Proposed Changes to Cayman Investment Funds Classified as Private Funds and Mutual Funds
Peter M.O. Young, B.Sc., BBA, CPA, CEMBA, Acc. Dir., MAFM, Partner, Marcum LLP (Cayman)
The Cayman Islands Government Ministry of Financial Services and Home Affairs, together with other associated authorities (in particular, the Cayman Islands Monetary Authority “CIMA”) has notified the financial services industry of several pending changes to the regulation of investment funds. On January 8, 2020, the government published a draft Private Funds Bill, 2020 (the “Private Funds Bill”) and a draft Mutual Funds (Amendment) Bill, 2020 (“Mutual Funds Bill,”), both of which seek to enhance the oversight of closed-ended and open-ended funds (“Investment Funds”).
These new bills were presented to the Legislative Assembly on January 30, 2020, where they were passed into law with only minor changes.
The Private Funds Bill seeks to establish a framework for monitoring closed-ended funds, which are currently beyond the scope of the existing Mutual Funds Law (MFL). The Mutual Funds Bill, an amendment to the existing MFL, will enhance the regulatory and supervisory framework for mutual funds.
- Strengthen investor confidence in Cayman Islands investment funds vehicles, and
- Ensure that the Cayman Islands remains the preeminent jurisdiction for investment funds formation.
The bills account for the need to update the investment funds framework while staying mindful of industry realities. The bills also address EU suggestions for investment fund oversight as set forth in a report dated May 27, 2019 from the EU Code of Conduct Group (Business Taxation).
Private Funds Bill:
The Private Funds Bill has three key pillars: (a) registration; (b) operational regulation; and (c) supervision and enforcement.
All existing vehicles falling within the scope of the private funds definition and section 3(1) of the Private Funds Bill must register with CIMA by August 7, 2020 and, once so registered, will be subject to regulatory obligations.
The Private Funds Bill sets out exemptions to the registration requirement for the following entities: regulated mutual funds and regulated EU-connected funds, non-fund arrangements, and certain overseas private funds that solicit the Cayman Islands public for investments.
Private Funds must provide information upon registration, pay an annual registration fee, comply with annual audit and return requirements, retain accessible records and comply with certain ongoing obligations in relation to valuation of fund assets, safekeeping of fund assets, cash monitoring and identification of securities.
Private funds that are not yet registered with CIMA cannot, pending registration, carry on or attempt to carry on business in the Cayman Islands by receiving capital contributions from investors. However, they may still solicit eligible investors, including receipt of subscription documents, pending registration. That said, such private funds must make their registration application to CIMA within 21 days of accepting capital commitments from investors and must be registered with CIMA before receipt of capital contributions.
Operating Conditions for Registered Private Funds
Once registered, the Private Funds Bill requires private funds to comply with certain ongoing obligations in order to meet best practices and the needs of sophisticated global institutional investors.
The Private Funds Bill also contains requirements for valuation, safekeeping, title verification, and cash monitoring and offers flexibility by permitting private funds to choose the service provider(s) who will provide any required valuation, safekeeping, title verification, and cash monitoring services, provided that any administrator, custodian, or other independent third party appointed is independent from the fund’s manager or operator, or, where any manager or operator or their affiliates is appointed, they identify, manage, monitor, and disclose any conflicts of interest.
Supervision and Enforcement
The Private Funds Bill authorizes CIMA to administer the law. CIMA’s duties include examining registration applications and determining application parameters and other informational requirements.
In cases where CIMA determines that a private fund is not in compliance with its obligations, it may enforce special measures, such as the performance of an audit or one-off or periodic reports as appropriate. CIMA also has the power to impose administrative fines, varying in level depending on the provision(s) breached.
In certain instances – for example, when a private fund is carrying on business in a fraudulent or detrimental manner that harms investors – CIMA may take additional special measures, including imposing operational restrictions, appointing an adviser or controller to direct fund management, or deregistering the fund.
CIMA has notified industry that it will apply a risk-based approach to the regulatory oversight of private funds.
Mutual Funds Bill:
The Mutual Funds Bill brings within the scope of regulation certain mutual funds not currently covered by MFL. Funds that meet the 15 or fewer investor criteria exemption set out in section 4(4)(a) of the MFL will now be required to register with CIMA and, once so registered, will be subject to regulatory obligations.
The exemption to the registration requirement for certain overseas private funds that solicit the Cayman Islands public for investments under the MFL will remain in place.
Similar to private funds, all regulated mutual funds must provide CIMA with information upon registration, pay an annual registration fee, comply with annual return requirements, retain accessible records, and have annual audits issued or undertaken by a CIMA-approved local auditor and in accordance with International Financial Reporting Standards or the Generally Accepted Accounting Principles of the United States of America, Japan or Switzerland or any non-high-risk jurisdiction. There is no specification with respect to prior years’ unaudited reports, or if they will be required to be audited.
The Cayman Islands government has notified the industry that it is mindful that a successful transition to the new regulations will require preparation and adequate time. New entities that are within the scope of these new requirements must adhere to the registration process prescribed. Existing entities will have a grace period of six months in which to comply. Further, the Cayman Islands government has confirmed that the local audit requirement and electronic submission of the Fund Annual Return (FAR) will not be required to be filed with CIMA until six months following the first full fiscal year after registration (for most funds with a December 31 year end, this will mean their first filing will be due by June 30, 2022, in respect of the year ended December 31, 2021).
To avoid any missteps, Cayman-domiciled funds not registered with CIMA should consult their Marcum professional for assistance in navigating these new requirements.