Navigating Cayman Islands Investment Funds: 10 Key FAQs for Emerging Managers

When is a Cayman Islands investment fund required to register with CIMA as a Mutual Fund?

A fund structured as an open-ended vehicle (i.e., one that allows investors to withdraw/redeem interests at their option) typically falls within the scope of the Mutual Funds Act (as amended).  Such funds must typically register with CIMA before accepting subscriptions and commending trading.  Registration requires submission of the fund’s offering document, certain prescribed information and payment of CIMA’s registration fee.  Most mutual funds are required to appoint an administrator.  All mutual funds must appoint a CIMA-approved Cayman Islands auditor.

What about as a Private Fund?

Closed-ended investment funds (i.e., those which do not permit investors to withdraw/redeem interests at their option) fall within the ambit of the Private Funds Act (as amended).  Registration of private funds with CIMA is required within 21 days of accepting capital commitments and before the receipt of capital contributions for the purpose of investment.  As with mutual funds, the registration process involves submission of the fund’s offering documents (or alternatively a summary of terms), provision of certain information and payment of the prescribed registration fee to CIMA.  Private funds must appoint a CIMA-approved Cayman Islands auditor.

Private funds are required to appoint independent service providers to conduct the valuation, safekeeping and cash monitoring functions, or otherwise ensure (if kept in-house) that such functions are independent from portfolio management of the fund and that all associated conflicts of interest are managed, monitored and disclosed to investors.

Can we apply for an audit waiver for a fund registered as Mutual Fund or Private Fund?

It is possible to apply to CIMA for a waiver of a fund’s audit obligations for a particular annual period in certain circumstances prescribed by CIMA’s applicable regulatory policies.  For mutual funds this includes where the fund has not “launched”[1] or has launched but hasn’t raised sufficient capital for sustainability.  For private funds, this includes where the fund has launched[2] but hasn’t raised sufficient capital for sustainability; where a private fund hasn’t yet received any capital contributions the correct route is to provide CIMA with the required declaration under section 3(2) of the Private Funds Act.

CIMA may grant an audit waiver for reasons other than those prescribed in its regulatory policies (i.e. in “exceptional circumstances”) but it is important to note that CIMA will likely scrutinize such requests in more detail and can make a determination on a discretionary case-by-case basis whether to approve or deny a particular request.

What is the process for deregistering a Cayman fund with CIMA?

Once a fund has ceased to carry on business, it must be formally deregistered with CIMA to avoid accruing annual fees and being subject to ongoing regulatory compliance obligations.  It is important to note that deregistration is a distinct and separate process from liquidation (see question 6 below).  The fund must first complete its final audit, submit outstanding regulatory filings, and notify its cessation of business to CIMA within 21 days.  A deregistration application is then submitted to CIMA along with a deregistration fee and operator’s affidavit[3] confirming the fund’s inactive status.  CIMA will not deregister a fund unless it is in good standing (see question 5 below).

In practice, it is important to conclude the deregistration process prior to start of a new year so the fund is not liable for that year’s annual fees.

What happens if a Cayman fund fails to maintain good standing with CIMA?

Failure to maintain good standing with CIMA (such as by not filing audited accounts or paying annual fees) can lead to administrative penalties, including fines, publication on CIMA’s breach lists, and potentially regulatory enforcement action.  More importantly, such lapses can delay or prevent fund launches, investor subscriptions, regulatory clearances or the deregistration of a fund.  Therefore, investment managers (and their local counsel) should stay vigilant with respect to Cayman Islands annual filings and fee payments (see question 9 below).

What is the voluntary liquidation process for a Cayman fund structured as company?

Cayman Islands funds that are companies are typically registered as exempted companies[4].  A Cayman Islands fund that is an exempted company may generally commence a voluntary liquidation by a shareholder resolution if it is solvent.  The process involves appointing a voluntary liquidator[5], publishing the liquidation in the Cayman Islands Gazette, and (if not already nil-nil) settling liabilities and distributing remaining assets to shareholders.  Upon conclusion, the liquidator files final returns with the Registrar.  If the fund is still registered with CIMA, it must also complete deregistration as noted above prior to concluding its liquidation.  The entire de-registration and liquidation process typically takes 3–4 months, assuming no complications.

