By Aoife O'Sullivan, Associate, Hunter & Hunter
Having for many years applied modern and effective regulation to aspects of the financial services industry such as mutual funds, banking and insurance, the Cayman Islands have recently completed this framework by updating the law relating to investment business. The Securities Investment Business Law, 2001 (the "Securities Law") provides for the licensing and control of persons engaged in securities investment business and introduces criminal liability for creating a false or misleading market and insider dealing.
The Securities Law was passed on 12 March, 2002 but will not come into force until an order to that effect has been made by the Governor in Council. At the date of writing, an order has been made bringing into force only the provisions regarding persons carrying on securities investment business who do not require a licence ("Excluded Persons"). Such Excluded Persons are however obliged to pay an annual fee and file an annual declaration stating that they are eligible for exemption. This obligation arises as of 14 August 2002 and of itself obliges anyone carrying on securities investment business in or from the Cayman Islands to examine their status under the Securities Law and consider whether they should now apply for Excluded Persons status, or potentially be subject to the full force of the Securities Law in due course. Any person lawfully carrying on securities investment business immediately before the commencement of the Law may carry on such business for a transitional period of six months thereafter.
TO WHOM DOES THE LAW APPLY?
The Securities Law applies to:
1. Companies; general, limited and exempted partnerships; and foreign companies incorporated or registered in the Cayman Islands.
Such entities are regulated wherever they carry on their securities investment business regardless of whether or not such business is ever carried on in the Cayman Islands. It is the fact of incorporation or registration in the Cayman Islands that attracts regulation by the Securities Law.
2. Any person or entity based anywhere else in the world.
Such persons or entities are regulated only to the extent that their securities investment business is carried on within the Cayman Islands, in that they have established a place of business through which such activities are carried on. Confirmation is awaited and to whether or not establishing a "place of business" in the Cayman Islands requires having a physical presence on the Islands.
SECURITIES INVESTMENT BUSINESS
The Securities Law defines "Securities" to include shares, stock, interests in limited partnerships, units of trusts, debt instruments, warrants, options, futures and contracts for differences.
Section 5(2) of the Securities Law states that a licence will be required where words are used in any language which connote securities investment business in the description or title of the business in question; where a representation is made in a document or any other manner that a person is carrying on investment business, or otherwise holds himself out as carrying on investment business.
"Securities Investment Business" includes the following activities:
1. Dealing in Securities – as agent, or as principal where the person entering into that transaction holds himself out: (a) as willing as principal to buy, sell or subscribe for securities at generally determined prices, not specific to that particular transaction; (b) as engaging in the business of underwriting securities; or (c) regularly solicits members of the public to induce them to deal in securities and the transaction results from such solicitation.
2. Arranging deals in Securities – with a view to another person dealing in securities or with a view to a person who participates in the arrangements dealing in securities.
3. Managing Securities – belonging to another person in circumstances involving the exercise of discretion.
4. Advising a person on Securities – if the advice is:
(b) on the merits of that person dealing in securities or exercising any right conferred by a security to deal in securities.
Schedule 3 to the Securities Law specifically excludes certain activities from the ambit of the law. Such activities are not considered securities investment business in the following circumstances:
1. Dealing in Securities
(b) where a company, partnership or trust issues, redeems or repurchases any of its shares, debt instruments or warrants (but not options, futures or contracts for differences);
(c) where the sole or main purpose in buying, selling, underwriting or subscribing for securities is to manage risk;
(d) where the buying, selling, underwriting or subscribing for securities is for the purpose of, or in connection with, the disposal of goods or supply of services and the supplier does not generally deal in securities;
(e) where dealing in securities is an incidental activity of carrying on any profession or business (which would not otherwise be considered securities investment business) and is not separately remunerated;
(f) where the buying, selling, underwriting or subscribing for securities is in connection with the operation of an employee share or pension scheme; or
(g) where a company, partnership or trust on its own behalf deals in securities by applying its proprietary assets.
2. Arranging Deals in Securities
(b) where a person makes arrangements as an incidental part of a profession or business (which would not otherwise be considered securities investment business) and is not separately remunerated;
(c) where arrangements are made to provide a means of communication between parties to a transaction;
(d) arrangements in connection with securities evidencing indebtedness;
(e) making arrangements with the sole purpose of providing finance to enable someone else to deal in securities;
(f) making arrangements to introduce persons to each other with a view to the provision of independent service;
(g) making arrangements in connection with the disposal of goods or supply or services; or
(h) arrangements in connection with the operation of a share or pension scheme.
3. Managing Securities
Where a person manages securities that are or are to be managed in connection with the disposal of goods or supply of services.
4. Advising on Securities
Advising on securities in connection with disposal of goods or supply of services, as part of a media communication or incidentally to any legal, accounting or other advice.
CAN I BE EXEMPTED?
