The Cayman Islands is the world's leading offshore domicile for investment funds and the Cayman Islands Stock Exchange (CSX) has developed a streamlined, flexible and progressive regime for the listing of a wide variety of investment funds. Since its inception CSX has listed over 3,000 securities and the aggregate market capitalisation of listed securities is in excess of US$160 billion with the great majority of issuers being funds.
Who may List
CSX permits the listing of every type of fund vehicle whether a company, unit trust or limited partnership. Closed and open ended funds, stand-alone and master-feeder structures, property funds, umbrella funds and segregated portfolio company structures are all permitted to apply. There is no restriction to Cayman based funds and a wide number of other jurisdictions are permitted under the listing rules, including almost all of the other popular fund domiciles and CSX may consider applicants from other jurisdictions on a case-by-case basis.
Reasons for Listing
Broaden Investor Base
Institutional and other investors in numerous jurisdictions are prohibited from investing in unlisted fund securities or securities which are not listed on a recognised stock exchange and a listing can therefore increase the marketability of funds. An example of this applicable in the UK would be CSX's status as a "recognised stock exchange" which enables CSX listed securities to be held by personal and occupational pension schemes, Personal Equity Plans and Individual Savings Accounts. In addition, in certain countries regulatory authorities provide exemptions allowing promoters to market a fund if it is listed on a recognised stock exchange.
Many investors are required by internal policies or regulations to invest in securities which are marked to market. CSX has an automated electronic NAV reporting system which enables each listed fund to electronically publish its current NAV and CSX has dedicated pages on both the Bloomberg Financial Markets Information Service and Telekurs allowing each listed fund's net asset values and investment profiles to be accessed from over 80,000 terminals worldwide.
Third Party Review and Oversight
CSX officers will undertake a qualitative review of each fund at the time of listing and a successful application and listing should indicate to investors that a fund is bona fide and managed appropriately. In particular CSX's listing staff vets the initial listing documents and reviews the suitability of each fund issuer's directors, investment manager, administrator and other service providers. This review is no rubber stamp process and in particular funds with unsuitable or inexperienced managers will be refused a listing. On an ongoing basis, CSX's compliance staff enforces the required periodic filing of NAVs, electronically monitors and reviews NAV update filings for unusual changes, monitors for the timely filing of audited financial statements and reviews such statements for undisclosed information and risks. All of this third party due diligence serves to provide a lower risk offering for investors particular when the home jurisdiction provides little or no third party oversight and is increasingly attractive to fund promoters in a more cautious investment environment with heightened investor expectations as to fund governance and operation.
CSX remains proactive and competitive in the funds space adapting its listing requirements to address the particular needs of new fund structures and products. In particular updates in 2009 brought in new listing requirements in respect of property funds to address pragmatically the unique features of such funds, to require third party valuations of property assets but to reduce the frequency of NAV reporting for such funds to mitigate the cost burden in frequently valuing a property portfolio.
In determining listing requirements CSX will always seek to strike a pragmatic balance and avoid the imposition of any regulatory requirement that unnecessarily increases a fund's costs and investor returns. Unlike some other competing exchanges, there are no specific applicable investment policy restrictions, but there is a requirement for a transparent and complete disclosure in the offering document of the investment policies to be pursued. Some other examples of CSX's flexibility are set out below.
- There is no requirement for locally resident directors.
- The investment manager may be based in any jurisdiction and there is no minimum AUM provided that such investment manager can prove to CSX that it has adequate experience and expertise to manage the particular fund applying for a listing.
- There are no specific requirements for the selection of brokers or other service providers to a fund provided details of all service providers are clearly disclosed in the listing document.
- No audited financial statements are required to list a recently established fund where operations have not yet commenced.
- No interim statements need be filed unless prepared for other reasons.
Timing, Professionalism and Cost
CSX is committed to providing initial comments on any draft listing document within five business days and a document turnaround time of three business days thereafter and it usually takes between three to six weeks to list an investment fund. All comments are dealt with electronically and CSX staff are available at short notice to assist in the resolution of outstanding issues. The listing process is quick, disclosing all relevant information without imposing unnecessary conditions. This is largely because the European directives which apply to the Dublin, Luxembourg and London exchanges do not apply to CSX and it can therefore be more flexible in its approach. CSX listing fees are extremely competitive with a typical fund listing costing just US$2,000 per annum.
Status of Cayman and CSX
The Cayman Islands is a whitelisted OECD jurisdiction fully compliant with the international standard for exchange of tax information, its financial regulator the Cayman Islands Monetary Authority is a full member of IOSCO and CSX is an affiliate member evidencing that the jurisdiction and the exchange meet the highest internationally accepted standards of securities regulation. CSX is also an affiliate member of the Intermarket Surveillance Group, a surveillance focused group of over 30 exchanges from around the world, including all US equity and derivatives exchanges and has affiliations or memberships with other relevant forums (for further details see "Recognitions and Affiliates www.csx.com.ky).
Every issuer must be able to satisfy the following basic eligibility conditions.
- The directors of the fund or its controlling entity must have adequate experience and expertise in the management of funds.
- The securities to be listed must be transferable, save that certain restrictions necessary to prevent securities being transferred in breach of securities laws or requiring the issuer to be registered under the laws of any jurisdiction are acceptable.
- The fund is usually required to appoint a third party custodian to hold its assets.
