On 7 February 2020 the Private Funds Law, 2020, supplemented by the Private Funds Regulations, 2020 and the Private Funds (Savings and Transitional Provisions) Regulations, 2020 (the Private Funds Law) and the Mutual Funds (Amendment) Law, 2020 (the Mutual Funds Law) came into force in the Cayman Islands.
The enactment of the Private Funds Law resulted in significant changes to the supervision, regulation and registration requirements of private funds in the Cayman Islands.
A private fund is defined as a company, unit trust or partnership whose principal business is the offering and issuing of investment interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors to receive profit or gains from such entity's acquisition, holding, management or disposal of investments, where: (a) the holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments and (b) the investments are managed as a whole by or on behalf of the operator of the private fund, directly or indirectly, for reward based on the assets, profits or gains of the private fund.
Notably excluded from the definition of a private fund and therefore out of scope of the private funds regime is: (a) a person licensed under the Banks and Trust Companies Law (Revised) or the Insurance Law 2010; (b) a person registered under the Building Societies Law (Revised) or the Friendly Societies Law (Revised); and (c) non-fund arrangements.
A private fund may engage in oral or written communications and enter into agreements with high-net-worth persons or sophisticated persons prior to making an application for registration with the Cayman Islands Monetary Authority (CIMA). However, an application for registration must be made within 21 days of accepting capital commitments and the private fund must be registered with CIMA prior to accepting capital contributions.
CIMA has issued registration application requirements which involve providing details of the fund and its structure as well as its service providers. While there is a transitional period, all new and existing private funds will need to comply with the Private Funds Law by 7 August 2020 and all managers and operators of private funds will be responsible for compliance.
The Mutual Funds Law removes the exemption from registration of mutual funds with fifteen or fewer investors where the majority of those investors are capable of appointing or removing the fund's operator (Section 4(4) funds).
Previously exempted section 4(4) funds are now required to register with CIMA, pay the prescribed annual registration fee and provide evidence that the majority of the fund's investors are capable of appointing and removing the fund's operator.
All new section 4(4) funds will need to comply immediately with the Mutual Funds Law while existing section 4(4) funds will have a transitional period until 7 August 2020 to comply and once again all managers and operators of section 4(4) funds will be responsible for compliance.
- Private Funds Law
Private funds are required to:
- Have an asset valuation performed by: (a) an independent third party; (b) the manager or operator of the fund (provided that the valuation function is independent from the portfolio management function or that potential conflicts are properly identified and disclosed); or (c) an administrator and must be carried out at a frequency that is appropriate to the assets held by the private fund and in any case at least on an annual basis;
- Appoint a custodian to hold, in segregated accounts, the custodial fund assets and verify and maintain a record of other fund assets to which the fund holds title (unless it is neither practical nor proportionate to appoint a custodian which in that instance, the private fund must notify CIMA and appoint either an independent third party or, subject to appropriate conflicts management, the manager or operator to carry out the title verification);
- Appoint either an administrator, custodian, independent third party or, subject to appropriate conflicts management, the manager or operator to perform cash monitoring;
- Maintain a record of the identification codes of the securities and make these available to CIMA upon request if the private fund regularly trades securities or holds them on a consistent basis; and
- Have at least two natural persons acting as or for the operator of the private fund.
- Private Funds Law and Mutual Funds Law
Both private funds and section 4 (4) funds are required to:
- Submit an annual fee to CIMA by January 15 every year;
- File an annual return;
- Submit annual audited accounts, signed off by an approved Cayman Islands auditor, within six months of the private fund's year end;
- Provide CIMA with such documents, statements or other information as CIMA may reasonably require;
- Maintain records in accessible manner and in accordance with the rules, statements of principle and guidance issued by CIMA; and
- Inform CIMA of any material change in information submitted in the fund's registration application and any changes in relation to the fund's registered office or location of its principal office within 21 days of such change.
How we can help?
Ocorian offers a wide range of fiduciary, corporate and legal services to assist funds with seamlessly navigating the new legislation.
Our legal team can assist with any classification and registration requirements as well as any other queries you may have. Our corporate services team can also make the relevant submissions in relation to CIMA filings and provide corporate governance.
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.