This briefing provides a summary of a number of recent changes to laws and regulations which have been enacted in the Cayman Islands over the last quarter which impact, or will impact, Cayman Islands funds. This briefing provides a summary of these developments, and is intended as a handy reference guide with respect to the recent changes and updates.
The Key Takeaways
On 7 July 2020, an amendment to the Private Funds Law 2020 was enacted; the key change being the expansion of the definition of "private fund". The deadline to register remains 7 August 2020, therefore all closed-ended Cayman investment vehicles must be promptly re-assessed to achieve compliance.
On 26 June 2020 an amendment to the Monetary Authority (Administrative Fines) Regulations (2019 Revision) was passed, expanding significantly the list of regulatory breaches for which CIMA may issue administrative fines. The fines range from1 US$6,098 to US$121,951 (for individuals) and US$1,219,512 (for entities), depending on the nature and category of the breach.
CIMA has published the Rule on the Contents of Offering Documents – Regulated Mutual Funds, and the Rule on the Contents of Marketing Materials – Registered Private Funds, which set out certain prescribed disclosure requirements that must be included in offering documents relating to regulated mutual funds and registered private funds.
The Department for International Tax Cooperation provided an update to industry on 26 June 2020 regarding the transition to a new portal for registration (notification) and reporting purposes. The reporting deadline for the 2019 reporting period in relation to both CRS and FATCA returns is extended to 16 November 2020.
The Cayman Islands Court of Appeal has reiterated the importance of following the redemption procedures set out in a fund's articles of association.
In addition, Q1 saw a number of legal and regulatory changes which were discussed in our Cayman Islands Funds update: Q1 2020. Two notable upcoming deadlines are:
- All open-ended unregistered funds that are currently operating under the exemption in section 4(4) of the Mutual Funds Law (Revised) must be registered with CIMA by 7 August 2020; and
- Changes to the Anti-Money Laundering Regulations (2020 Revision) (AML Regulations) come into effect on 5 August 2020 whereby funds will no longer be able to rely on the list of countries maintained by the Anti-Money Laundering Steering Group for anti-money laundering purposes, and instead must conduct a separate country-risk assessment. Funds should check their / their administrator's policies to ensure compliance and ensure they have a robust and well documented risk assessment system in place.
Private Funds Law – Expanded Scope
As referred to in our recent briefing here, on 7 July 2020 the Cayman Islands Government enacted an important amendment to the Private Funds Law 2020 (PF Law) that will increase the number and categories of closed-ended Cayman investment vehicles required to register with the Cayman Islands Monetary Authority (CIMA). As the deadline for registration remains 7 August 2020, all closed-ended Cayman investment vehicles must promptly be re-assessed in light of the amended definitions to achieve compliance. Open-ended mutual funds and hedge funds are unaffected.
Administrative Fines Regime – Expanded Scope
On 26 June 2020 the Cayman Islands Government passed the Monetary Authority (Administrative Fines) (Amendment) Regulations, 2020 amending the Monetary Authority (Administrative Fines Regulations (2019 Revision) (together the Regulations) issued under the Monetary Authority Law, which allows CIMA to impose administrative fines upon individuals and entities licensed and regulated in the Cayman Islands who are in breach of a provision of the Monetary Authority Law or certain other laws, regulations and rules (Administrative Fines Regime).
The Regulations, which came into force with immediate effect, significantly expand the list of regulatory breaches for which CIMA may issue administrative fines, which was previously limited to breaches under the AML Regulations.
Categories of breach
The breaches are categorised in the Monetary Authority Law and Regulations as minor, serious or very serious, with the administrative fine ranging between US$6,098 to US$1,219,512 depending on the nature and category of the breach and whether it was made by an individual or an entity.
- Minor breaches incur a fixed fine of US$6,098. The fine may be imposed within six months of CIMA becoming aware of the breach, including on a continuous basis (unless the breach is remedied or the fine is paid in full) up to a maximum of US$24,390.
- Serious breaches incur a discretionary fine of up to US$60,976 (for individuals) and US$121,951 (for entities). There is a two year limitation period and the amount of the fine will depend on the nature of the breach and the discretion of CIMA.
- Very Serious breaches incur a discretionary fine of up to US$121,951 (for individuals) or US$1,219,512 (for entities). There is a two year limitation period and the amount of the fine will depend on the nature of the breach and the discretion of CIMA.
Criteria for imposing a fine
The Monetary Authority Law and the Regulations specify the breaches under the relevant regulatory laws, regulations and rules, in respect of which a fine may be imposed. They also include the prescribed list of criteria for determining mitigating or aggravating circumstances, which CIMA must take into consideration when issuing breach notices and imposing discretionary fines.
Process for imposing and disputing a fine
Prior to imposing a fine, CIMA must issue a breach notice informing the relevant party of its intention to impose a fine and setting out the nature of the breach and the amount of the proposed fine.
