The Cayman Islands continues to strengthen its legal and regulatory framework relating to the provision of international financial services. As anticipated, these changes include an expansion to the regulatory oversight of investment funds, in particular through the registration of private funds and the elimination of an exemption for mutual funds with fifteen or fewer investors. Lesley Connolly, Regional Head of Regulatory and Compliance Services and Operations in Cayman, provides an overview of the changes expected.
Both bills were published on 8 January 2020 and, while it remains subject to industry consultation and adjustment prior to being passed into law, it's expected that the final form of the bill will be passed by 30 January 2020. Accordingly, while the following summarises key elements of the bills and accompanying legislative guidance notes as published, Intertrust will provide a further update once the final terms of the laws are confirmed.
We understand that the pace of regulatory change can be difficult to keep up with and that management of costs is important. Read on for update on these changes and contact us to discuss how we can help you minimise the legal and regulatory burden and expense of complying with these changes.
Registration of private funds
The Private Funds Bill, 2020 (the "Private Funds Bill") proposes the introduction of a requirement for close-ended funds to be registered with the Cayman Islands Monetary Authority ("CIMA"), sets out the operating conditions applicable to private funds, creates various offences, and gives CIMA various powers in relation to registration and supervision of private funds.
A private fund is prohibited from carrying on (or attempting to carry on) business in or from the Cayman Islands unless it has submitted of an application for registration to CIMA within 21 days of accepting capital commitments, has filed the prescribed details in respect the private fund with CIMA, has paid the prescribed annual registration fee, complies with any conditions imposed on its registration, and complies with provisions of the law. A private fund is prohibited from accepting capital contributions from investors in respect of investment interests until is registered by CIMA.
Ongoing operating conditions
Once registered, a private fund is required to pay an annual fee by 15 January each year, have its annual accounts audited by an auditor approved by CIMA, submit the audited accounts to CIMA within six months of the respective financial year end, submit an annual return, in the prescribed form, in respect of each financial year end, and file with CIMA details of changes that materially affect information submitted to CIMA and changes to its registered office or principal office within 21 days. The records of a private fund must be maintained in an accessible manner and in accordance with rules, statements of principle and guidance issued by CIMA.
In addition, a private fund must:
- have appropriate and consistent procedures for the purposes of proper valuations of its assets and ensure that valuations are conducted in accordance with the law;
- appoint a custodian to (i) hold, in segregated accounts, the custodial fund assets and (ii) verify, based on information provided by the private fund and available external information, that the private fund holds title to any other fund assets and maintain a record of those other fund assets; however, where CIMA is notified of a private fund's intention not to appoint a custodian and it's neither practical nor proportionate to do so, having regard to the nature of the private fund and type of assets held, the private fund shall appoint a person to conduct the title verification described above;
- appoint a person to (i) monitor the cash flows of the private fund, (ii) ensure that all cash of the private fund has been booked in cash accounts opened in the name of, or for the account of, the private fund, and (iii) ensure that all payments made by investors to the private fund in respect of investment interests have been received, and
- where it regularly trades securities or holds them on a consistent basis, (i) maintain a record of the relevant identification codes of the securities it trades and holds and (ii) make this record available to CIMA upon request.
The Private Funds Bill allows valuation, custody and cash monitoring functions to be handled by independent third parties and, subject to conditions relating to independence and conflicts of interest, persons with a relationship with the private fund's manager or operator.
The Private Funds Bill contemplates regulations being issued to prescribe various matters (including forms and fees) and to establish transitional provisions.
Repeal of exemption for mutual funds
The Mutual Funds (Amendment) Bill, 2020 (the "Mutual Funds Bill") proposes the repeal of the existing exemption from registration for mutual funds with fifteen or few investors the majority of whom have the ability to appoint or remove the operator of the fund and introduces a requirement that such funds (i) be registered with CIMA and (ii) have a licensed mutual fund administrator providing its principal office in the Cayman Islands. CIMA's powers in relation to regulated funds will be largely extended to funds required to be registered.
A mutual fund that was previously exempted is prohibited from carrying on (or attempting to carry on) business in or from the Cayman Islands unless it has filed with CIMA a certified copy of an extract of its constitutional document specifying that a majority of investors in number are capable of appointing or removing the operator of the mutual fund, has filed with CIMA any other information in the form prescribed, is registered with CIMA, and has paid the prescribed annual registration fee.
Ongoing operating conditions
A mutual fund registered pursuant to the Mutual Funds Bill is required to pay an annual fee, have its accounts audited annually by an auditor approved by CIMA, submit the audited accounts to CIMA within six months of the respective financial year end, and submit an annual return, in the prescribed form, in respect of each financial year end.
The Mutual Funds Bill allows mutual funds that were exempted immediately prior to its coming into force six months to become compliant with the new provisions.
Our Cayman team has assisted clients with maintaining legal and regulatory compliance in the Cayman Islands for over 35 years. As an independent service provider, with a large and experienced team, and the holder of trust, company management and mutual fund administrator licences, we're ideally placed to assist with satisfying registration requirements, custody and cash monitoring needs, and record keeping obligations in addition to ongoing governance matters.
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.