Cayman law changes will mean more funds need to register with CIMA
The Cayman Islands Government has published two laws relevant to fund managers, imposing registration and other requirements on different fund types.
Background
On 7 February 2020, the Cayman Islands Government published two laws which are of relevance to fund managers:
the Mutual Funds (Amendment) Law, 2020 (the MF(A) Law) requires previously exempt mutual funds to register with the Cayman Islands Monetary Authority (CIMA); and
the Private Funds Law, 2020 (the PF Law) requires certain closed-ended fund vehicles (private funds) to register with CIMA.
The two Laws are intended to reflect the Cayman Islands' commitment to be seen as a co-operative jurisdiction. Nevertheless, on 18 February, 2020, EU finance ministers added the Cayman Islands to the EU's blacklist of non-cooperative jurisdictions.
See our note, "Cayman Islands added to EU tax blacklist" here.
What do the Laws change?
Taking them in turn:
(a) Mutual Funds Amendment Law
What funds are affected?
The Mutual Funds Law (2020 Revision) provided funds (known as Section 4(4) Funds) which had 15 or fewer investors, a majority of whom could appoint or remove the fund's operator, with an exemption from the general requirement to register with CIMA.
What are the effects of the changes?
The MF(A) Law, though, now requires
- Section4(4) Funds in existence on 7 February 2020 to register with CIMA by 7 August 2020
- new Section 4(4) Funds to comply with certain (albeit straightforward) registration requirements before they can launch.
The key changes made by the MF(A) Law mean that, from now on, a Section 4(4) Fund will now have to
- pay an annual registration fee
- file with CIMA a certified copy of an extract of its constitutional documents specifying that a majority of its investors can appoint or remove the fund's operator. (The fund will not, though, need to file offering documents.)
- have at least two natural persons in management roles
- have its accounts audited annually by a Cayman Islands-based auditor
- file its accounts with CIMA within six months of the fund's FYE along with an annual return in CIMA's prescribed form
Accounts of all regulated mutual funds and Section 4(4) Funds will have to be prepared and audited in accordance with International Financial Reporting Standards or generally accepted accounting principles of the US, Japan or Switzerland or other non-high risk jurisdiction.
(b) Private Funds Law
What funds are affected?
The PF Law requires various closed-ended funds (private funds) to register with CIMA.
Under the PF Law, a "private fund" is one whose principal business is:
"the offering and issuing of its 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 profits or gains from such entity's acquisition, holding, management or disposal of investments, where -
the holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments; and
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 [fund]."
As a result, it seems likely that many parallel or feeder funds will need to register.
The definition, though, excludes "non-fund arrangements", such as pension funds, holding vehicles and single family offices.
What are the effects of the changes?
The PF Law allows a six-month transitional period for existing private funds and any new private funds that receive capital contributions between now and 7 August 2020.
A private fund that starts carrying on business after this date will be able to market to certain sophisticated and high net worth investors without being registered but must submit an application for registration with CIMA within 21 days of accepting capital commitments from investors and the fund must be registered before it can accept any capital contributions for the purposes of investment.
Registration (as for Section 4(4) funds above) should be straightforward, with each private fund being required to file prescribed particulars with CIMA. However, offering documents and other constitutional documents will not need to be filed.
There will be no registration fee for private funds that register on or before 7 August 2020 though annual fees will be payable from 1 January 2021.
As with regulated mutual funds, a private fund which falls in scope of the PF Law will have to have its accounts audited annually by a Cayman Islands-based auditor and to file them with CIMA within six months of the fund's financial year-end.
The PF Law also sets out a number of requirements on the valuation of assets, safekeeping of fund assets, cash monitoring and identification of securities. Asset valuation, safekeeping and cash monitoring must be conducted by an independent third party. However, these functions may be conducted instead by the fund's manager or operator provided that there is independence from the portfolio management function and all conflicts of interest are identified, monitored and disclosed to investors.
