A unit trust is a special kind of trust which, in addition to being subject to the laws governing trusts, is also subject to the laws governing mutual funds. A unit trust may be registered as a mutual fund if the trust units are redeemable at the option of the investor. Units trusts may also be registered as exempted trusts under the provisions of the Trusts Law (as amended) provided that none of the investors are, or are likely to be, resident or domiciled in the Cayman Islands. A unit trust can also be created as a STAR trust, a statutory purpose trust.
The Mutual Funds Law 1993 was introduced to the Cayman Islands on 26 July 1993 and was consolidated and revised to become the Mutual Funds Law (as amended) (the "MFL"). The MFL regulates all mutual funds established in or operating from the Cayman Islands, and those who administer mutual funds in or from the Cayman Islands. A unit trust is a type of mutual fund defined by the MFL to mean a trust established by a trustee which, for valuable consideration, issues trust units in profits or gains arising from the acquisition, holding, management or disposal of investments by the trustee of the trust, the proper law of which is the law of the Cayman Islands or the law of any other jurisdiction.
With one exception, the MFL requires all mutual funds other than closed ended mutual funds, to be regulated. The exception is for a mutual fund in which the equity interests are held by not more than fifteen investors, the majority of whom are capable of appointing or removing the trustee. A mutual fund of this type escapes regulation altogether.
ADVANTAGES OF A CAYMAN ISLANDS' UNIT TRUST
There is no taxation in the Cayman Islands in relation to income or capital gains, in respect of a unit trust, or in relation to distributions to unitholders or capital gains on redemption or sale of units. In addition, under current legislation, upon application to the Cayman Islands' Government, the Governor will ordinarily grant a guarantee of freedom from such taxation for up to 50 years in the case of an exempted trust.
No exchange controls
There are no exchange controls in the Cayman Islands and thus investments may be made and realised in unit trusts without any governmental consent.
Provided the trustee is permitted to do so by the trust deed governing the unit trust, investments of any type may be made anywhere in the world, subject always to the restrictions of local laws of any applicable jurisdiction.
Local regulations and legislation
Other than the requirement outlined below relating to managers, there are no governmental approvals or consents which need to be obtained, nor any statutory requirements to be complied with in relation to the issue of units by a Cayman Islands' unit trust or the circulation of offering documentation, provided the offer is not made to the public of the Cayman Islands nor to persons resident or domiciled in the Cayman Islands.
TYPES OF UNIT TRUSTS
What is a unit trust?
All assets of a unit trust are vested in a trustee under a trust deed or declaration of trust which divides the beneficial ownership into a number of units which are usually (but not necessarily) freely transferable and redeemable. The rights and obligations of the trustee and the unitholder, the terms of redemption and valuation rules are all set out in the trust deed.
A subscription agreement will contain the contractual provisions between the trustee and the unitholders. The contractual provisions governing the relationship between the trustee and other advisers to the trustee will be set out in an agreement between the trustee and the service provider.
There are two basic types of unit trust: open ended mutual funds and closed ended mutual funds. A unit trust is established by a trust deed, or often a declaration of trust by the trustee. Most mutual funds are established as "open ended" and this memorandum primarily concerns that type of unit trust.
Open ended unit trust
In an open ended unit trust, the fund is divided into a number of units, each unit representing a proportion of the assets held by the trustee. Units may be issued and/or redeemed from time to time as required by the provisions of the trust deed and offering document at their then net asset value.
Closed ended unit trust
Closed ended unit trusts have a fixed capital and therefore the prices are determined by supply and demand. The units may be issued at a premium or a discount to the net asset value but the capital remains the same and the units of the trust fund do not expand or contract.
Registration of the trust as an exempted trust
If the trust is registered as an exempted trust, the trustee is entitled to apply for an undertaking that no law enacted in the Cayman Islands for a period of up to 50 years after the date of creation of the trust which imposes any tax or duty on income or on capital assets, gains or appreciation, or any tax in the nature of estate duty or inheritance tax, will apply to the assets or income arising under that unit trust or to its trustee or unitholders.
