At a glance private funds

  • Similar to existing regime for mutual funds, but with important differences
  • Closed ended funds will need to register, pay an annual fee, and file prescribed details with Cayman Islands Monetary Authority (CIMA)
  • CIMA to be notified of changes to prescribed details in the same manner as for mutual funds
  • New categories of alternative investment vehicle and restricted scope private fund
  • Annual audit and local audit sign off required
  • Codification of requirements to value and safe keep assets, monitor cash and identify securities
  • Supervision and enforcement powers for CIMA

Application

The Private Funds Law applies to companies, unit trusts or partnerships 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 (a) the holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments; and (b) 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. Private funds do not include, however, single investor funds; regulated mutual funds under the Mutual Funds Law (as amended); persons licensed under the Banks and Trust Companies Law or the Insurance Law; persons registered under the Building Societies Law or the Friendly Societies Law; or, importantly, any non-fund arrangements – the list of which is extensive and includes:

pension funds; securitisation special purpose vehicles; contracts of insurance; joint ventures; proprietary vehicles; officer, manager or employee incentive, participation or compensation schemes, and programmes or schemes to similar effect; holding vehicles; individual investment management arrangements; debt issues and debt issuing vehicles; structured finance vehicles; preferred equity financing vehicles; a fund of whose investment interests are listed on a specified stock exchange; sovereign wealth funds; or single family offices.

Registration and Audit

Private funds will need to register, pay an annual fee, and file prescribed details with CIMA within 21 days following the fund’s acceptance of capital commitments from investors for the purposes of investments. However, the private fund may not accept capital contributions from investors in respect of investments until it is registered. The registration date of a fund is expected to be the date that a complete application is filed with CIMA, assuming that the application is fully compliant with the law. A private fund must also have its accounts audited annually by an approved auditor and signed off on and filed by a local auditor with CIMA within six months of its financial year end along with an annual return (in the same manner as for mutual funds). An offering document need not be prepared or filed.

Valuation

A private fund must have appropriate and consistent procedures for the purposes of proper valuations of its assets to be carried out at a frequency that is appropriate to the assets held and, in any event, on at least an annual basis. For example, this may be carried out as part of the audit process. Valuations of the assets of a private fund may be performed by independent third parties appropriately professionally qualified to conduct valuations; the manager or operator of the private fund, or a person who has a control relationship with the manager of the private fund, provided that the valuation function is independent from the portfolio management function; or potential conflicts of interest are properly identified and disclosed to the investors of the fund; or by an administrator appointed by the fund. CIMA may exempt a private fund from the valuation requirements either absolutely or subject to such conditions as it may deem appropriate.

Safekeeping

A private fund must also 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, based on information provided by the private fund and available external information, that the private fund holds title to any other fund assets and maintain a record of those assets. A private fund shall not be required to appoint a custodian, however, if it has notified CIMA and it is neither practical nor proportionate to do so, having regard to the nature of the fund and the type of assets it holds. Where a private fund so notifies CIMA, the private fund must appoint one of the following to carry out the title verification: 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 title verification function is independent from the portfolio management function; or potential conflicts of interest are properly identified and disclosed to the investors of the fund.

Cash Monitoring

A private fund must appoint an administrator, custodian or an independent third party or the manager or operator to monitor the cash flows of the fund; ensure that all cash of the private fund has been booked in cash accounts opened in the name, or for the account, of the private fund; and ensure that all payments made by investors to the private fund in respect of investment interests have been received.

Identification of Securities

A private fund that regularly trades securities or holds them on a consistent basis must maintain a record of the identification codes of the securities it trades and holds e.g. ISIN codes.

Alternative Investment Vehicles and Restricted Scope Private Funds

Alternative investment vehicles mean companies, unit trusts, partnerships or other similar vehicles that (a) are formed in accordance with the constitutional documents of a private fund for the purposes of making, holding and disposing of one or more investments wholly or mainly related to the business of that private fund; and (b) only has as its members, partners or trust beneficiaries, persons that are members, partners or trust beneficiaries of the private fund.

Where IFRS or GAAP of a non-high risk jurisdiction permit consolidated or combined financial account reporting and a private fund chooses to report consolidated or combined financial statements with an alternative investment vehicle, the requirements described above pertaining to audit, valuation, safe keeping, cash monitoring and  identification of securities do not apply to such alternative investment vehicle.

Restricted scope private funds are private funds that are (a) exempted limited partnerships; (b) managed or advised by a person who is licensed or registered by CIMA or authorised or registered by a recognised overseas regulatory authority; and (c) in which all of the investors are non-retail in nature, being either high net worth persons or sophisticated persons.

Aside from these provisions there are no further references to either alternative investment vehicles or restricted scope private funds and, therefore, it may be reasonably expected that further guidance will be issued in due course with respect to these new categories.

Supervision and Enforcement

CIMA has been given broad supervision and enforcement powers analogous to those already in place in the context of mutual funds.

Timing

Existing private funds and private funds formed after 7 February must register with CIMA no later than 7 August 2020 (or such further period as may be specified by CIMA).

Mutual Funds (Amendment) Law

This law primarily introduces a registration requirement for what were previously referred to as ‘exempt’ funds, having fifteen or less investors the majority of whom have the power to remove/appoint the operator. These will now be regulated mutual funds required to register, pay a fee, and file prescribed details with CIMA as well as having to file audited accounts annually via an approved auditor.

Such funds must also register with CIMA no later than 7 August 2020 (or such further period as may be specified by CIMA).

The new laws seek to strike a balance to achieve their dual purposes of strengthening investor confidence in Cayman Islands investment funds and ensuring that the Cayman Islands remains the preeminent jurisdiction for investment fund formation. The new laws also address EU suggestions for investment fund oversight, as set forth in a report dated 27 May 2019, from the EU Code of Conduct Group (Business Taxation). The Ministry of Financial Services worked closely with a Cayman Islands based working group comprised of CIMA and fund professionals, including accounting, audit, administration, governance and legal firms in drafting the laws.

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