Comparative Guides

Welcome to Mondaq Comparative Guides - your comparative global Q&A guide.

Our Comparative Guides provide an overview of some of the key points of law and practice and allow you to compare regulatory environments and laws across multiple jurisdictions.

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4. Results: Answers
Alternative Investment Funds
4.
Management and advisory relationships
4.1
How are alternative investment fund managers and advisers typically structured in your jurisdiction?
Cayman Islands

Answer ... There is no requirement for Cayman Islands funds to appoint a Cayman Islands based investment manager or adviser. The fund manager or adviser can be located anywhere in the world.

Where a promoter chooses to establish a Cayman Islands based fund manager or adviser, these have typically been formed as Cayman Islands exempted companies or limited liability companies, though there is no prohibition on the use of a Cayman Islands partnership. In addition, a foreign fund management or advisory company may establish a place of business in the Cayman Islands. Fund managers and advisers formed or with a place of business in the Cayman Islands are subject to the requirements of the Securities Investment Business Act and the International Tax Cooperation (Economic Substance) Act impacts Cayman Islands based managers to securities funds. See questions 4.3 and 4.6.

For more information about this answer please contact: Richard Mansi from Travers Thorp Alberga
4.2
What are the advantages and disadvantages of these different types of structures?
Cayman Islands

Answer ... Traditionally, investment managers and advisers formed in the Cayman Islands were organised as companies, as a convenient form in which to establish subsidiary or joint venture operations. Occasionally, managers and advisers were formed as partnerships based on the promoters’ onshore needs. With the advent of limited liability companies (LLCs) in 2016, LLCs have become increasingly popular as the legal structure, given the ability to include joint venture or shareholder agreement provisions directly within a single constitutional operating agreement.

For more information about this answer please contact: Richard Mansi from Travers Thorp Alberga
4.3
Must alternative investment fund managers be authorised or licensed in your jurisdiction?
Cayman Islands

Answer ... The Securities Investment Business Act regulates, among other things, the activities of discretionary management of, provision of advice upon, arrangement of deals in and market making or dealing in securities by a person formed or otherwise with a place of business in the Cayman Islands. ‘Managing’ and ‘advising upon’ activities capture traditional asset and risk management decisions; whereas ‘arranging deals’ covers private negotiation of investments and the distribution or placement of equity interests in the fund itself. ‘Securities’ are defined under the Securities Investment Business Act to include a wide range of equity, debt, commodities, futures, options and similar instruments. Accordingly, the vast majority of Cayman Islands based fund managers must be registered with or licensed by the Cayman Islands Monetary Authority (CIMA).

Notably, real estate and cryptographic tokens/coins generally fall outside the definition of ‘securities’. Accordingly, a manager or adviser to these assets will not be regulated under the Securities Investment Business Act in its current form. However, such a fund manager may require licensing by CIMA under the Companies Management Act as a company manager or under the Mutual Funds Act as a mutual fund administrator, depending on the particular structure.

Question 4.6 sets out a summary of the International Tax Cooperation (Economic Substance) Act as it relates to Cayman Islands based managers to securities funds.

For more information about this answer please contact: Richard Mansi from Travers Thorp Alberga
4.4
If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?
Cayman Islands

Answer ... Fund managers and advisers that provide services to funds comprising sophisticated persons or high-net-worth persons qualify for a simplified registration regime under the Securities Investment Business Act. A ‘sophisticated person’ is a person:

  • who, by virtue of knowledge and experience in financial and business matters, is reasonably to be regarded as capable of evaluating the merits of the investment and invests at least US$100,000;
  • who is regulated by CIMA or a recognised overseas regulatory authority; or
  • whose securities are listed on a recognised securities exchange

A ‘high-net-worth person’ is an individual whose net worth is at least US$1 million or a person with total assets of not less than US$5 million. A similar registration category is available to applicants regulated overseas or which only provide services to an affiliated group. The registration process entails an assessment by CIMA of the fitness and propriety of the owners and controllers of the applicant.

General partners, directors and certain other constitutional operators are usually exempt from the registration and licensing regime of the Securities Investment Business Act on the basis that constitutional operators are engaged in own account activity.

The licensing regime is less common, with only 46 licensees as at 30 June 2021, of which 23 were in the investment adviser class or the investment manager class. The assessment by CIMA will extend to the knowledge, skills and experience of the staff of the applicant.