In order to register a unit trust as exempted, the Registrar of Trusts has to be satisfied that the unitholders under the trust do not and are not likely to include any person (which for this purpose includes a company) at any time resident or domiciled in the Cayman Islands. A company incorporated in the Cayman Islands as an exempted or ordinary non-resident company is statutorily deemed not to be domiciled in the Cayman Islands. In our view, such a company would also not be considered resident in the Cayman Islands provided that it:
- does not conduct business in the Cayman Islands;
- does not have its central management and control located
in the Cayman Islands; and
- is not owned by Cayman Islands' residents.
Consequently it is perfectly possible for a Cayman Islands' company to own units in an exempted unit trust.
Once a unit trust is registered as exempted, it does not cease to be an exempted trust by reason of the fact that any unitholder is at any time resident or domiciled in the Cayman Islands, but any unitholder who is so resident or domiciled loses the benefit of the Tax Undertaking in respect of his interest in the unit trust.
Once the unit trust has been registered as exempted, the trustee must lodge with the Registrar all documents containing or recording the trusts, powers and provisions of the unit trust.
Application for registration should be made after execution of the trust deed. Once the Registration Certificate has been received, application should be made for the Tax Undertaking. There is however, no need to await the issue of the Tax Undertaking before commencing any placement or offering.
TRUSTEES/CUSTODIANS AND MANAGERS
For a unit trust to operate two entities are normally required: a trustee, usually a Cayman Islands licensed trust company, and a manager. A unit trust's documentation normally provides certain safeguards whereby each of the trustee/custodian or manager is able to remove the other for certain specified causes, and the unitholders usually have the power to remove the custodian or manager or, in certain cases, the trustee.
The trustee or (custodian)
The functions of the trustee or custodians are to:
- act as custodian of all the securities and cash of the
- collect distributions and other payments due in respect
of the unit trust's securities;
- act as registrar, transfer agent in relation to the
issue, transfer, redemption of certificates for all units
issued by the trustee and to maintain the appropriate
- make distribution and redemption payments.
There are a number of excellent trust companies licensed to carry on trust business in the Cayman Islands and it is recommended that one of these be appointed as trustee or custodian when an unit trust is being established. (Clients are likely to be familiar with the names of such trustees and other service providers on the Island.)
In certain exceptional circumstances it may be desirable for a client to establish its own trust company and obtain a licence under the Banks & Trust Companies Law (as amended), (see our memorandum on Banks and Trust Companies).
The functions of the management company, and restrictions on its operation depend upon the circumstances in each case. For example the manager may be involved in the marketing of the unit trust, the sale and redemption of units and providing investment services. Alternatively, the manager may have no fiduciary duties in relation to the operation of the unit trust. The degree and nature of the activity performed by the manager and where the manager is either incorporated or carries on business will affect whether the manager (in addition to the trustee) is required to be licensed under the Banks & Trust Companies Law or the Companies Management Law. The Cayman Islands' Government presently takes the position that a manager performing full management functions of a Cayman Islands' unit trust and being either incorporated in the Cayman Islands or carrying on business in the Islands as a foreign company has to be the holder of a Restricted Trust Licence, (see our Memorandum on Banks & Trust Companies).
APPLICABLE TAX AND SECURITY LAWS
We are unable to provide legal advice in relation to the offering of units of a Cayman Islands' unit trust in foreign jurisdictions or to residents of foreign countries and in some cases, (such as the United States), citizens of foreign countries. We therefore strongly advise clients to obtain applicable specialist advice as to the manner in which a proposed unit trust is structured or proposed to be marketed for the applicable jurisdictions.
What is a mutual fund?
"Mutual Fund" is defined in the MFL as a company, unit trust or partnership that issues equity interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors in the mutual fund to receive profits or gains from the acquisition, holding, management or disposal of investments but does not include a person licensed under the Banks and Trust Companies Law (as amended) or the Insurance Law (as amended), or a person registered under the Building Societies Law (as amended) or the Friendly Societies Law (as amended).
