|The following is an update from Ministry of Financial Services.|
The purpose of this briefing note is to assist local service providers to communicate new regulatory requirements related to investment funds to clients of the jurisdiction. Further detail will be provided during the month of January in the form of a FAQ ahead of the meeting of the Legislative Assembly on the 30th January at which the Bills will be considered.
As the demonstrated leader in the global investment funds industry, the Cayman Islands is making legislative changes to enhance the oversight of open-ended and closed-ended funds (“investment funds“).
The changes seek to modernise regulation for open-ended funds, i.e. mutual funds, and close-ended funds, i.e. private funds, in the Cayman Islands. The changes would provide additional surety and transparency for investors and managers of Cayman Islands investment funds, while better aligning with best market practices, enhanced anti-money laundering and other key regulatory standards.
To this end, the Cayman Islands Government (the “Government”) has drafted the Mutual Funds (Amendment) Bill, 2020 and the Private Funds Bill, 2020 (together the “Bills“). The Bills seek to adopt the similar sensible and flexible regulation that has been the mainstay of our open-ended funds regime and will maintain the primacy of the Cayman Islands in and among the investment funds investing community.
The Bills balance the need for efficiency with investors’ desire for transparency and surety. The Government is dedicated to ensuring that the implementation of the legislation is seamless for industry stakeholders, investors and Government alike, and to that end is adopting processes that consider the current market practices of fund managers and other operators.
After consultation with interested parties and taking relevant legal advice from UK counsel, the Government has drafted the Private Funds Bill, 2020 (the “Private Fund Bill“). The Private Fund Bill seeks to establish a framework to monitor closed-ended funds, which are currently beyond the scope of the Mutual Funds Law. The Mutual Funds (Amendment) Bill, 2020 (the “Mutual Fund Bill“) will enhance the regulatory and supervisory framework for mutual funds.
The Bills strike a balance to achieve their dual purposes of (1) strengthening investor confidence in Cayman Islands investment funds vehicles and (2) ensuring 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 addresses 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).
While drafting the Bills, the Ministry of Financial Services consulted a Cayman Islands-based Working Group comprised of the Cayman Islands Monetary Authority (“CIMA“) and funds professionals, including accounting, audit, administration, governance and legal firms and associations to provide local industry perspectives.
SUMMARY OF BILLS
Mutual Fund Bill
The Mutual Fund Bill brings within the scope of regulation certain mutual funds not currently covered by the Mutual Funds Law (the “MFL”). Funds that meet the fifteen or fewer investor criteria 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.
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 in accordance with international audit standards.
Private Fund Bill
The Private Fund Bill has three key pillars: (a) registration; (b) operational regulation; and (c) supervision and enforcement.
All vehicles falling within the scope of the private funds definition and section 3(1) of the Private Fund Bill must register with the CIMA and once so registered (“Private Funds“) will be subject to regulatory obligations.
The Private Fund 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.
CIMA will apply a risk-based approach to the regulatory oversight of Private Funds.
Operating Conditions for Registered Private Funds
Once registered, the Private Fund Bill requires Private Funds to comply with certain ongoing obligations in order to meet with best practice and the needs of sophisticated global institutional investors.
All Private Funds must comply with annual return requirements, retain accessible records and have annual audits issued or undertaken by a CIMA-approved local auditor in accordance with international audit standards, and pay an annual registration fee.
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 of the manager or operator or their affiliates is appointed, they identify, manage, monitor and disclose any conflicts of interest.
Supervision and Enforcement
The Private Fund Bill authorises CIMA to administer the law. CIMA’s duties include examining registration applications and determining application parameters and other informational requirements.
In cases in which CIMA determines that a Private Fund is not complying 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.
The Government is mindful that a successful transition takes preparation and time. With the legislative changes to investment fund oversight, existing funds will be afforded transitional periods to comply with the new requirements of the regime. The Government expects 2020 to be an equally busy and challenging year, as we continue to build out regulations and regulatory measures to support the investment funds regime.
CIMA will be adequately resourced to take on the additional volume of funds that will now fall under its remit.
The Bills aim to support the continued vitality of the investment funds industry in the Cayman Islands. They consist of strong commercial legislation, ensuring that the world’s investors maintain confidence in Cayman Islands vehicles.
The Bills seeks to balance proper responsibility and regulatory oversight with established market practice.
The Bills are consistent with current industry practice and has appropriate information gathering provisions to better inform and enhance oversight of the industry. Overall, the Bills enable the Cayman Islands to continue to effectively compete at a high level, allowing for innovation and market development, based on a regulatory framework that effectively supervises the industry and strengthens investor confidence in Cayman Islands vehicles