The regulation of mutual funds which are established under Cayman Islands Law, or which are administered or managed in the Cayman Islands is largely governed by the provisions of the Mutual Funds Law ("the Law") which was originally enacted in 1993 and was last revised in 1996. The Law defines a mutual fund as:
1. a company, unit trust or partnership;
2. which issues shares, trust units or partnership interests respectively;
3. that carry an entitlement to participate in the profits or gains of the company, unit trust or partnership and are redeemable or re-purchasable at the option of the investor before the commencement of winding up or dissolution of the company, unit trust or partnership;
4. with the purpose or effect of pooling investor funds with the aim of spreading investment risks and enabling investors to receive profits or gains from investments.
The definition specifically excludes any person who is licensed under the Banks and Trust Companies Law or the Insurance Law or who is registered under the Building Societies Law or the Friendly Societies Law.
The scheme of the Law is to apply an appropriate level of regulation to each mutual fund, depending on its circumstances. In descending order of degrees of regulation, funds may be either licensed under sub-section 3(1)(a) ("Licensed Funds"), administered under sub-section 3(1)(b) ("Administered Funds"), registered under sub-section 3(3) ("Registered Funds") or exempted under sub-section 3(4) of the Law ("Exempted Funds").
The Law provides that, unless it is an Administered, Registered or Exempted Fund, a mutual fund shall not carry on or attempt to carry on business in or from the Cayman Islands unless it has a Mutual Fund Licence and has either a registered office in the Cayman Islands or, in the case of a unit trust, has as its trustee a trust company licensed under the Banks and Trust Companies Law. The grant of a Mutual Fund Licence is within the discretion of the Managing Director of the Monetary Authority, who may require such information as he may deem necessary to satisfy himself that the promotor of the applicant fund is of sound reputation, that its administration will be undertaken by persons who are of sound reputation and have sufficient expertise, and that its business and any offer of equity interests in it will be carried out in a proper way. An application for a Mutual Fund Licence may be made in the prescribed form (Form MF3) and must be accompanied by:
1. a copy of the current offering document or latest draft;
2. a copy of the most recent annual audited accounts;
3. where applicable, a certified copy of the Certificate of Incorporation or Registration issued by the Registrar of Companies;
4. completed personal questionnaires, references and police clearance certificates for all directors of a corporate mutual fund, or all directors of a corporate trustee of a unit trust mutual fund?, or all directors of any corporate general partner of a limited partnership mutual fund;
5. a letter of consent from an approved auditor accepting an appointment as auditor, including a statement that, if the auditor becomes aware of or has reason to believe that the fund is or is likely to become insolvent, is carrying on or attempting to carry on business or is winding up its business in a manner prejudicial to its investors or creditors, or is carrying on or attempting to carry on business without keeping sufficient accounting records to allow for a proper audit of its accounts, then the auditor will immediately notify the Monetary Authority pursuant to Section 39 of the Law;
6. a letter of consent from the administrator of the fund; and
7. the application fee of CI $700.00 (US $854.00). (The annual licence fee is also CI $700.00).
A Mutual Fund Licence may be granted on terms that it will take effect upon the incorporation of a corporate mutual fund [or, in the case of a foreign company, upon its registration as a foreign fund under Part IX of the Companies Law (1998 Revision)], or on the establishment of any unit trust. A Mutual Fund Licence may also be granted subject to such conditions as the Monetary Authority may consider appropriate, and the Monetary Authority may, upon application, waive, vary or revoke any such condition.
