Given the recent regulation of the previously unregulated Cayman Islands mutual fund industry, this Memorandum has been produced to provide information concerning Cayman Islands mutual funds. We recommend that we be consulted concerning existing funds since the new regulations will involve all existing funds in certain reporting and filing requirements and may involve the necessity for a licence application.
The new law is intended to regulate mutual funds themselves and those businesses that act as Administrators to mutual funds in the Cayman Islands.
WHAT IS A CAYMAN ISLANDS MUTUAL FUND
The new Mutual Funds Law of the Cayman Islands defines a "Mutual Fund" as a company, a unit trust or a partnership that issues equity interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks. There are certain important exceptions from the definition which include the following:
- 1. Mutual funds which provide no redemption or repurchase rights to investors (eg closed end funds);
- 2. Investment companies issuing debt (eg capital markets or structured financing transactions);
- 3. Funds where equity interests are held by fewer than 15 investors who by majority are capable of appointing and removing the directors, the trustee or the general partners of the mutual fund. For this purpose "Investor" means the investor of record not the ultimate beneficiary.
REGULATION OF MUTUAL FUNDS: THE THREE OPTIONS
1. The separately licensed mutual fund
Under this option the promoter would file the offering document with the Inspector together with a statutory form outlining the relevant service providers and pay the appropriate fee ($600). The Inspector will grant a licence if, upon reviewing the offering document, the statutory test is met. At the moment we understand that this procedure will take approximately two to three days from application and the Inspector will operate on the basis of a late draft of the offering document ie the finalised offering document does not have to be printed or circulated etc. One feature of regulation is that no mutual fund will be obliged to employ a Cayman Islands administrator or other service providers. This option will therefore be appropriate for mutual funds set up as Cayman Islands vehicles which wish to utilise administration or other service providers, elsewhere.
2. Cayman Islands administered mutual fund
In the case of a mutual fund designating its principal office at the principal office of an unrestricted mutual fund administrator, regulation will be provided by the administrator itself which is given the statutory responsibility to ensure that the statutory test is met. The fees to the Government remain the same. In this case the Inspector of Mutual Funds has no discretion in the matter.
3. Section 4(2) Exemption Funds which either:
may proceed by registering with the Inspector and paying the fees. The Inspector has no discretion as is the case with the licensed mutual fund above.
- (a) provide for a minimum subscription per investor of US$50,000; or
- (b) are listed on any one of a list of specified stock exchanges.
The exchanges listed are:
- New York Stock Exchange
- American Stock Exchange
- Toronto Stock Exchange
- Vancouver Stock Exchange
- Hong Kong Stock Exchange
- Amsterdam Stock Exchange
- Dublin Stock Exchange
- Luxembourg Stock Exchange
- Paris Stock Exchange
- London Stock Exchange
- Tokyo Stock Exchange
4. Filing Requirements and Offering Memoranda etc
With the exception of exempted funds all funds regulated in the Cayman Islands must file with the Inspector "prescribed details" and a copy of the funds current offering memorandum which must describe the equity interests in all material respects and contain such other information as is necessary to enable a prospective investor in the mutual fund to make an informed decision as to whether or not to subscribe for or purchase the equity interests. The provisions are no different from those already existing in Cayman Islands statutes or under common law. There is no power for the Inspector to involve herself in the form or content of the offering document. In the event amended offering documents are published these must also be filed as must updating material where there is a continuing offering.
All regulated mutual funds must file audited accounts within six months of the fund's financial year end. The auditor need not be a Cayman Islands firm but must be approved by the Inspector. Much will obviously depend on the identity and suitability of the audit firm.
LICENSING OF MUTUAL FUND ADMINISTRATOR$
Subject to two exceptions, all Cayman Islands mutual fund administrators will henceforth have to be licensed. There are two types of licence:
1. an Unrestricted Mutual Fund Administrators Licence; and
2. a Restricted Mutual Fund Administrators Licence.
An unrestricted mutual fund administrator may act for an unlimited number of mutual funds.
A restricted mutual fund administrator may only act for the mutual funds specified in its licence.
One of the above licenses will be required in all cases where mutual fund administration is carried out. Mutual fund administration is defined as any one of the following:
Mutual fund administration does not include the mere provision of a registered office at which purely legal records are kept or company secretarial work is undertaken.
- 1. The management, including control of all or substantially all of the assets of a mutual fund;
- 2. The administration of a mutual fund;
- 3. The provision of the principal office of a mutual fund in the Cayman Islands;
- 4. The provision of a trustee, director or general partner to a mutual fund in the Cayman Islands.
Both types of proposed licensee must meet the following test ("the statutory test') which is to show the Inspector of Mutual Funds:
- 1. it has sufficient expertise to administer regulated mutual funds;
- 2. it is of sound reputation; and
- 3. it will administer regulated mutual funds in a proper manner.
An unrestricted mutual fund administrator requires a net worth of at least US$500,000 although compliance with this may be waived in some circumstances if other evidence of financial viability can be produced. A restricted mutual fund administrator is not subject to any net worth requirement.
An unrestricted mutual fund administrator must have a principal office in the Islands and two individuals or a body corporate (usually another licensed administrator or licensed bank etc) as its agent resident or incorporated in the Islands.
A licensed mutual fund administrator must give notice to the Inspector in any case where a regulated mutual fund:
- (a) is or is likely to become unable to meet its obligations as they fall due; or
- (b) is carrying on business otherwise in accordance with the Mutual Funds Law; or
- (c) is carrying on business in a manner that is likely to be prejudicial to investors or creditors of the mutual fund.
There are significant financial and other penalties involved in non-compliance and the Inspector has various supplementary. powers regarding enforcement. A right of appeal exists against any action of the Inspector. Appeal is made to the Executive Council of the Cayman Islands.
In addition to the obligations placed upon licensed administrators, auditors are also under an obligation to give written notice to the Inspector of the matters set out in the above concerning administration obligations or if a licensed mutual fund is carrying on business without complying with any conditions of a mutual fund licence. Subject to the provisions regarding enforcement above, the Inspector is subject to Cayman Islands secrecy laws.
The attached table includes the fees specified in the Mutual Funds Regulations produced pursuant to the Mutual Funds Law.
TABLE OF FEES
Item Provision of Law Description of Fee Fee 1 4(3)(d) Annual registration US$609.75 fee in respect of a mutual fund registered with the Inspector 2 5(1)(b)(iv) Application fee for US$609.75 a Mutual Fund Licence 3 9(1) Annual licence fee in US$609.75 respect of a Mutual Fund Licence 4 10(2) Application fee for US$243.90 exemption from obligation to obtain Mutual Fund Administrators Licence 5 10(5) Annual exemption fee US$243.90 in respect of a mutual fund administrator exempted from obtaining a Mutual Fund Administrators Licence 6 12(1)(b)(ii) (a) Application fee for Fund US$6,097.56 Administrators Licence Mutual other than in restricted Mutual Fund Administrators Licence (b) Application fee for a US$2,439.02 restricted Mutual Fund Administrators Licence 7 14(1)(b) Fee payable by a Mutual US$609.75 Fund Administrator upon starting to provide mutual fund administration in respect of a regulated mutual fund regulated pursuant to Section 4(1)(b) 8 15(2) Annual fee payable by a US$609.75 Mutual Fund Administrator in respect of a mutual fund regulated pursuant to 4(1)(b) 9 15(3) (a) Annual licence fee US$6,097.56 in respect of a Mutual Fund Administrators Licence other than a restricted Mutual Fund Administrators Licence (b) Annual Licence fee in US$2,439.02 respect of a restricted Mutual Fund Administrators LicenceThe content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.