On 7th February 2020, the Cayman Islands Government approved and adopted two key changes to Cayman fund legislation: the Private Funds Law, 2020, and the Mutual Funds (Amendment) Law, 2020. These laws target both open-ended and closed-ended funds and have been created to meet evolving investor needs, as well as to cement the Cayman’s position as a leading jurisdiction within the international fund community.
We expect that the Cayman Islands Monetary Authority (“CIMA”) will publish guidance to assist in the interpretation and understanding of the Private Funds Law and the changes to the Mutual Funds Law. We will provide an update as soon as this information is published.
Private Funds Law, 2020
The Private Funds Law, 2020 (“the Law”) establishes a regulatory framework which introduces the registration and regulation of closed-ended funds (or ‘private funds’) which were previously outside regulatory parameters. This Law applies to private funds set up as Cayman Islands partnerships, companies, unit trusts, and limited liability companies.
The Law exempts structural entities and other ‘non-fund arrangements’ from its application. The confirmed scope of these non-fund arrangements will be clarified further by the CIMA in due course.
The private funds framework created by this Law has three key focuses: registration, operational regulation, and supervision and enforcement.
All fund vehicles within the scope of the definition of a private fund as stipulated by the Law must register with CIMA, including both existing and new structures.
Exempt to the registration requirement include regulated mutual funds and EU-connected funds, non-fund arrangements, and certain overseas private funds that solicit the Cayman Islands public for investments.
Once registered, private funds falling within the scope of the Law cannot continue or attempt to continue business in the Cayman Islands by receiving capital contributions from investors. A new private fund must (a) submit its registration application within 21 days after accepting capital commitments from investors; and (b) be CIMA-registered before it accepts capital contributions from investors.
The Law requires registered private funds to comply with ongoing obligations, which include:
- Provide information to CIMA
- Pay an annual registration fee
- Comply with annual audit and return requirements
- Retain accessible records
- Valuation of assets, safekeeping of assets, cash flow monitoring, and identification of securities
In respect to the valuation of assets, verification of title, and cash flow monitoring, this needs to be carried out by an independent party or administrator or, if done by the manager/operator of the fund, such function needs to be clearly independent of the portfolio management function. Alternatively, if not undertaken by an independent third party, the potential conflicts of interest are required to be properly identified and disclosed to investors. CIMA has the power to require funds to have the relevant function verified by an appropriately qualified independent third party.
Supervision and Enforcement
The Law provides CIMA with enforcement powers to administer the law. CIMA’s new authorised duties include examining registration applications, determining application parameters, and other related informational requirements. CIMA may also enforce special measures where they deem the private fund is non-compliant. In these circumstances, CIMA can perform audits, one-off/periodic reports, and impose administrative fines.
In instances where the private fund is acting in a fraudulent or detrimental manner that could potentially harm investors, CIMA may impose operational restrictions, appoint an adviser/controller to direct the fund’s management or deregister the fund.
The timeline for implementation is as follows:
- The Law came into force on 7th February 2020
- There are transitional provisions for existing private funds and any that launch prior to 7th August 2020 which permits them until 7th August 2020 to register with CIMA
- No fee will be charged upon registrations completed before 7th August 2020, but an annual fee will be payable in January of each following year
- The first audited accounts for registered private funds will not be required to be filed with CIMA until six months following the first full financial year after registration. For example, if 31st December 2020 is the financial year-end, registered private funds wouldn’t be required to filed audited accounts until June 2022
Mutual Funds (Amendment) Law, 2020
The Mutual Funds (Amendment) Law, 2020 amends the Mutual Funds Law to remove the exemption which previously allowed funds with 15 or fewer investors to avoid registration as a mutual fund under the Mutual Funds Law.
Funds currently relying on this, otherwise known as ‘Section 4(4) funds’, will now need to comply with the new regulations and related requirements within the prescribed period of 6 months from 7th February 2020, although CIMA does have the power to change this period.
Any mutual funds that start carrying on business after the commencement date of the 7th February 2020 must comply with the new regulations and registration requirements with immediate effect.
Upon registration, the Section 4(4) funds will be subject to regulatory obligations, which includes:
- Providing CIMA with relevant information and documentation
- Pay annual registration fee
- Comply with annual return requirements
- Retain accessible records
- Issue or undertake annual audits by a CIMA-approved local auditor in accordance with international audit standards
Such funds will also be required to have at least two natural persons as directors and that these persons will be required to be registered under the Cayman Islands Directors Registration and Licensing Law, 2014.
At SMP, we will work with the relevant authorities in the Cayman Islands to keep up to date on the latest progress of each of the Laws and provide updated summaries and advisories as they happen.
Whether you have an existing fund structure, or you are looking for advice with regards to setting up a fund in the Cayman Islands, the SMP Partners group of companies can provide bespoke fund advice tailored to your needs.
SMP Cayman offers a full suite of fund services including structuring and establishment of the fund, shareholder servicing, liaising with legal advisers, day-to-day administration and accounting, and maintaining statutory records. We offer advice and support for investment fund structures domiciled in most jurisdictions and encompassing all investment types.
In particular, our services can assist private funds in meeting their operational requirements whether through engagement as an independent administrator or custodian or through the provision of verification and oversight capabilities.
If you would like further information on any of the points discussed above or would like to discuss any Cayman fund-related matters with one of our specialists, please speak to your usual SMP adviser or get in touch with one of the contacts listed below:
Tel: +1 345 814 4825
Tel: +1 345 914 4674