Cayman Islands: Alternative Investment Funds 2017 5th Edition

Last Updated: 30 June 2017
Article by Richard May and Heidi de Vries

Most Read Contributor in Cayman Islands, October 2017

1 REGULATORY FRAMEWORK

1.1 What legislation governs the establishment and operation of Alternative Investment Funds?

The Securities and Investment Business Act, 2010, as amended ("SIBA") and its subsidiary legislation, including the Securities and Investment Business (Incubator and Approved Funds) Regulations, 2015, provides for the regulation of open-ended mutual funds, among other matters. Responsibility for regulation under SIBA rests with the Financial Services Commission (the "Commission") of the British Virgin Islands (the "BVI").

In addition, the Mutual Fund Regulations, 2010 (the "MFR") provide further detail regarding the obligations of mutual funds. Public funds are also subject to the Public Funds Code, 2010.

1.2 Are managers or advisers to Alternative Investment Funds required to be licensed, authorised or regulated by a regulatory body?

A manager or advisor which is established or, in the case of a foreign company, registered in the BVI and which conducts "investment business", whether or not that investment business is carried on in the BVI, will also fall within the scope of SIBA. Managers and advisors holding a full licence under SIBA are regulated by the Commission and are subject to the Regulatory Code, 2009 (the "Code"); managers and advisors approved under the Investment Business (Approved Managers) Regulations, 2012, as supplemented by the Approved Managers (Amendment) Regulations, 2013 (the "Approved Managers Regulations"), are regulated by the Commission, but are not subject to the Code.

"Investment business" is defined as being engaged, by way of business, in any activity which is of a kind that is specified in Schedule 2 Part A and is not excluded by Schedule 2 Part B to SIBA. Those activities include managing investments belonging to another person on a discretionary basis, acting as the manager or investment advisor of a mutual fund and advising in relation to investments, if the advice is given to someone in their capacity as investor or potential investor or in their capacity as agent for an investor or a potential investor and the advice is on the merits of that person (whether acting as principal or agent) buying, selling, subscribing for or underwriting a particular security or exercising any right conferred by a security to buy, sell, subscribe for or underwrite a security. "Investments" are defined in Schedule 1 to SIBA and include most forms of shares and stock, debt instruments, options, futures, contracts for differences, and derivatives.

Any person conducting investment business in, or from within, the BVI must be licensed by the Commission or be an approved investment manager or advisor under the Approved Managers Regulations, unless that person is exempt from holding a licence. A licence may be restricted (meaning that securities investment business may only be transacted with particular clients) or unrestricted. A licence may also be issued subject to conditions or may be unconditional.

Schedule 2 Part B to SIBA specifically excludes certain activities from the definition of investment business, although those exclusions are unlikely to apply to a person conducting discretionary investment management or investment advisory activities for a mutual fund.

Under Schedule 2 Part C to SIBA, a person carrying on investment business may be excluded from the requirement to obtain a licence or to be approved under the Approved Managers Regulations. It is unlikely that such exclusions would apply to a person conducting discretionary investment management or investment advisory activities for a mutual fund.

An "Excluded Person" includes:

  1. a company carrying on investment business exclusively for one or more companies within the same group;
  2. a person who is a participant in a joint enterprise and conducts such investment business for the purposes of, or in connection with, the joint enterprise;
  3. a person who is a partner in a partnership and conducts such investment business for the purposes of, or in connection with, the partnership; and
  4. a person who is a director of a company and conducts such investment business for the purposes of, or in connection with, the company,

in each case, provided that the person does not otherwise carry on or hold himself out as carrying on investment business, and does not receive remuneration for carrying on the investment business separate from the remuneration the person receives for acting in the relevant capacity specified.

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