Exemptions exist for licensed banks and trust companies and licensed insurance companies.
The reference to "equity interests" is critical. Under the MFL "equity interests" are defined as a share, trust unit or partnership interest that carries an entitlement to participate in the profits or gains of the company, unit trust or partnership and that is redeemable or repurchasable at the option of the investor, but does not include debt.
Closed ended funds
The MFL does not cover closed ended funds in which investors do not have the right to redeem or require repurchase of their interest. Many trusts are not covered by the MFL for this reason.
Other definitions under the MFL
The term "investments" is not specifically defined and will take its normal English language meaning.
In respect of a mutual fund "investor" means the legal holder of record of an equity interest in a mutual fund but does not include a promoter or operator. In respect of a mutual fund "operator" means:
- where the mutual fund is a unit trust, a trustee;
- where the mutual fund is a partnership, a general partner
in that partnership; or
- where the mutual fund is a company, a director of a
It follows that the term "operator" does not include a manager operating under a contractual arrangement with the mutual fund.
Types of funds
Mutual funds break down into essentially three types:
- licensed mutual funds (ie holding a
licence under the law), unit trusts must have a trustee which
is licensed under the Banks and Trust Companies Law (as
- mutual funds which have a licensed mutual fund
administrator providing its principal office in the
Cayman Islands; and
- mutual funds where either:
a. the minimum equity interest purchasable by a prospective investor is US$100,000.00 or equivalent; or
b. equity interests are listed on an approved stock exchange or over-the-counter market.
Regulation under (3) above is generally designed for more sophisticated investors such as those having at least US$100,000.00 to invest and who are therefore assumed to be better able to afford professional advice in the management of their affairs.
REQUIREMENTS FOR APPLICATION FOR MUTUAL FUNDS REGULATION
Tier 1 - licensed mutual fund
Application for a licence for a licensed mutual fund is made to the Monetary Authority of the Cayman Islands in an approved form, accompanied by the prescribed application fee and the following:
- the current offering document (or the latest
- a synopsis of the offering document;
- details of its trustee;
- details of the mutual fund administrator (if any)
providing its principal office in the Cayman Islands;
- sufficient evidence to satisfy the Monetary
a. as to the sound reputation of each promoter;
b. as to the sound reputation and expertise of each person undertaking the administration of the mutual fund; and
c. that the business of the mutual fund and any offering of equity interests will be carried out in a proper way;
- a letter from the mutual fund's administrator
confirming its consent to act; and
- a letter from the mutual fund's auditors
confirming their consent to act. Local auditors must at a
minimum sign off on the mutual fund's account
Tier 2 - mutual funds with a licensed mutual fund administrator
Mutual funds which are represented by a licensed mutual fund administrator are not required to obtain a licence but the licensed mutual fund administrator is required to satisfy itself:
- as to the sound reputation of the promoter;
- as to the sound reputation and expertise of the person
undertaking the administration of the mutual fund; and
- that the business of the mutual fund and any offering of
equity interests will be carried out in a proper way and must
give details of each mutual fund which he represents and pay
the prescribed fee for each mutual fund.
Tier 3 - regulated mutual funds
Mutual funds where either:
- the minimum aggregate equity interest purchasable by a
prospective investor is US$100,000.00 or equivalent; or
- equity interests are listed on an approved stock exchange
or over-the-counter market;
are not required to obtain a licence nor to be represented by a licensed mutual fund administrator but are regulated.
Provisions common to all mutual funds
All regulated mutual funds are required to:
- submit to the Monetary Authority and keep current a copy
of its most recent offering document;
- submit to the Monetary Authority audited annual accounts;
- pay an annual fee of approximately CI$2,500.00
Offering documents must describe the equity interests in all material respects and contain such other information as is necessary to enable a prospective investor to make an informed decision as to whether or not to invest.
