Cayman Islands: Regulation Of Investment Business

In 2002 the Cayman Islands Government proposed legislation to regulate investment business carried out in or from the Cayman Islands. The Securities Investment Business Law (2003 Revision) (the "Law") became fully effective on 29^th July 2003. Any person in the Cayman Islands conducting securities investment business as defined in the Law must now be licensed by the Cayman Islands Monetary Authority ("CIMA"), unless that person is exempt. Those persons currently conducting investment business covered by the legislation have a period of 6 months to apply to CIMA for a license, or file for an exemption from licensing.

The Law applies to any entity that is established in the Cayman Islands and which carries on investment business (whether or not that investment business is carried on in the Cayman Islands). It also applies to foreign entities that have established a place of business in the Cayman Islands through which the relevant activity constituting the securities investment business is carried on.

The investment business that is now regulated includes dealing in securities as an agent, or dealing in securities as a principal if that person is a market maker, making arrangements in relation to securities or managing securities or acting as an adviser on the merits of making an investment in securities. Securities are defined very broadly in the Law and include most forms of shares and stock, debt instruments, options, futures, contracts for differences and derivatives.

Certain activities are exempt from licensing, and certain are excluded. If an activity is excluded there is no requirement to be licensed or to file for an exemption. Exempt activities do not require a license but the persons carrying on exempt activities are in some cases required to file a declaration with CIMA confirming that they are entitled to rely on the relevant exemption.

Activities which are excluded: raising capital for a person's own business; dealing in debt instruments that were created by the dealer; dealing in securities for risk management purposes in connection with a non-securities investment business; dealing in securities or giving legal, accounting or other advice as a necessary or incidental part of carrying on a non-securities investment business; employee share option schemes and the provision of finance to enable another person to deal in securities.

Licences issued by CIMA may be restricted (which means that securities investment business may only be transacted with particular clients) or unrestricted. A licence may also be issued subject to conditions (such as limits on the nature and scope of the securities investment business to be carried out), or the licence may be unconditional.

Regulations made under the Law deal with various aspects of a licensee's business including specifying advertising standards, disclosure requirements in relation to clients and establishing standards in relation to the holding of clients' monies.

The Law also creates certain offences relating to the creation of a false or misleading appearance in relation to the active trading in, or market for, or price of any securities listed on the Cayman Islands Stock Exchange, and individuals who have information as insiders dealing in, or encouraging another person to deal in, securities listed on the Cayman Islands Stock Exchange, or improperly disclosing such information.