Cayman Islands: Securities Investment Business Law

Last Updated: 13 October 2008
Most Read Contributor in Cayman Islands, September 2018

INTRODUCTION

The Securities Investment Business Law (the "Law") came into effect on 22 July 2003 was consolidated and revised in 2004 and was passed in order to regulate the business of securities investment in the Cayman Islands.

WHO DOES THE LAW APPLY TO?

The Law applies to any company, foreign company or partnership incorporated or registered in the Cayman Islands and carrying on securities investment business anywhere in the world or any entity which has established a place of business in the Cayman Islands through which securities investment business is carried on. A company, foreign company or partnership incorporated or registered in the Cayman Islands need not be carrying on securities investment business in the Cayman Islands in order to fall within the ambit of the Law, ie it need not have a physical presence in the Cayman Islands.

WHAT ACTIVITIES CONSTITUTE SECURITIES INVESTMENT BUSINESS?

Securities

The term "securities" is widely defined and includes shares, partnership interests, trust units, debt instruments, warrants, options, futures and contracts for differences.

Securities investment business

"Securities investment business" covers:

1. dealing in securities as an agent;

2. dealing in securities as principal where the person entering into that transaction:

  1. holds himself out as willing as principal to deal in securities at prices determined by him generally and continuously;
  2. holds himself out as engaging in the business of underwriting securities; or
  3. regularly solicits members of the public to deal in securities and the transaction results from such solicitation;

3. making arrangements with a view to:

  1. another person dealing in securities; or
  2. a person who participates in the arrangements dealing in securities;

4. managing securities of another person in circumstances involving the exercise of discretion;

5. advising a person on securities if:

  1. the advice is given to someone in their capacity as an investor or as an agent for an investor; and
  2. the advice is on the merits of dealing in the security or of exercising a right conferred by a security to deal in securities.

WHAT ACTIVITIES DO NOT CONSTITUTE SECURITIES INVESTMENT BUSINESS?

The Law specifically provides that certain activities do not constitute securities investment business, including:

1. where a person (as principal or agent) deals in securities which evidence indebtedness in relation to any financial accommodation made by such person;

2. a company, partnership or trust issuing, redeeming or repurchasing any securities that it has issued;

3. dealing in securities for the purposes of risk management;

4. dealing in securities or advising on securities in the course of any professional business not constituting securities investment business and where this is a necessary incidental part of such business which is not separately remunerated;

5. dealing in securities in connection with an employee share or pension scheme;

6. a company, partnership or trust acting as principal on its own behalf and applying its own proprietary assets to deal in securities; and

7. making arrangements in relation to certain dealings in securities.

EXEMPTIONS

The Law creates exemptions for certain excluded persons, including those set out below.

Recognised overseas regulated authority

A person who is regulated in respect of securities investment business by a recognised overseas regulatory authority.

Providing services exclusively within the group

A company within a group of companies carrying on securities investment business exclusively for one or more companies within the same group.

"Group of companies" includes direct and indirect subsidiaries of a holding company. A company is treated as a subsidiary company if:

1. the holding company is a member of the subsidiary and controls the composition of its board of directors; or

2. the holding company, directly or indirectly, controls more than half of the votes which may be cast at general meetings of the subsidiary; or

3. the subsidiary is a subsidiary of any other company which is itself a subsidiary of the holding company.

("Controls" means if the holding company can appoint or remove all or a majority of the subsidiary's directors, without the consent or concurrence of any other person.)

Sophisticated or high net worth persons

A person carrying on securities investment business exclusively for one or more of the following:

1. a sophisticated person; being a person:

  1. regulated by the Cayman Islands Monetary Authority ("CIMA"); or (
  2. regulated by a recognised overseas regulatory authority; or
  3. any of whose securities are listed on a recognised security exchange; or
  4. who:
  1. by virtue of knowledge and experience in financial and business matters is reasonably to be regarded as capable of evaluating the merits of a proposed transaction; and
  2. participates in a transaction with a value or in monetary amounts of at least US$100,000.00 in the case of each single transaction;

2. a high net worth person; being a person who is:

  1. an individual whose net worth is at least US$1,000,000.00; or
  2. any person who has total assets of not less than US$5,000,000.00; or

3. a company, partnership or trust of which the shareholders, unitholders or limited partners are one or more persons falling within 1 or 2 above.

Capacity of person carrying on securities investment business

A person carrying on securities investment business only in the course of acting in any of the following capacities:

1. director;

2. partner;

3. liquidator (including a provisional liquidator);

4. trustee in bankruptcy;

5. receiver of an estate or company;

6. executor or administrator of an estate; or

7. a trustee who is not required to be licensed under the Banks & Trust Companies Law (2003 Revision),

provided that in each case such person:

  1. is not separately remunerated for his securities investment business activities (otherwise than as part of any remuneration received for acting in such capacity); and
  2. does not hold himself out as carrying on securities investment business otherwise as a necessary or incidental part of performing functions in that capacity; or
  3. is acting on behalf of a company, partnership or trust that is otherwise licensed or exempted from licensing under the Law.

Joint enterprises

A person carrying on securities investment business for the purposes of or in connection with a joint enterprise.

Obtaining an exemption

Any person wishing to obtain an exemption from the requirement to obtain a licence under exemptions in respect of a recognised overseas regulated authority, business provided exclusively within the group, or services provided to sophisticated or high net worth individuals, must:

1. file annually with CIMA a declaration (in the approved form) that any of the first three exemptions referred to above (ie a recognised overseas authority, providing services exclusively to the group or to a sophisticated or high net worth person) apply to him; and

2. pay an annual fee of US$1,250.00 to CIMA.

