- 1 What does this mean for Private Funds and Mutual Funds?
- 2 Summary of Provisions
- 3 Deadline for registration
- 4 Next steps
On 7 February 2020, the Cayman Islands Government enacted the Private Funds Law 2020 (PF Law) along with important amendments to the Mutual Funds Law (2020 Revision) (MF Law amendment). As the leading international domicile for both open-ended and closed-ended investment funds, the recent changes bring Cayman’s law in line with evolving global regulations.
The amendments to the legislation were largely driven by recommendations made by the Caribbean Financial Action Task Force (CFATF) the Organisation for Economic Cooperation and Development (OECD) and the European Union. The legislation strives to bring about a balanced and proportionate approach to regulation while also reaffirming the Cayman Islands position as a co-operative jurisdiction with global regulatory bodies.
- Previously unregulated private funds and section 4(4) mutual funds are now required to be registered with the CIMA.
- Six months transitional period for compliance. The deadline for registration for affected funds is 7 August 2020.
What does this mean for Private Funds and Mutual Funds?
The amendments introduce regulation for previously unregulated private funds and funds that held prior exemption by section 4(4) of the MF Law (i.e. funds with 15 or fewer investors). These funds will now be required to register, obtain authorization, and be under the jurisdiction of the Cayman Islands Monetary Authority (CIMA).
Summary of Provisions
We summarise key features of the PF Law and MF Law Amendment.
Private Funds Law 2020
The aim of the PF Law is to increase the transparency of a private fund’s operations and processes. It achieves this by setting requirements for the valuation of assets, safekeeping of fund assets, cash monitoring, identification of securities and audit.
What is a Private Fund?
Under the legislation, the definition of a ‘private fund’ captures any company, unit trust or partnership where:
- Its principal business is offering investment interests with the aim of receiving profits or gains from investment activity;
- Its purpose is pooling investor funds to spread investment risk; and
- the investors don’t have day-to-day control over investment activities.
A ‘fund’ established for a single investor falls outside the scope of the PF Law as it doesn’t meet the ‘pooling of investor funds’ requirement.
Also exempt from the PF Law are ‘non-fund arrangements’ including joint-ventures, single-family offices, securitization special purpose vehicles, proprietary vehicles, holding vehicles, sovereign wealth funds and preferred equity financing vehicles.
Valuation of assets
Valuation of assets must be carried out annually. Although CIMA has the ability to waive valuation requirements were it deems appropriate. Valuations can be conducted by an independent third party or by the manager or operator of the private fund so long as functional independence requirements have been met and any potential conflicts are identified and disclosed to investors.
Safekeeping of fund assets
A custodian is required to hold private fund assets, verify title, and maintain records of fund assets. Except for where a custodian is neither practical or proportionate given the type of assets held and the fund has notified CIMA. In these circumstances, a title verification can be conducted by an independent third party or any manager or operator of the fund.
A person must be appointed to monitor cash flows, checking of cash accounts and receipt of investor payments. The person may be an independent third party, manager or operator of the private fund subject to functional independence requirements and any potential conflicts are identified and disclosed to investors.
Identification of securities
Private funds that regularly trade securities or hold securities on a consistent basis are required to maintain a record of the identification codes of the securities.
Annual audit of accounts by Cayman Island-based auditors
All private funds are required to have their accounts audited annually by a Cayman Islands-based auditor. Audits are required to be submitted to the CIMA within six months of the fund’s end of financial year.
Mutual Funds Law (Amendment 2020)
The MF Law Amendment essentially removes the previous exemption from registration with the CIMA that was granted under Section 4(4). Mutual funds with 15 or fewer investors are now required to register and the CIMA, pay an annual fee and file a certified copy of its constitutional documents with the CIMA.
Annual audit of accounts
Section 4(4) funds now have the same annual audit and annual return requirements currently applied to regulated mutual funds. As such, their accounts are to be audited annually by a Cayman Islands-based auditor and audits are required to be submitted to the CIMA within six months of the fund’s end of the financial year.
Deadline for registration
The government has introduced an ambitious six month transition period. The registration deadline for affected funds already in operation on 7 February 2020 is 7 August 2020. All new funds will need to comply with the legislation from launch. It is important to note that a private fund must register with CIMA before accepting capital contributions from investors in respect of investments.
While the initial registration fee is waived, an annual fee will be payable in January of each following year.
The first audited accounts for transitional private funds are required to be filed with CIMA six months following the first full financial year after registration. This means if a private fund has a year-end of 31 December, the first required audit must be filed with CIMA by June 2022. The auditor must be an approved Cayman Islands-based auditor.
Given the brief transitional period, the registering process should start with haste.
If you are concerned that your fund may be affected by the recent changes, please get in touch with our office so we can guide you through the registration process. We’d be happy to discuss the changes to the law and discuss specific fund structures. You can contact our office on [email protected] or +852 3905 36184