In relation to minor, non-discretionary breaches, the party may provide CIMA with a rectification notice stating that the breach has been rectified within 30 days. In relation to serious or very serious breaches the party may reply to CIMA within the time period specified in the breach notice (which must be not less than 30 days of the breach notice being issued). Upon receiving a reply or rectification notice, CIMA is obliged to reconsider the circumstances of the breach and its decision to impose a fine. If no such reply is received or if on review, CIMA is not satisfied that the breach has been rectified (with respect to minor breaches) or that a discretionary fine is still required (with respect to serious or very serious breaches), CIMA must issue a fine notice in accordance with the Regulations. The Administrative Fines Regime sets out a further review procedure to be carried out by CIMA's Management Committee in the case of non-discretionary fines for minor breaches and grants leave to appeal against the original decision to the Grand Court in relation to discretionary fines for serious or very serious breaches.
CIMA publishes new Rules for regulated entities and registered funds
New Disclosure Rules for Offering Documents and Marketing Materials
On 29 May 2020, CIMA published a series of Rules in relation to regulated mutual funds and registered private funds.
Of particular note to the funds industry will be the Rule on the Contents of Offering Documents – Regulated Mutual Funds (MF Offering Document Rules) and the Rule on the Contents of Marketing Materials – Registered Private Funds (PF Marketing Materials Rules and together with the MF Offering Document Rules, the Disclosure Rules).
The MF Offering Document Rules apply to funds regulated under the Mutual Funds Law (Revised) (Regulated Mutual Funds). Any document, such as an offering document or private placement memorandum, pursuant to which equity interests in a Regulated Mutual Fund are offered for sale will need to comply with the MF Offering Document Rules. In practice, the MF Offering Document Rules should not require significant additional disclosure to be included in the fund offering documents from the usual market practice, but there are a couple of mandatory disclosure statements concerning CIMA which must be included in a specified form. All new offering documents will need to include these statements and every offering document update should take into account the new MF Offering Document Rules, including the addition of these statements.
The PF Marketing Rules do not impose a requirement upon private funds registered under the PF Law (Registered Private Funds) to prepare any form of marketing materials where none are contemplated. However, where a Registered Private Fund does intend to prepare any documents to be distributed to investors prior to the purchase of investment interests in the Registered Private Fund, including any offering document or private placement memorandum, such marketing materials will need to be compliant with the PF Marketing Materials Rules. Again the PF Marketing Materials Rules do not require significant additional disclosures from existing typical marketing materials but will require the inclusion of CIMA's mandatory statements and all new or updated marketing materials for any Registered Private Funds should be reviewed to ensure compliance.
In each case only Regulated Mutual Funds or Registered Private Funds with new or ongoing offerings will be required to comply with the new Disclosure Rules. CIMA's enforcement powers are set out in the Mutual Funds Law and the PF Law, respectively, and are covered by the Administrative Fines Regime. Breach of the Disclosure Rules would constitute a serious breach as set out in the Regulations (see above section on Administrative Fines Regime).
AEOI Portal and FATCA and CRS Reporting
The Department for International Tax Cooperation (DITC) provided an update to industry on 26 June 2020 (DITC Update) regarding the transition to a new portal (DITC Portal) for registration (notification) and reporting purposes, which will eventually encompass all relevant legislative frameworks, including economic substance reporting. The Cayman Islands Automatic Exchange of Information (AEOI) Portal (AEOI Portal) remains offline pending the transition.
The DITC confirmed that a new launch date for the DITC Portal would be provided in due course and all functionality (notifications and reporting) will be available at that time. All user accounts from the AEOI Portal will be migrated to the new DITC Portal. Authorising Persons and Principal Points of Contact of Cayman Financial Institutions should expect to receive an email from the DITC in due course, which will contain steps on how to log onto the DITC Portal.
Further details on this process are also expected to be posted on the DITC website. The DITC Update, including a series of FAQs, can be accessed here. The DITC Update also confirmed that the reporting deadline for the 2019 reporting period in relation to both CRS and FATCA returns is extended to 16 November 2020.
Cayman Islands Court of Appeal re-examines master-feeder redemption procedures
In the matter of Ardon Maroon Asia Master Fund (in Official Liquidation), CICA, 20 May 2020, the Cayman Islands Court of Appeal (CICA) has reiterated the importance of following the natural and ordinary meaning of a fund's articles, in order to ensure that redemptions are effective. CICA reaffirmed the 2018 decision of the Cayman Grand Court whereby the court rejected the argument of the feeder fund's liquidators that upon receipt and acceptance by the feeder fund of a redemption request by one of its investors, an 'automatic' redemption of the feeder fund's holding in the master fund had occurred on a 'back-to-back' basis. In reaching its decision CICA considered the weight to be given to commercial considerations and, in particular, the extent to which extrinsic evidence of commerciality and business efficacy could be used to imply terms into the statutory contract created by the articles of association of a company. CICA concluded that the comprehensive redemption procedures set out in the articles left no room to imply additional provisions based on the natural and ordinary meaning of the articles. The confirmation by CICA of the earlier decision is welcome. However, it does serve to highlight the importance of ensuring that the redemption procedures set out in a master fund's articles are strictly adhered to as a matter of practice. For a more detailed discussion of the decision please see our client briefing here.
1. Administrative fines are levied in Cayman Islands dollars. The figures quoted are in US dollars at an exchange rate of US$1.00=CI$0.82, rounded up to the nearest US dollar.
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.