1 Regulatory Framework

1.1 What legislation governs the establishment and operation of Alternative Investment Funds?

The Mutual Funds Act (As Revised) (the "MF Act") provides for the regulation of open-ended investment funds and mutual fund administrators. Responsibility for regulation under the MF Act rests with the Cayman Islands Monetary Authority ("CIMA").

The Private Funds Act (As Revised) (the "PF Act") provides for the regulation of closed-ended investment funds. Responsibility for regulation under the PF Act rests with CIMA.

In addition, the Retail Mutual Funds (Japan) Regulations (As Revised) (the "Japan Regulations") provide a regulatory regime for retail mutual funds that are marketed to the public in Japan

CIMA has also published rules and guidance regarding certain operational requirements for CIMA registered mutual funds and private funds, including in respect of the valuation of assets, safekeeping of fund assets, cash monitoring and identification of securities.

Although not Cayman Islands law, the broad scope and extra-territorial effect of the EU Directive on Alternative Investment Fund Managers ("AIFMD") will capture most types of Cayman Alternative Investment Funds, regardless of whether they are open-ended or closed-ended and regardless of their legal structure and investment strategy, with very few exceptions, to the extent that they are being marketed or managed in Europe (as such terms are defined for the purposes of the AIFMD). Legislation for AIFMD consistent regimes for Cayman Islands funds and their managers was introduced in 2019, which enable Cayman Islands AIFs and AIFMs to "opt in" to take full advantage of the AIFMD if and when the AIFMD passport is extended to the Cayman Islands. The legislation also contemplates a CIMA notification regime for CIMA licensed managers and any fund managed by a manager registered in an EU Member State or being marketed to investors in an EU Member State.

1.2 Are managers or advisers to Alternative Investment Funds required to be licensed, authorised or regulated by a regulatory body?

Generally, there is no local restriction on or regulation of a manager or adviser from another jurisdiction managing an Alternative Investment Fund established as a Cayman Islands vehicle. However, a manager or adviser which is itself established or, in the case of a foreign company, registered in the Cayman Islands and which conducts "securities investment business" ("SIB"), whether or not that securities investment business is carried on in the Cayman Islands, will fall within the scope of the Securities Investment Business Act (As Revised) ("SIBA").

SIB is defined as being engaged in the course of business in any one or more of the activities set out in Schedule 2 to SIBA. Those activities include managing securities belonging to another person on a discretionary basis and advising in relation to securities, but only if the advice is given to someone in their capacity as investor or potential investor or in their capacity as agent for an investor or a potential investor and the advice is on the merits of that person (whether acting as principal or agent) buying, selling, subscribing for or underwriting a particular security or exercising any right conferred by a security to buy, sell, subscribe for or underwrite a security. "Securities" are defined to include most forms of shares and stock, debt instruments, options, futures, contracts for differences, and derivatives

Schedule 3 to SIBA specifically excludes certain activities from the definition of SIB, although those exclusions are unlikely to apply to a person conducting discretionary investment management or investment advisory activities.

Any person within the scope of SIBA conducting SIB must be licensed by CIMA, unless that person is registered as a "Registered Person" under SIBA. A licence may be restricted (meaning that SIB may only be transacted with particular clients) or unrestricted. A licence may also be issued subject to conditions or may be unconditional.

A person carrying on SIB may be exempt from the requirement to obtain a licence but will still be required to be registered as a "Registered Person" under SIBA. In the case of Registered Persons, which is likely to apply to fund managers or advisers, they are required to register with CIMA by filing a declaration and paying a fee of CI$5,000 (approximately US$6,097.56), prior to carrying on SIB and annually thereafter, confirming that they are entitled to rely on the relevant exemption.

A "Registered Person" includes:

  1. a company carrying on SIB exclusively for one or more companies within the same group;
  2. a person carrying on SIB exclusively for one or more of the following classes of person:
    1. a sophisticated person (i.e., a person regulated by CIMA or a recognised overseas regulatory authority or whose securities are listed on a recognised securities exchange or who by virtue of knowledge and experience in financial and business matters is reasonably to be regarded as capable of evaluating the merits of a proposed transaction and participates in a transaction with a value or in amounts of at least US$100,000 in each single transaction);
    2. a high-net-worth person (i.e. an individual whose net worth is at least US$1 million or any person that has any assets of not less than US$5 million); or
    3. a company, partnership or trust of which the shareholders, limited partners or unitholders are all sophisticated persons or high-net-worth persons, provided always that such person has a registered office or a place of business in the Cayman Islands provided by a licensed corporate services provider (such as, for example, Maples Corporate Services Limited); and
  3. a person who is regulated by a recognised overseas regulatory authority in the country or territory (other than the Cayman Islands) in which the SIB regulated activity is being conducted.

