The Retail Mutual Funds (Japan) Regulations 2003 (the "Regulations") were introduced by the Cayman Islands' Government on November 19, 2003. They apply to Cayman Islands mutual funds marketed to the Japanese public (for the purposes of this update termed "retail mutual funds").
The Regulations address specific concerns expressed by some Japanese distributors and regulatory bodies. Although some retail mutual funds have been launched, it is expected that the Regulations will create a greater degree of certainty resulting in significant growth in the mutual funds sector.
The Regulations are aimed at complying with the requirements of the Japan Securities Dealers Association ("JSDA") (which apply to publicly offered offshore funds), the provisions of the Business Practice Rule, Number 4, Articles 26-27, the Japanese Income Tax Law and the Securities Exchange Law.
Retail mutual funds will be regulated by the Cayman Islands Monetary Authority ("CIMA"). In addition to the current mutual fund regime, CIMA must be provided with additional reports and information for retail mutual funds.
The Regulations provide that the prospectus for retail mutual funds must contain certain information. They also provide that specific service providers are appointed for such funds and provide for certain duties and responsibilities to be carried out by such service providers. It is extremely important, therefore, that service providers understand their new obligations with respect to retail mutual funds.
We have summarised below the key provisions of the Regulations:
- The constitutional documents and offering memoranda of retail mutual funds must include certain information, including: all rights and restrictions attached to the securities offered; the terms for valuing the retail mutual fund's assets and liabilities; the manner of calculation of the net asset value of each security, as well as the issue price and redemption or repurchase price; the terms of issue and how these can be changed; and transfer terms.
- Retail mutual funds must appoint a CIMA approved auditor. They must also appoint an administrator, custodian and investment adviser which meet the requirements of the Regulations. CIMA must give its prior consent before a replacement service provider can be appointed.
- A retail mutual fund must, within 6 months of the end of its financial year (or specified earlier date), distribute an annual report to its investors together with its audited financial statements.
- Within 20 days after the end of the 6 month period following the end of a financial year, a written report on the activities of the retail mutual fund along with the prescribed details must be provided to CIMA.
- CIMA must be notified as soon as practicable, in writing, of suspensions of subscriptions, redemptions or repurchases and of any intention to liquidate the retail mutual fund, along with the reasons for doing so.
- An administrator must make a report to the Operator of the retail mutual fund (i.e. the board of directors of a company, the general partner of an exempted limited partnership or the trustee of a unit trust (the "Operator")) and to CIMA, as soon as it becomes aware that some or all the assets have not been invested in accordance with the investment objectives and restrictions contained in the prospectus or that the operator or investment adviser is not conducting the business affairs or investment activities materially in accordance with the constitution or prospectus. The report (or a summary of it) must also be included in the next annual report or interim periodic report.
- The Operator of a retail mutual fund must submit an annual declaration to CIMA that to the best of its knowledge and belief the retail mutual fund's investment guidelines and restrictions, constitutional documents and prospectus were complied with and that the retail mutual fund did not operate in a manner prejudicial to investors or creditors.
- Investors and prospective investors have new rights to information in respect of retail mutual funds.
- The Regulations apply only to new Cayman Islands investment vehicles that will be sold to the Japanese public. Existing retail mutual funds may choose to opt into the new regime.
Based in the Cayman Islands, with offices in the British Virgin Islands, Hong Kong and London, Walkers has an international reputation as one of the leading law firms specialising in investment funds. Our investment funds team is long established and we advise some of the best-known names in the market, whether they be asset managers, promoters or institutional investors. We have significant hedge fund and private equity fund practices and our expertise in these areas is widely acknowledged.
We have established investment funds for our clients with virtually every known style and strategy. Accordingly, our lawyers have extensive experience of all the structures used in the investment funds market, their practical and legal consequences as well as the commercial rationale behind them.
Walkers is also a listing agent for the Cayman Islands Stock Exchange (CSX) and our lawyers are regularly involved in the listing of mutual funds on the CSX.
We have advised many substantial clients about structuring investment fund products to be sold in the Japanese market and can offer Japanese language capabilities through the Tokyo branch office of Walkers SPV Limited, our associated trust company.
Further information about the Regulations is available from the following:
Mark Lewis, Iain McMurdo and Jonathan Tonge
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.