Managing Partner, Kendra Foster and Associate, Tian Peralto Levers analyse the success of last year's fundamental changes to the regulation of investment funds in the Cayman Islands and identify important regulatory requirements for fund operators. *
In 2020, the Cayman Islands Government enacted legislation to regulate certain closed-ended investment funds that fall within the definition of a private fund under Cayman Islands law (Private Funds).
Now that the initial registration exercise has been completed by the existing Cayman Islands private fund vehicles, we want to reflect on the successful launch of this new regulatory regime and highlight some important developments/requirements.
Despite initial concerns that Private Funds would not wish to register, many managers, advisors, investors and lenders gracefully accepted the additional regulatory oversight and complied with the new requirements. As a result of this new legislative requirement, the Cayman Islands Monetary Authority (CIMA) reported that over 12,000 funds were registered as Private Funds during the summer of 2020.
Key areas of focus since the initial launch of the private funds regime include: (i) legislative changes, (ii) CIMA issued statements of guidance, (iii) CIMA issued supervisory notices and (iv) ongoing legislative obligations.
Legislative changes - The Cayman Islands government widened the scope of the definition of a Private Fund to ensure that the private funds regime would capture additional vehicles such as Private Funds holding a single investment. If you conducted an initial classification of your fund prior to 7 July 2020 and it was determined that your Cayman Islands entity fell outside the scope of the definition of a Private Fund, we recommend that you review this classification to ensure that your Cayman Islands entity still remains out of scope. If you have determined that your entity still remains out of scope, we recommend that you clearly document this classification and ensure that the classification documentation is filed at the registered office service provider of the entity in the Cayman Islands, such as Ocorian Trust (Cayman) Limited. This will guarantee that the classification documentation is readily available should a regulatory enquiry be made in relation to the status of your entity by CIMA.
CIMA issued statements of guidance - Since the implementation of the registration requirement for Private Funds, CIMA has published statements of guidance in relation to the following matters: (a) Non-Fund Arrangements, (b) Calculation of Asset Values, (c) Segregation of Assets, (d) Marketing Materials, (e) Exemption from Audit Requirement, and (f) Exemption from Valuation. These particular statements of guidance are intended to act as a guide to interpreting and complying with the Private Funds legislation. If, however, further clarification is needed in relation to these or any other statements of guidance, we suggest that you get in touch with your Cayman Islands legal counsel or contact us.
CIMA issued supervisory notices - CIMA has also published the following supervisory notices since the implementation of the Private Funds legislation: (a) Private Funds Law FAQs Update, (b) Private Funds & Mutual Funds - Regulatory Rule Segregation of Assets FAQs, (c) Private Funds Law FAQs Update - Audit Requirements, (d) Private Funds Law FAQs Update - AIVs Registration and Audit Requirements. These notices relay important updates from CIMA that may affect regulated entities such as your Private Fund. Similarly, should further guidance be needed in relation to these or other CIMA issues supervisory notices, we suggest that you get in touch with your Cayman Islands legal counsel or contact us.
Ongoing obligations - It is important to bear in mind that the work to achieve compliance does not simply end after registration. Private Funds must now adhere to ongoing obligations such as, but not limited to: (a) submission of annually audited financial accounts signed off by an approved Cayman Islands auditor, (b) adoption and application of a valuation policy, (c) where applicable, engaging a custodian, (d) performance of cash monitoring measures, (e) where applicable, maintenance of a record of securities, (f) payment of annual fees, (g) appointing at least two controllers and (h) notification of material changes to CIMA within 21 days.
- Keep on top of regulatory changes by signing up to CIMA's RSS feeds so that you can be directly notified by email of new legislation, statements of guidance or supervisory notices as the same are posted on the CIMA website.
- Ensure your Cayman Islands service providers such as independent directors, registered office service providers and legal counsel keep abreast of the current and new requirements and keep you up to date with developments.
It is important to fully understand the implications of Private Fund registration and to keep informed of any regulatory changes impacting Private Funds going forward. Understanding all obligations of Private Funds will ensure a compliant operating history and will aid the Private Fund in maintaining a positive relationship with CIMA. We highly recommend that all operators, managers and other advisors get in touch with us or their Cayman Islands legal counsel to get any additional information needed in relation to operating within this regulatory regime.
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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.