1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a regulatory body?

An investment fund qualifies as a "mutual fund" and is required to be regulated under the MF Act if:

  1. it is a company, partnership or unit trust carrying on business in or from the Cayman Islands;
  2. it issues "equity interests" to investors (i.e. shares, partnership interests or trust units that carry an entitlement to participate in profits or gains and which may be redeemed or repurchased at the option of those investors prior to winding up); and
  3. its purpose or effect is the pooling of investor funds with the aim of spreading investment risks and enabling investors to receive profits or gains from investments.

There are four categories of mutual funds:

  1. a licensed fund under section 4(1)(a) of the MF Act;
  2. an administered fund under section 4(1)(b) of the MF Act;
  3. a registered fund under section 4(3) of the MF Act; and
  4. a limited investor fund under section 4(4) of the MF Act.
  1. A mutual fund licence will be granted if CIMA considers that the promoter is of sound reputation, there exist persons of sufficient expertise to administer the fund, who are of sound reputation, and that the business of the fund and any offer of equity interests will be carried out in a proper way. Detailed information is required concerning the directors, trustee or general partner ("GP") of the mutual fund (as the case may be) and the service providers. However, few investment funds are fully licensed under the MF Act, as this is generally only necessary for retail funds.
  2. Registration as an administered fund requires the designation of a Cayman Islands licensed mutual fund administrator as the fund's principal office. The administrator must satisfy itself that the fund's promoters are of sound reputation, that the fund's administration will be undertaken by persons with sufficient expertise who are also of sound reputation and that the fund's business and its offering of equity interests will be carried out in a proper way. The administrator is obliged to report to CIMA if it has reason to believe that a mutual fund for which it provides the principal office (or any promoter, director, trustee or GP thereof) is acting in breach of the MF Act or may be insolvent or is otherwise acting in a manner prejudicial to its creditors or investors. This imposes a quasi-regulatory role and an obligation to monitor compliance on the administrators themselves, and generally higher fees charged by administrators in relation to this category of investment fund.
  3. Mutual funds registered under section 4(3) of the MF Act are divided into three sub-categories:
    1. where the minimum investment per investor is at least US$100,000;
    2. where the equity interests are listed on a recognised stock exchange; or
    3. where the mutual fund is a "master fund" (as defined in the MF Act) and either:
      1. the minimum investment per investor is at least US$100,000; or
      2. the equity interests are listed on a recognised stock exchange.
  4. Limited investor funds registered under section 4(4) of the MF Act have 15 or fewer investors, a majority in number of whom have the power to appoint and remove the fund's directors, GP or trustee, as applicable.

A master fund is a Cayman Islands entity that issues equity interests to at least one feeder fund (either directly or through an intermediate entity established to invest in the master fund) that is itself regulated by CIMA under the MF Act that holds investments and conducts trading activities for the principal purpose of implementing the overall investment strategy of the regulated feeder.

An investment fund qualifies as a "private fund" and is required to be regulated under the PF Act if it is a company, unit trust or partnership that offers or issues or has issued investment interests (being interests that are not redeemable or repurchasable at the option of the investor), the purpose or effect of which is the pooling of investor funds with the aim of enabling investors to receive profits or gains from such entity's acquisition, holding, management or disposal of investments, where:

  1. the holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments; and
  2. the investments are managed as a whole by or on behalf of the operator of the private fund, directly or indirectly, but does not include:
    1. a person licensed under the Banks and Trust Companies Act (As Revised) or the Insurance Act (As Revised);
    2. a person registered under the Building Societies Act (As Revised ) or the Friendly Societies Act (As Revised); or
    3. any non-fund arrangements.

1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment Funds (or otherwise differentiate between different types of funds or strategies (e.g. private equity vs hedge)) and, if so, how?

Yes, open-ended funds are governed by the MF Act and closedended funds are governed by the PF Act. The key distinction between open-ended and closed-ended funds is the ability of investors to voluntarily redeem or repurchase some or all of their investment prior to winding up.

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