CAYMAN ISLANDS: An Introduction to Investment Funds
Overview: Investment Funds in the Cayman Islands
INTRODUCTION
The Cayman Islands has become the leading offshore jurisdiction for establishment of mutual funds and private funds. This phenomenal growth has been due in part to the use of innovative legislation and the absence of taxation and exchange controls, which, together with the presence of sophisticated professional service providers, has resulted in the jurisdiction’s reputation for responsible supervision and regulation of funds.
MUTUAL FUNDS
The Mutual Funds Act (2020 Revision) (hereafter the "Mutual Funds Act") applies to all open-ended funds (funds in which the investors have the right to redeem their interests at their option), except those specifically excluded from regulation.
TYPES OF REGULATED MUTUAL FUNDS
Under the Mutual Funds Act, the main type of mutual fund that is subject to regulation and supervision by the Cayman Islands Monetary Authority (CIMA) is the registered mutual fund, which requires an initial minimum equity interest purchasable by an investor of at least USD100,000.
Registration requires filing the appropriate forms with CIMA together with a copy of the current offering document, consent letters from the auditors and administrators and payment of the registration fee.
Where the fund is not a registered mutual fund and is not excluded from regulation, it must either apply for a mutual fund licence or apply to be regulated as an administered mutual fund.
Master funds of regulated feeder funds which issue equitable interests redeemable at the option of the feeder fund must register with CIMA in accordance with the Mutual Funds Act.
Finally, an open-ended fund with 15 or fewer investors – who have the ability to appoint or remove the operator of the fund – is referred to as a “limited investor fund”. These are also required to register with CIMA in accordance with the Mutual Funds Act.
REQUIREMENTS FOR ALL REGULATED MUTUAL FUNDS
All Regulated Mutual Funds are required to:
1. Submit to CIMA a current copy of the fund offering document (exceptions apply for a limited investor fund or a master fund). The offering document must describe the equity interests offered to investors in all material respects and must contain such information as is necessary to enable a prospective investor to make an informed decision as to whether to purchase the equity interests.
2. Submit to an annual audit and file accounts within 6 months of the end of the fund’s financial year. This will involve appointing an auditor in the Cayman Islands.
3. Pay a prescribed annual registration fee.
PRIVATE FUNDS
The Cayman Islands Private Funds Act, 2020 (the "Private Funds Act") applies to all closed-ended funds (funds in which the investors do not have the right to redeem their interests at their option). The Private Funds Act specifically excludes from regulation certain ‘non-fund arrangements’ which include: pension funds; joint ventures; structured finance vehicles; preferred equity financing vehicles and holding vehicles.
TYPES OF REGULATED PRIVATE FUNDS
Closed-ended private funds which fall under the definition of a private fund pursuant to the Private Funds Act are required to register with CIMA. The Private Funds Act also provides for ‘alternative investment vehicles’ and ‘restricted scope private funds’.
A restricted scope private fund is a private fund that is an exempted limited partnership managed or advised by a person who is either licensed or registered by CIMA, or authorised or registered by a recognised overseas regulatory authority. All investors in this type of fund are non-retail in nature, and are often high net worth individuals.
REGISTRATION UNDER THE PRIVATE FUNDS ACT
The Private Funds Act sets out a registration process for private funds which involves the filing of prescribed details with CIMA and payment of an annual fee. The Private Funds Act does not require the filing of a full offering memorandum (or similar) in relation to a private fund or impose any requirements on the contents of a private fund's offering materials (if any). Where a private fund (a) makes any changes, or becomes aware of any changes, that materially affects any information submitted to CIMA under the provisions of the Private Funds Act; or (b) changes its registered office or the location of its principal office, the private fund shall within 21 days of making the change, or becoming aware of the change as the case may be, file with CIMA the details of the change.
Operating Conditions for Private Funds
The Private Funds Act requires a private fund to ensure it has certain ongoing operating provisions in place relating to annual audits, annual returns, retention of records, valuation of assets, safekeeping of fund assets, cash monitoring and identification of securities which can be summarised as follows:
Annual audit of private fund
A private fund shall have its accounts audited annually by an auditor approved by CIMA. Accounts will need to be prepared in accordance with International Financial Reporting Standards (IFRS) or the generally accepted accounting principles of the United States of America, Japan, Switzerland or any other non high-risk jurisdiction.
Annual return
A private fund will, in respect of each financial year of the private fund, be required to submit an annual return in the prescribed form.
Retention of records
A private fund shall maintain its records in an accessible manner and in accordance with rules, statements of principle and guidance issued by CIMA under section 34 of the Monetary Authority Act (2018 Revision). This requirement includes an obligation to maintain a record of the identification codes of any securities that are regularly traded or held on a consistent basis.
Valuation
A private fund shall have appropriate and consistent procedures for the purposes of proper valuations of its assets, which shall ensure that valuations are conducted in accordance with the requirements in the Private Funds Act. Valuations of the assets of a private fund shall be carried out at a frequency that is appropriate to the assets held by the private fund and, in any case, on at least an annual basis.
Valuations of the assets of a private fund shall be performed by (a) an independent third party who is appropriately professionally qualified to conduct valuations in a non high-risk jurisdiction, or (b) the manager or operator of the private fund, or a person who has a control relationship with the manager of the private fund. If the valuation is undertaken by the latter of these options then it must be independent from the portfolio management function and potential conflicts of interest must be properly identified, managed, monitored and disclosed to investors. Alternatively, the valuation function could be undertaken by an administrator not falling under option (a) who is appointed by the private fund.
Safekeeping of fund assets
A private fund shall appoint a custodian to hold in custody, in segregated accounts opened in the name or for the account of the private fund, the custodial fund assets and verify that the private fund holds title to any other fund assets and maintain a record of those other fund assets. A private fund is not required to appoint a custodian if it notifies CIMA that it is neither practical nor proportionate to do so, having regard to the nature of the private fund and the type of assets it holds.
In this scenario the private fund shall appoint either an administrator or another independent third party or the manager or operator, or a person with a control relationship with the manager of the private fund, provided that the verification function is kept separate and conflicts of interest are identified, managed and monitored in the same way that the valuation function is administered as set out above.
Cash monitoring
The Private Funds Act requires that monitoring of cash flows and checking of cash accounts and receipt of investor payments be carried out by any of the following: the manager or operator of the private fund (subject to functional independence or conflicts management requirements), an independent administrator, independent custodian or other independent third party.
Author: Chris Humphries, Managing Director at Stuarts Walker Hersant Humphries