- The fund must appoint an independent auditor to audit its financial statements and appoint a registrar and transfer agent in the Cayman Islands or another approved jurisdiction.
- The net asset value of the fund must be calculated no less than quarterly or semi-annually in the case of a property fund.
- A closed ended fund must have at least 25% of its listed securities in the hands of the public (defined as unconnected shareholders each holding less than 10% of all securities) at all times.
The Listing Agent
The first step for any proposed issuer is to appoint one of the Cayman Islands law firms which have been approved by CSX to act as approved listing agents. The listing agent acts as the issuer's adviser in respect of the requirements of CSX's listing rules as well as acting as the liaison point between CSX and the issuer and assisting in answering any of CSX's queries in respect of the listing.
The Listing Document
Following determination of the prima facie eligibility of the issuer, a listing document will need to be prepared which may take the form of the fund's existing prospectus modified to include any additional disclosures required by the listing rules.
The listing document for all issuers including funds needs to include all information which according to the particular nature of the issuer and the offered securities, is necessary to enable an investor to make an informed assessment of the activities, assets and liabilities, financial position, management and prospects of the issuer, of its profits and losses and of the obligations, rights, powers and privileges of such securities.
The specific requirements and disclosures in relation to funds are too detailed to be included in a short article but some of the more material commercial requirements are summarised below.
The Fund's Investments
The listing document will need to include a description of the investment objective, policies and restrictions to be followed by the fund, including details in respect of the manner in which such objective, policies and restrictions may be changed or varied and appropriate statements as to the fund's use of leverage, hedging and derivatives. Connected party transactions should be fully disclosed.
It should be noted that the investment requirements are directed to achieve transparency for investors and CSX does not seek to impose arbitrary prescriptive investment limits or restrictions or to prohibit funds from changing their investment strategies in accordance with the provisions of the listing document. This gives CSX listed funds a great deal of flexibility and makes a listing on CSX attractive to funds offering highly focused investment strategies.
All material risks associated with investing in the fund, including any material counterparty, custody or settlement risks should be detailed and where the fund is authorised to issue more than one class of securities, a statement as to the effect that the activities or value of one class might have on the activities or value of any other class of securities in the fund will need to be included.
The listing document will need to include a summary of the principal contents of the service providers' contracts, including particulars of the dates and parties, terms and conditions, fees or remuneration to be paid to such service providers, including an explanation of how they are calculated and details of how they can be altered and arrangements relating to termination of their appointment including any provisions for compensation upon termination. Again the requirements are directed to transparency for investors rather than seeking to impose arbitrary jurisdictional or other requirements for service providers.
Fees and Expenses
A statement of all material fees to be paid by the fund and a statement as to how any contracts or arrangements requiring the payment of such fees may be varied and in the case of a newly-formed fund, a statement of the aggregate cost of establishing the fund together with details as to how such costs will be borne and amortised.
Net Asset Value
With regard to the determination of the net asset value of the fund's securities, the frequency, method of valuation and publication and the identity of the valuer should be included and where pricing information regarding the underlying investments of the fund is provided to the person calculating the net asset value by a connected person, a statement as to whether or not the person calculating the net asset value performs an independent verification of such pricing information.
The listing rules also require that details of the circumstances in which the valuation, issue or redemption of the fund's securities may be suspended or terminated by the fund and a statement that any such suspension or termination will be notified to CSX.
For open-ended funds details must be included as to the frequency and method of redemptions, details of applicable gates and whether or not redemptions can be made in kind.
In addition to satisfying the generally applicable listing requirements a closed-ended fund must include in its constitution a provision that it will obtain the prior written approval of its listed security holders in the circumstance listed below.
- Any material change being made to the fund's constitution.
- Any change being made to the rights of any class of listed securities.
- The creation of any additional classes of security in the fund, whether such classes will be listed or not.
- Any material change occurring in the investment policies or objectives, investment restrictions or borrowing restrictions of the fund.
- Any intention of the fund to extend the life of or terminate the fund or to compulsorily redeem all of its securities.
A fund which is a closed-ended fund must also disclose in the listing document, in so far as is known to the fund, the names of its shareholders holding over 10% or more of issued securities together with the size of such stakes.
Variations on a Theme
There are separate obligations set out for property funds, feeder funds, umbrella funds, fund of funds and funds proposing side pockets to hold special situation or illiquid investments. CSX also reserves the right to allow non-publication of information to the extent that publication would be contrary to public interest or unduly detrimental to the issuer and the non-publication of such information would not be likely to mislead investors with regard to the facts and circumstance which are essential for an assessment of the fund's securities.
Once listed, an investment fund must continue to comply with its ongoing obligations, as specified in the listing rules. In particular, CSX must be notified of any major new developments in the fund's activities which are not public knowledge and which may lead to a substantial movement in the price or net asset value of the shares. The net asset value of each listed fund following calculation must be advised to CSX.
The listing rules are flexible, pragmatic and straightforward and throughout the listing rules the emphasis is towards transparency not inflexible prescription. The rules serve to ensure that every relevant piece of information is disclosed to investors in order that they have enough information to enable them to make a truly informed decision as to whether to invest in a particular fund without seeking to impose onerous and arbitrary requirements as to the management and operation of funds. A CSX listing is an inexpensive and effective way to add transparency, profile and reputation to any fund offering.
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.