How is liquidation handled for a Cayman fund which is a limited partnership?

Cayman Islands funds that are limited partnerships are typically registered as exempted limited partnerships (ELP).  A solvent ELP’s liquidation is typically governed by its limited partnership agreement (LPA).  Where the LPA is silent or lacks provisions, the Exempted Limited Partnership Act (as amended) provides a statutory fallback to commence the winding up process[6].  The general partner or a third-party liquidator oversees winding up the fund, including (if not already nil-nil) paying any creditors and distributing any surplus assets to limited partners.  As with corporate funds, an ELP must also complete any deregistration with CIMA prior to finalizing its liquidation.

Common issues arising with the liquidation of ELPs are navigating around LPA provisions that impinge on the general partner’s ability to unilaterally trigger a winding up and process issues with respect to older ELPs[7] (where the requisite filings may need to be made at least 28-days prior to the final distribution of assets as opposed to within 28-days of commencement of winding up).  Cayman counsel should be engaged at the outset to review the LPA to determine the available paths to dissolution.

What are the main annual filing and fee obligations for Cayman investment funds?

Key annual obligations for Cayman funds include:

• CIMA annual registration fee (due by January 15);
• Annual return filing and fee (due by 31 January);
• Audited financial statements and FAR form (due within six months of financial year-end);
• Economic substance notification (due by January 31);
• FATCA/CRS reporting (due by July 31); and
• CRS compliance form filing (due by September 15)

Is it necessary to update CIMA when changes occur to a fund’s structure or service providers?

Yes.  CIMA must be notified with 21 days of material changes to an active fund, including material amendments to the fund’s constitutional documents, offering documents, or changes to directors, auditors, or other key service providers.

How does Cayman law regulate foreign investment managers of Cayman funds?

Foreign investment managers of Cayman Islands funds are generally not subject to regulation in the Cayman Islands, provided they do not carry on business from or have a physical presence in the Cayman Islands.  No specific disclosures are required on the part of the investment managers, but a fund’s offering document must include disclosures relating to the following:

• any material involvement by the investment manager in the calculation, determination or production of the fund’s NAV or pricing of the fund’s portfolio;
• information concerning the manner, amount and/or calculation of remuneration paid to the investment manager;
• the names and biographies of the investment manager’s principals; and
• the material provisions of the investment management agreement.

Investment managers should consult with their local counsel to ensure they are properly licensed or exempt under applicable law with respect to the management of a Cayman fund and ensure that the fund documentation clearly reflects their role and responsibilities.

Conclusion

Navigating the local Cayman Islands requirements with respect to investment funds requires close coordination between investment managers, local counsel and Cayman Islands counsel.

From fund registration, throughout ongoing operations, and through to deregistration and wind-down, proactive planning is essential to ensure regulatory compliance and operational efficiency.  Understanding these FAQs will ensure a smoother experience when structuring, maintaining, and ultimately exiting Cayman Islands investment funds.  For fund sponsors and legal advisors alike, maintaining good standing and timely filings with CIMA are critical components for the long-term success of Cayman Islands investment funds.

For more detailed or fund-specific queries, we encourage emerging managers to reach out to any member of the Appleby’s Cayman Islands Funds & Investment Services team.

[1] In this context, with respect to mutual funds, “launched” means where a fund has accepted subscriptions from investors, admitted the investors and commenced trading with subscription monies.

[2] For the purposes, “launched” with respect to private funds means where the fund has received capital contributions from investors.

[3] A letter from the fund’s administrator may also be required.

[4] Or segregated portfolio companies, which are also exempted companies for the purposes of the Companies Act (as amended).

[5] The voluntary liquidator can be any person, including a director of the company or a service provider.

[6] Where no time or event is specified in the LPA, the statutory fallback is upon the passing of a resolution of all general partners and a two-third majority of limited partners.

[7] Meaning ELPs registered prior to 11 May 2009.