For a mutual fund wishing to carry on business in or from the Cayman Islands, one alternative to obtaining a Mutual Fund Licence is to have a licensed mutual fund administrator provide its principal office in the Cayman Islands. In accepting an engagement to provide the principal office of a Licensed, Administered or Registered fund (a fund of any such category, a "Regulated Fund"), a licensed mutual fund administrator is required to satisfy itself, and make a declaration to the Monetary Authority, that each promotor of the Regulated Fund is of sound reputation, the administration of the fund will be undertaken by persons who are of sound reputation and have sufficient expertise, and the fund's business and any offer of equity interests in it will be carried out in a proper way. This declaration and other prescribed details in respect of the Regulated Fund must be filed with the Monetary Authority (on Form MF2) as soon as the administrator starts to provide its principal office. In addition, the licensed mutual fund administrator must submit:
1. the fund's current offering document or the latest draft;
2. a letter of consent from an approved auditor containing the Section 39 statement;
3. a summary of the services to be provided by the administrator;
4. where applicable, a certified copy of the Certificate of Incorporation or Registration issued by the Registrar of Companies; and
5. the first annual Administered Fund's fee of CI $700.00.
Administered Funds are therefore to be contrasted with Licensed Funds in that the licensed mutual fund administrator has a duty to conduct suitable inquiries to satisfy itself of the probity of the promotors, administration and business of the Administered Fund, whereas in the case of a Licensed Fund this responsibility is vested directly in the Monetary Authority. To this extent the regulatory regime is characterised by the principle of self-regulation, although, as described below, the Monetary Authority retains comprehensive powers to intervene where appropriate. The principle of self-regulation is further expressed in the duty of the licensed mutual fund administrator to notify the Monetary Authority immediately if it should become aware, or have reason to believe that a Regulated Fund for which it provides a principal office (or a promotor, trustee, general partner or director of such a Regulated Fund) is or is likely to become insolvent, or is carrying on business unlawfully or in any manner that is or is likely to be prejudicial to its investors or creditors.
There is every reason to believe the legislature's apparent faith in the ability of the mutual fund administration industry in the Cayman Islands to assist in the regulation of mutual funds is well founded. It is reported that there are now some ( ) mutual fund administrators holding unrestricted licences under the Law, and these include most, if not all, of the leading fund administrators world-wide, such as ABN Amro Trust Company, Bankers Trust, Barclays Private Bank and Trust, Brown Bothers Harriman, CITCO Fund Services, Coutts & Company, Deutsche Morgan Grenfell, Goldman Sachs and MeesPierson. Most of these administrators are members of the Cayman Fund Administrators Association which has developed its own code of conduct for the regulation of the conduct of its members. The depth and strength of the fund administration industry follows on from the enormous success of Cayman's banking industry - the Cayman Islands is the world's fifth largest banking centre (after London, New York, Tokyo and Hong Kong) with nearly 600 bank and trust licencees including 45 of the world's top 50 banks with dollar deposits in excess of US $500 billion.
As a further alternative to obtaining a Mutual Fund Licence or appointing a licensed mutual fund administrator to provide its principal office in the Cayman Islands, the Law provides that a mutual fund may carry on or attempt to carry on business in or from the Cayman Islands if the minimum equity interest purchasable by a prospective investor in that mutual fund is CI $40,000 (approximately US $50,000) or its equivalent in any other currency, or if its equity interests are listed on a stock exchange (including an over-the-counter market) specified by the Monetary Authority. For this purpose the Cayman Islands Stock Exchange was approved by the Monetary Authority on [ ]. Such a fund may apply for a Certificate of Registration from the Monetary Authority by filing the prescribed details (on Form MF1) in respect of its current offering document or the latest draft, which should be accompanied by:
1. a letter of consent from an approved auditor containing the Section 39 statement;
2. a letter of consent from its administrator;
3. where applicable, a certified copy of the Certificate of its Incorporation or Registration issued by the Registrar of Companies; and
4. the first annual Registered Fund's fee of CI $700.
The lighter regulatory touch which is applied to Registered Funds is premised on the assumption that investors who are in a position to invest the minimum subscription amount of US $50,000 are likely to be a sophisticated investor who can assess (or afford professional advice on) the risks associated with an investment in the fund, or alternatively that listed funds will be subject to effective regulation by the relevant stock exchange.