Registrants and licensees under the Securities Investment Business Act which are formed as companies must have at least two directors or managers (and a similar obligation arises in respect of the board of directors of an ultimate general partner to a partnership). The directors and managers are required to be registered or licensed under the Directors Registration and Licensing Act.

For more information about this answer please contact: Richard Mansi from Travers Thorp Alberga
4.5
What is the process for obtaining authorisation and how long does this usually take?
Cayman Islands

Answer ... The registration process takes approximately two to three weeks. The licensing process takes approximately four to six weeks.

For more information about this answer please contact: Richard Mansi from Travers Thorp Alberga
4.6
What other requirements or restrictions apply to alternative investment fund managers and advisers in your jurisdiction?
Cayman Islands

Answer ... In addition, the Anti-Money Laundering Regulations, the Foreign Account Tax Compliance Act and the Common Reporting Standard Regulations, various sanctions orders and the Data Protection Act apply to all fund managers and advisers, although their incremental impact is limited relative to ordinary compliance processes. Directors to managers or advisers regulated under the Securities Investment Business Act must be registered or licensed by CIMA under the Director Registration and Licensing Act. Managers or advisers regulated under the Securities Investment Business Act must also adhere to CIMA’s Rule and Statement of Guidance on Cybersecurity.

Distinct from the position with regard to Cayman Islands funds and their operators and investment advisers, Cayman Islands fund managers to securities funds are within the scope of the recent International Tax Cooperation (Economic Substance) Act. In scope fund managers must:

  • conduct core income-generating activities within the Cayman Islands (eg, asset management, risk, reserve and hedging assessment and regulatory and performance reporting);
  • be appropriately directed and managed from within the Cayman Islands; and
  • have adequate operating expense, physical presence and staff in the Cayman Islands.

In order to meet the economic substance requirements, we envisage that a number of managers will:

  • look to add local directors and locally licensed delegate managers to assist in establishing activity in the Cayman Islands;
  • narrow the roles of the manager to reduce the impact of the requirements; or
  • move to restructure their business so that the manager is no longer in scope for the regime.

For more information about this answer please contact: Richard Mansi from Travers Thorp Alberga
4.7
Can an alternative investment fund manager impose restrictions on the issue, redemption or transfer of interests in the funds under management?
Cayman Islands

Answer ... The terms and restrictions applicable to the issue, redemption and transfer of interests in a fund are entirely a commercial matter to be decided by the promoters when preparing the fund’s constitutional and offering documents. It is normal for an open-ended fund to include the ability to restrict (ie, gate) or suspend redemptions where there is a lack of liquidity or valuation uncertainty. Similarly, it is typical for a fund to have a restrictive transfer regime.

For more information about this answer please contact: Richard Mansi from Travers Thorp Alberga
4.8
Are there any requirements regarding the ownership of alternative investment fund managers? If so, please provide details.
Cayman Islands

Answer ... When considering a licensing or registration application under the Securities Investment Business Act, CIMA will have regard to the fitness and propriety of the owners of the applicant. This usually amounts to CIMA ensuring that the underlying beneficial owners of more than 10% of the applicant are of good repute and standing.

For more information about this answer please contact: Richard Mansi from Travers Thorp Alberga
4.9
Can alternative investment fund managers delegate to third-party investment managers or investment advisers? If yes, please provide details of any specific requirements.
Cayman Islands

Answer ... Fund managers licensed under the Securities Investment Business Act must have regard to CIMA’s statement of guidance concerning prudent outsourcing. Investment managers which are registered, as opposed to licensed, under the Securities Investment Business Act are not governed by the guidance.

Under the International Tax Cooperation (Economic Substance) Act, most Cayman Islands securities fund managers (as opposed to fund advisers) that are licensed or registered under the Securities Investment Business Act should seek advice before delegating activities outside of the Cayman Islands.

For more information about this answer please contact: Richard Mansi from Travers Thorp Alberga
4.10
Can alternative investment fund manager provide investment management services to clients other than alternative investment funds? If yes, do any additional requirements apply?
Cayman Islands

Answer ... No particular distinction is drawn under the Securities Investment Business Act as to the client type and thus, generally speaking, a fund manager may provide portfolio management or advisory services to private clients or single managed accounts. This is subject to the requirement for registrants under the Securities Investment Business Act that clients be sophisticated, high-net-worth or otherwise fall within the parameters summarised in question 4.4. In the case of licensees, regard should be had to any specific licence conditions imposed by CIMA.

For more information about this answer please contact: Richard Mansi from Travers Thorp Alberga
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Alternative Investment Funds