1. The Securities Law specifically exempts the following persons from the ambit of the Law, provided that in each case they file an annual declaration of exemption with the Cayman Islands Monetary Authority ("CIMA") and pay an annual fee (currently US$1,250):
(b) A person (having a registered office in the Cayman Islands for which services are provided by a licensed person) carrying on a securities investment business exclusively for:
(i) A sophisticated person
(A person regulated by CIMA or an overseas regulatory authority; or a person whose securities are listed on a recognized security exchange; or who by virtue of knowledge and experience in financial and business matters is reasonably regarded as capable of evaluating the merits of a proposed transaction and each single transaction has a value of at least US$100,000)
(ii) A high net worth person
(An individual whose net worth is at least US$1million or has total assets of not less than US$5 million.)
(c) A person who is regulated in respect of securities investment business by a recognised overseas regulatory authority in the country or territory (other than the Islands) in which the securities investment business is being conducted.
2. The Securities Law specifically exempts the following persons from the ambit of the Law without requiring an annual declaration or fee:
(b) A person who carries on securities investment business only in the course of acting in the following capacities:
(iii) liquidator (including provisional liquidators);
(iv) trustee in bankruptcy;
(v) receiver of an estate or company;
(vi) executor or administrator of an estate; or
(vii) a trustee acting together with co-trustees in their capacity as such, or acting for a beneficiary under the trust.
provided that in each case such person is not separately remunerated for his securities investment business activities; does not hold himself out as carrying on securities investment business otherwise than as a necessary or incidental part of performing functions in that capacity; or is acting on behalf of a company, partnership or trust that is otherwise either licensed or exempt under the Securities Law.
THE LICENSING REQUIREMENTS
Unless exempt or excluded as set out in this note, any person carrying on securities investment business must hold a license granted under the Securities Law. There is no exemption from licensing for entities licensed under other legislation in the Cayman Islands. Therefore banks, trust companies, mutual fund managers and other licensed entities will have to apply for a licence under the Securities Law if they engage in securities investment business (other than with exempted persons).
License fees have yet to be set by regulation.
Regulations established under the Securities Law may specify such matters as advertising standards, disclosures to clients, standards for dealing with clients and clients’ assets, financial and reporting requirements, arrangements for settlement of disputes and any insurance requirements.
To obtain a license, an applicant must satisfy CIMA that it can comply with the Securities Law and the Money Laundering Regulations (and any regulation made thereunder); that it will not be against public interest to approve the application; the applicant has personnel qualified to carry on the business and the applicant’s senior officers are fit and proper persons.
A license may be unconditional or subject to such conditions as CIMA considers appropriate and may be restricted or unrestricted in terms of the number of clients an applicant may have.
The carrying on of securities investment business without a license is a criminal offence or punishable by fine of US$125,000 by imprisonment of one year (or both); and in the case of a continuing offence to a fine of US$12,500 for each day during which the offence continues.
MARKET MANIPULATION AND INSIDER TRADING
The Securities Law also creates a new offence of creating a false or misleading market and an offence of insider dealing. The offence of creating a false or misleading market involves creating a false or misleading appearance of active trading in any listed securities or a false or misleading appearance with respect to the market for, or the price of, any such securities. Subject to certain defences available under the Law, any individual who has information as an insider is guilty of insider dealing if:
1. he deals in securities listed on the Cayman Islands Stock Exchange that are price-affected securities in relation to the information;
2. he encourages another person to deal in securities listed on the Cayman Islands Stock Exchange that are price affected securities in relation to the information; or
3. he discloses the information otherwise than in the proper performance and functions of his employment, office or profession, to another person.
The territorial scope of the insider dealing offence is restricted to such persons (or the persons encouraged by him to deal) being within the Cayman Islands at the time of the alleged dealings. Any person who commits an offence under these provisions commits a criminal offence punishable by a fine of up to US$12,500 and to a term of imprisonment of up to seven years.
1. A contract, obligation, transaction or instrument entered into by any person shall not be rendered unenforceable merely because it is entered into in connection with securities investment business carried on by that person who should otherwise hold a licence under the Securities Law.
2. CIMA approval is required to transfer or dispose of any shares or interests of a company or partnership licensee.
3. A licensee shall separately account for the funds and property of each client and for the licensee’s own funds and property.
4. A licensee must have its accounts audited annually by an approved auditor and filed within six months of the end of a licensees’ financial year.
5. The Securities Law provides that a licensee requires CIMA approval to open a subsidiary, branch, agency or representative office or change its name.
This article has been prepared for you as a summary only and should not be taken as a substitute for a comprehensive review of the Securities Law as it may pertain to your particular circumstances. It is not a legal opinion and does not contain specific legal advice on the matters covered.
For a more detailed and case specific review of the Securities Law please contact Hunter and Hunter directly.