The Law permits one category of funds to carry on or attempt to carry on business in or from the Cayman Islands without any filing whatsoever with the Monetary Authority. This exempt status is available only to those funds in which the equity interests are held by not more than 15 investors, the majority of whom are capable of appointing or removing the trustees of a unit trust mutual fund, the general partners of a limited partnership mutual fund or the directors of a corporate mutual fund, as the case may be. In order to meet this requirement the power to appoint and remove directors etc. must be vested in a majority in number of the investors, rather than a majority in terms of the value of equity interests. Funds which are structured so that the investors are issued with a class of shares which carry participation rights but which do not carry voting rights will not qualify as Exempted Funds. Despite the exempt status of such funds under the Law, all law firms, banks, trust companies, fund administrators and other service providers in the Cayman Islands have a responsibility under the Proceeds of Criminal Conduct Law 1996 ("the PCCL") to make suitable inquiries before providing services to any client in order to avoid their services being used in connection with the proceeds of criminal conduct and the PCCL contains provisions for such service providers to report suspicious activity to the relevant authority.
Under the Law, the requirement that Licensed Funds and Administered Funds should have their current offering documents filed with the Monetary Authority, and that Registered Funds should have prescribed details in respect of their current offering documents filed with the Monetary Authority is not satisfied unless:
a. each such offering document describes the equity interests in all material respects, and contains such other information as is necessary to enable a prospective investor to make an informed decision as to whether or not to subscribe for or purchase the equity interest; and
b. if there is a continuing offering of equity interests and any promotor, director, trustee, or general partner of the fund is aware of any change that materially affects any information in the offering document (or the prescribed details) filed with the Monetary Authority and the fund has not filed an offering document (or amended prescribed details) incorporating that change within twenty-one days.
The Monetary Authority requires an annual report to be filed (on Form RF1) by 31st March of each year, indicating any changes which may have occurred to information previously filed.
Every Regulated Fund is required to file accounts audited by an approved auditor within six months of the end of each financial year, and every Regulated Fund must pay its annual fee of CI $700 to the Monetary Authority on or before 15th January in each year.
The Monetary Authority may at any time instruct a Regulated Fund to have its accounts audited and submitted to the Monetary Authority. The Monetary Authority may also request such information or explanation in respect of any Regulated Fund as it may reasonably require to enable it to carry out its duties under the law. If requested to do so, each promotor, director, trustee or general partner of a Regulated Fund is required to give the Monetary Authority access to or provide at any reasonable time all records relating to the fund, and the Monetary Authority may copy or take an extract of any record he is given access to.
If it is satisfied that a Regulated Fund is or is likely to become insolvent or is carrying on or attempting to carry on business or is voluntarily winding up its business in any manner that is prejudicial to its investors or creditors, the Monetary Authority may, inter alia;
a. revoke or impose conditions on any Mutual Fund Licence;
b. require the substitution of any promotor, director, trustee or general partner of a fund;
c. appoint a person at the expense of the fund to advise the fund on the proper conduct of its affairs or to assume control of and administer its affairs (including the power to terminate its business); and
d. require the fund to reorganise its affairs, or apply to the court for its compulsory liquidation,
The Monetary Authority also has power to apply to the Grand Court of the Cayman Islands for such orders as he thinks fit to preserve the assets of the investors of any fund which may be carrying on or attempting to carry on business in or from the Cayman Islands without being either Licensed, Administered, Registered or Exempted; including an order for the winding up of any such fund. The Monetary Authority may also apply for a warrant to search any premises where it reasonably believes that an offence has been, is being or is about to be committed, or where records to which it ought to have been given access are to be found; and may take from such premises the original or copies of any record which may indicate that an offence has been committed.
The Monetary Authority is prohibited from disclosing any information relating to the affairs of any fund except where disclosure is required for effective regulation of the fund or when required by law or the Courts of the Cayman Islands.
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 from a local lawyer or accountant.
This article also appears in the 'International Offshore and Financial Centres Handbook 1999/2000'. For further information about this highly informative guide to offshore centres, or to order your copy, please phone +44 (0) 207 820 7733 or send an email to firstname.lastname@example.org