The deadline for all existing private funds to register with the Cayman Islands authorities - as stipulated in new Private Funds Act and Regulations and the Mutual Funds Act - was 7 August 2020. More than six months on, Laura Da Ascencao, a director at TMF Group, reflects on the current position and looks at ways managers can get support and streamline their operations in line with this legislation.
When the new Act was announced in February 2020, investment managers and advisors were, quite rightly, predominantly focused on assessing whether their Cayman entities would be in scope for the private funds' regime.
As a minimum, managers worked with their service providers to meet the conditions outlined in the new legislation, including registering their entities with the Cayman Islands Monetary Authority (CIMA) to ensure they were compliant and paying the annual fees.
At the same time, TMF Group took up the charge, outlining the impact, including obligations and exemptions, of the new Private Funds Act and Regulations and the Mutual Funds Act - including obligations and exemptions - and examining the key points of the amendment.
However, since the legislation came into play, it is evident that the additional administrative burden that comes with the requirements is challenging for many. While more than 13,000 private funds have registered with CIMA, the ability to execute the entities' operational responsibilities - such as NAV calculation policy, cash monitoring, asset valuation and title verification - is a challenge.
To provide further clarification and support, CIMA has issued a variety of rules that support the interpretation of the new legislation. More precisely, a rule is a directive issued to licensees and creates binding obligations on all licensees. Non-compliance results in the imposition of a fine of up to US $1,200,000 for serious breaches or regulatory action.
Penalties and rules
The following relevant rules have recently been established: i) Calculation of Assets Values for registered Private Funds; ii) Segregation of Assets - Registered Private Funds; and iii) Marketing Materials - Registered Private Funds. Further information on these rules can be found here.
So, what should be your focus for 2021?
To avoid these penalties, the focus for the year ahead and beyond must be on entities' operating conditions, as these form a fundamental part of being compliant in the Cayman Islands.
Adhering to the rules and requirements, ensuring that the outputs are accurate and streamlining the processes should be a top priority if managers want a smooth route to success.
As well as appointing a Cayman-approved auditor and filing an annual return to CIMA by 30 June of each year, or within six months of the end of the financial year, there are three core areas that should be front of mind.
1. Cash Monitoring
Cash monitoring should be consistent with the investment strategy of the private fund and the type(s) of assets it typically holds. It is expected that CIMA will issue further rules for cash monitoring, however, in principle the following is covered:
- monitoring cash flows
- ensuring that all cash has been booked in cash accounts opened in the name, or for the account, of the private fund
- ensuring that all payments made by investors in respect of investment interests have been received.
2. Asset Valuation
The valuation of assets is conducted annually in accordance with the private funds' valuation policy (and Section 34 of the Monetary Authority Law 2020 revision) unless exempted. In most cases, the general partner or investment manager provides the valuation to the fund administrator.
The calculation of net asset values should be made in accordance with IFRS or GAAP of the USA, Japan, Switzerland or a non-high risk jurisdiction. The NAV calculation policy must be in writing and disclosed in the private funds' constitutional documents or marketing materials, or similar documents. The policy must include, among other things, the fund's practical and workable pricing along with its valuation policies and procedures. Asset valuation is based on fair value of the entity investment portfolio. Further reference to the rule - calculation of the NAV can be found here.
CIMA has issued a regulatory policy for the Exemption from Valuation Requirement for a Private Fund in September 2020, including the scope, definitions and valuation exemptions. Further information can be found here.
3. Safekeeping of fund assets: title verification if no custodian
If the appointment of a custodian is not required, CIMA should be notified accordingly. A private fund would need to appoint an administrator or third-party provider such as TMF Group for the title verification unless the fund manager keeps it in-house (which should be independent and where conflicts of interest are identified and disclosed). From a practical point of view, it is key that new transactions are supported and substantiated by the respective documentation.
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.