Regulated mutual funds which are required to be licensed or to employ a licensed mutual fund administrator are only to be administered by persons with sufficient expertise and of sound reputation and the Monetary Authority or the licensed mutual fund administrator will have to be satisfied that the business of the mutual fund and any offering which it makes is to be carried out in a proper way.
The MFL also contains enforcement provisions allowing the Monetary Authority to inspect books and records, call for accounting and to take action to protect investors where appropriate. The penalties imposed by the MFL for breach of any statutory requirement are relatively stringent.
UNIT TRUST STRUCTURES
Unit Trusts are usually established in one of the following ways.
Single series of units
A single class of redeemable units is issued to investors offered for sale to investors at an initial subscription price and thereafter at net asset value. All investors having the right to participate in unitholder meetings under the terms of the trust deed.
Multiple series of units
Different classes of redeemable units are issued to investors offered for sale to investors at an initial subscription price and thereafter at net asset value. Each type of unit is frequently governed by a separate sub trust to segregate the investments and in addition to having the right to participate in unitholder meetings there is usually provision for separate series unitholder meetings under the terms of the trust deed.
Where investors purchase units in a multiple series unit trust, it does not mean that there is a right to vary the rights of other unitholders of a different series. For example, unitholders of one series could not call a meeting to cancel rights of redemption attached to units held by unitholders of a different series.
An umbrella trust is made up of one or more sub trusts, each of which may have one or more classes of units.
STAR Trusts are created under the Special Trusts (Alternative Regime) Law, 1997 (now contained in Part VIII of the Trusts Law (as amended)). The advantages of a STAR Trust include the fact that it can be created solely for a purpose, as well as for persons, as would be the case for unitholders. It is a flexible vehicle suited for corporate transactions. The rule of perpetuities does not apply to STAR Trusts, so there is no restriction on their duration, as there is for common law trusts. A key feature of a STAR Trust is that the rights to enforce a trust which are given to beneficiaries under common law trusts are given to an 'Enforcer' under a STAR Trust. The promoter or investment manager can be the Enforcer of a unit trust. The unitholders as beneficiaries, would have no standing to enforce the Trust or obtain any information. The rule against perpetuities does not apply to STAR trusts, so they can last indefinitely.
FEES AND DISBURSEMENTS
The legal fees for professional services for all work to establish a unit trust inclusive of drafting appropriate documentation, drafting trustee resolutions to establish the trust, applying to register the trust as an exempted trust and, if relevant, a mutual fund, applying for the tax undertaking and providing an opinion on the structure if required. We would be pleased to provide an estimate on request giving full particulars of the proposal.
As to disbursements upon establishment of a unit trust and annual fees relative thereto these are set out below.
- Register as exempted trust: CI$500.00 (and an additional
CI$400.00 for express service)
- Tax undertaking: CI$500.00
- Register as mutual fund: CI$2500.00
- 4 certified copies of Certificate of Registration:
CI$328.00 (CI$82.00 for each copy)
Typical charges on establishing a unit trust are set out below.
- Initial charges: these are usually charged on a
percentage basis of the original amount invested on a sliding
scale decreasing as the investment increases.
- Annual management fees: these are usually expressed as a
percentage of the net asset value of the fund calculated
daily or monthly and payable monthly or quarterly in
- Incentive fees: these may be charged either in addition
to or instead of management charges, according to the
performance of the fund under the direction of the
- Operating expenses of the unit trust: these include
legal, accounting, trustee/custodian/manager fees.
- Redemption or transfer charges: these are usually minimal
to cover the administrative costs of effecting
We shall be pleased to discuss with clients the facilities and services that can be provided by Walkers and/or provide introductions to selected trust companies and accountancy firms.
Grant Stein, Partner
Andrew Miller, Partner
Anthony Partridge, Associate
Garry Mason, Associate
Peter Harris, Partner
David Pytches, Associate
British Virgin Islands
Christopher McKenzie, Partner
Carol Hall, Partner
Rod Palmer, Partner
David Whittome, Partner
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.