integrity of the Cayman Islands' financial system.
Special Trusts (Alternative Regime) Law
The bill for the Special Trusts (Alternative Regime) Law 1997 - 'STAR' - has already received its second reading and is expected to reach the statute book later this year. This law responds to the increasing demand in the offshore arena for non-charitable purpose trusts but is different from the purpose trust legislation of other offshore centres, providing a more secure statutory framework for these kinds of trusts. STAR is however far more than simply purpose trust legislation. The new law provides an alternative legal framework within which trusts of any description may be created, provided that their objects are lawful and not contrary to public policy.
Of course, in most situations, the existing trusts regime will be perfectly adequate and, for this reason, it will be wholly unaffected by this new legislation. STAR will only apply to a trust if expressly invoked by the trust instrument. STAR is designed however to provide settlors and their advisers far greater planning flexibility than under the traditional trust framework. It will establish an alternative regime under which all kinds of trusts might be created - trusts for persons, trusts for purposes (charitable and non-charitable) and trusts for a combination of persons and purposes. A particular feature of these special trusts will be the ability to remove "enforcement" rights from beneficiaries and to allow others to be nominated as "enforcers" of the trust. In addition to estate and tax planning applications, it is hoped that there will be a variety of commercial uses also for these special trusts. An obvious application will be the use of purpose trusts for holding shares in special purpose vehicles, private trust companies and other corporate entities when it is problematic for any interested parties to be shareholders themselves.
The Cayman Islands continues to adopt forward-looking legislation to promote its offshore sector and to enhance the financial services and products available in this jurisdiction. Each of the legislative initiatives described above are good examples of this and further technical amendments to the Banks and Trust Companies Law, the Companies Law, the Insurance Law and the Succession Law may be expected in the near future.
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.