The Cayman Islands Monetary Authority ("CIMA") has issued new rules that apply to private funds registered under the Private Funds Law, 2020 (the "Law")1. The new rules relate to: (i) the contents of Marketing Materials (the "Content Rules"); (ii) the Calculation of Net Asset Values (the "Valuation Rules"); and (iii) the Segregation of Assets (the "Segregation Rules")(collectively, the "Rules").
The Rules provide guidance as to how certain operational requirements for private funds mandated by the Law are to be satisfied.
All registered private funds that intend to prepare marketing materials are required to comply with the Content Rules. It will therefore be necessary to ensure that a private fund's offering document or any other documents used to solicit investors contain the necessary disclosures set out in the Content Rules.
There is no obligation for marketing materials to be prepared with respect to a registrable private fund. Nor is there an obligation on an existing registered private fund to update any previously issued offering document (or other marketing materials). Therefore, the Content Rules will only affect existing registered private funds which prepare new or updated marketing materials or new private funds required to register with CIMA under the Law.
While we do not expect the Content Rules to require material changes or additions to the disclosures commonly already included in offering documents, it is important that a thorough review of all new offering documents and / or any other marketing materials is undertaken to ensure that the requirements of the Content Rules are met and that specific advice is taken in the event that a new private fund does not intend to prepare an offering document.
The Valuation Rules require registered private funds to have in place a net asset value calculation policy (a "Valuation Policy") that ensures the fund's valuation of its assets is fair, reliable, complete, neutral and free from material error and is verifiable, with the methodology used to perform the valuation based on applicable accounting standards.
Unless otherwise required by applicable accounting standards, the Valuation Policy must require the private fund to value investments on the basis of Fair Value2. In estimating the Fair Value of an investment, the private fund should apply techniques that are appropriate considering the nature, facts, and circumstances of the investment. Valuations must be carried out at a frequency that is appropriate to the assets held by the private fund and, in any case, on at least an annual basis.
A private fund must ensure its Valuation Policy is applied unless there is satisfactory reason not to do so. Where deviations from the Valuation Policy are likely to have an effect on the reported valuation of the private fund, they must be disclosed to the private fund's investors in advance of the determination of the valuation and agreed to by the private fund's general partner / operator.
A private fund's constitutional documents or marketing materials must explicitly describe the limitations or potential limitations of the Valuation Policy and any material involvement by the investment manager / advisor in the valuation of the private fund's portfolio and any conflicts of interest caused by such involvement.
The private fund's general partner / operator has ultimate responsibility for oversight of the entire valuation process, and must approve, and review at least annually, the Valuation Policy utilised by the private fund.
The Segregation Rules require that a registered private fund's portfolio be segregated and accounted for separately from the assets of the general partner / operator, investment manager and any other service provider appointed to ensure the safekeeping of the fund's portfolio, and also require such fund to ensure that none of such persons use the fund's portfolio to finance their own or any other operations.
The Segregation Rules also require a registered private fund to establish, implement and maintain strategies, policies, controls and procedures to ensure compliance with the Segregation Rules that are consistent with any disclosures made in the private fund's offering document and that are appropriate for the size, complexity and nature of the private fund's activities.
Most registered private funds will likely already have policies and procedures in place to ensure compliance with the matters covered by the Valuation Rules and the Segregation Rules, particularly where such private funds are managed or advised by an entity subject to 'custody rule' requirements pursuant to onshore regulation such as the US Advisers Act.
Nevertheless, private funds should review such policies and procedures to ensure that any inconsistencies are addressed. Specific advice should be taken to ensure that any new or updated marketing materials comply with the Content Rules.
1 Similar Rules have been issued with respect to mutual funds regulated under the Mutual Funds Law (2020 Revision).
2 'Fair Value' means the price that would be received for the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Originally published by Maples Group, November 2020
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.