LICENSING REQUIREMENTS

Any person that carries on securities investment business must obtain a licence (unless one of the above exemptions apply).

An applicant for a licence will have to satisfy CIMA that:

1. it will be able to comply with the Law and the regulations made under the Law;

2. it will be able to comply with the Money Laundering Regulations (as amended);

3. it will not be against the public interest to approve the application;

4. it has personnel with the necessary skills, knowledge and experience, as well as such facilities and books and records as CIMA considers appropriate; and

5. its senior officers and managers are fit and proper persons.

CIMA may issue an unconditional licence or a licence subject to such conditions as it considers appropriate. The licence may be restricted (so that securities investment business may only be carried out with certain clients) or unrestricted.

The carrying on of securities investment business without a licence is a criminal offence punishable by a fine of US$125,000.00 and by imprisonment of one year (or both); and in the case of a continuing offence, to a fine of US$12,500.00 for each day during which the offence continues.

INSIDER DEALING

The Law also creates a new category of offence relating to creating a false or misleading market and insider dealing. Any person who creates a false or misleading appearance of active trading in any securities listed on the Cayman Islands' Stock Exchange (the "CSX") or a false or misleading appearance in respect of the market for, or the price of, any such securities is guilty of an offence.

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 CSX that are price affected securities in relation to the information;

2 .he encourages another person to deal in securities listed on the CSX 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.

(Securities are "price affected" only if the information would, if made public, be likely to have a significant effect on the price or value of the listed securities.)

Any person who commits an offence of insider trading commits a criminal offence punishable by a fine of up to US$12,500.00 and to a term of imprisonment of up to seven years.

OTHER PROVISIONS

CIMA approval for transfers

No shares in a company or interests in a partnership which is a licensee may be issued or transferred/disposed of without CIMA approval. CIMA may however exempt from this requirement any licensee whose shares or interests are publicly traded on a recognised securities exchange.

Annual audit

A licensee's accounts must be annually audited by an approved auditor and filed with CIMA within six months of the end of each fiscal year.

CIMA approval for offshore operations

A licensee may not open outside the Cayman Islands a subsidiary, branch, agency or representative office or change its name without the prior written approval of CIMA.

CIMA's powers

The Law also contains provisions relating to enforcement by CIMA including powers to revoke licences, replace directors/officers, appoint controllers, and for making court applications for injunctions, restitution orders and warrants to enter and search premises.

TYPICAL EXAMPLES

Discretionary investment managers/investment advisers

Most types of investment management or investment advice given by a Cayman Islands incorporated or registered entity or an entity with a physical presence in the Cayman Islands will be covered by the Law. A manager/adviser established and operating outside the Cayman Islands will not be covered by the Law, even if such entity manages/advises a Cayman Islands entity.

Exemptions however are available where the person provides discretionary management/investment advisory services:

1. to an entity within the same group of companies; or

2. to a sophisticated person or high net worth person or to an entity whose shares/interests are held exclusively by sophisticated persons/high net worth persons.

Therefore any Cayman Islands incorporated manager/adviser (or manager/adviser with a physical presence in the Cayman Islands) who only manages or advises investment funds which are within the same group of companies as the manager/adviser, or where the minimum subscription per investor for each fund is US$100,000.00, should be exempt from the Law. The manager/adviser would need to file an annual declaration of compliance together with an annual filing fee of US$1,250.00 as described above. Note that the Law regulates management and advice provided to non-Cayman Islands entities as well as to Cayman Islands entities. We understand that amendments are to be made to the mutual funds legislation and the companies management legislation to ensure that there is no double licensing requirement.

Existing Cayman Islands incorporated advisers (or advisers with a physical presence in the Cayman Islands) who do not presently require to be licensed under the existing mutual funds and companies management legislation may (unless exempted) now require to be licensed under the Law. However existing Cayman Islands incorporated managers (or managers with a physical presence in the Cayman Islands) currently licensed under the existing mutual funds and companies management legislation may find themselves able to rely on one of the exemptions to the licensing requirements of the Law.

Entities dealing for their own account

The activities of persons and entities dealing as principal for their own account should not constitute securities investment business provided that they do not solicit members of the public nor hold themselves out as dealing in securities (as described above).

General partners of partnership funds

General partners are specifically excluded from the requirement to obtain a licence under the Law when acting in such capacity provided that they are not separately remunerated (in addition to being remunerated for acting as general partner) and provided they do not hold themselves out as carrying on securities investment business. Certain activities may still require a general partner to be licensed or to obtain an exemption (as described above).

Trustees

Trustees who are not required to be licensed under the Banks & Trust Companies Law are exempted subject to the provisions described above (ie no holding out/no separate remuneration). Some trust activities will be covered however and we await transitional provisions which should ensure there is no double licensing requirement.

Brokers

The activities of brokers will now be covered by the Law and will require to be licensed unless an exemption is available. Note that brokers who are not incorporated or registered in the Cayman Islands and who do not have a physical presence here are not covered by the Law.

Issuance of own securities

The issuance, redemption or repurchase by a company, partnership or trust of its own securities are excluded activities under the Law and therefore do not give rise to any licence obligation in relation thereto. This memorandum is a summary only and does not purport to contain definitive legal advice. This memorandum sets out the Law as at the date hereof CI$:US$ conversion rates are calculated at 1:1.25. If you have any specific queries relating to the Law please consult your regular contact or any of the following:

Cayman Islands
Jonathan Tonge, Partner

London
David Whittome, Partner

Jersey
Heather Bestwick, Partner

British Virgin Islands
Richard May

Hong Kong
Philip Millward, Partner

Dubai
Rod Palmer, 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.

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