The Cayman Islands have a business friendly regulatory regime for the regulation of managers or advisers to investment funds.
The Securities Investment Business Law ("SIBL") regulates entities incorporated or operating in the Cayman Islands and it provides for four types of licenses. However, almost all managers to investment funds formed in the Cayman Islands are exempt from obtaining a license and are known as an 'excluded person'.
SIBL Excluded Person
In order to obtain the exemption from obtaining a license under the SIBL the manager must be providing management or advice to 'sophisticated persons', a 'high net worth person' (including investment funds) or a company, partnership or trust where the owners/investors are all sophisticated persons or high net worth.
A 'sophisticated persons' means:
- someone regulated by CIMA (or foreign regulator); or
- listed on a stock exchange; or
- a person who can recognize the risks of the investments they are making which are at least US$100,000 per transaction.
A 'high net worth person' is an individual with assets of at least US$1 million or any type of entity with at least US$5 million of net assets.
Therefore, managers to almost all investment funds regulated by The Cayman Islands Monetary Authority ("CIMA") would be an 'excluded person' under SIBL as it is based on the net worth of the parties being advised and almost all CIMA registered funds meet this requirement.
Even though the majority of Cayman managers are exempt from the SIBL and they do appear on the CIMA website as "Securities – Excluded Persons".
Initial and Ongoing Requirements
Initially, all that is required is the filing of an Excluded Persons Form with CIMA signed by a director and payment of the Excluded Person fee of US$4,269 (US$6,100 from 2013). Thereafter in January of each year the Excluded Persons Form confirming that only sophisticated persons (the investment fund) are advised by the Manager together with the fee of US$4,269 must be filed with CIMA.
Money Laundering Reporting Officer
There is a requirement to identify a person responsible to ensure the adherence to the anti-money laundering obligations of the manager. This person is listed on the Form as the 'Money Laundering Reporting Officer' in Form filed with CIMA (initially and annually) often the directors do not take on this role if they are not based in the Cayman Islands as they must be aware of the current Cayman Islands reporting requirements. In such cases it is useful to have at least one director located in the Cayman Islands to act as the Money Laundering Reporting Officer although this person need not be a director and they can act in such capacity on a stand-alone basis.
Directors and Shareholders
There are no specific requirements for the directors or shareholders of the Investment Manager. They can be located anywhere in the world and no professional designations or experience is required.
Interaction with Sub-Adviser
Investment Manager would normally delegate some of its duties to an advisor in another jurisdiction if it does not have personnel located in the Cayman Islands. However, it is usually important for the Cayman Islands manager to be left with some real activities which can range from simply having responsibility for payment of audit fees and arranging the audit process to actually making the investment management decisions, invoicing and operating bank accounts. The scope of services to be determined is normally based on onshore advisors recommendations.
In summary the Cayman Islands are an ideal jurisdiction for the formation of an Investment Manager to an investment fund as the regulatory regime is straightforward and flexible under the SIBL exemption.
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ABOUT THE AUTHOR: Victor Murray is an independent accredited director at MG Management Ltd. who is resident in the Cayman Islands and he is an Executive Committee member of the Cayman Islands Directors Association. He is admitted as a Lawyer in New York and as a solicitor in Scotland. He has considerable offshore fund experience as in-house counsel for Citco and thereafter as a director or many hedge funds.
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.