Over the past few years, the Cayman Islands legislature has introduced many amendments and regulatory changes to try and align with global compliance standards. On February 7, 2020, two new bills, the “Private Funds Bill 2020” and the “Mutual Funds Bill 2020,” were enacted placing previously unregulated funds under the jurisdiction of the Cayman Islands Monetary Authority (CIMA).
It is, of course, yet to be seen how these bills will affect doing business in the Cayman Islands. But having at least a topline understanding of how the rules have changed is still essential for offshore investors. And so here, in brief, we will provide an overview of those changes. Since the Mutual Funds Bill 2020 basically amends an existing law, and the Private Funds 2020 Bill puts regulation where there basically was none, we will begin with private funds.
PRIVATE FUNDS BILL 2020
The Private Funds Bill 2020 seeks to establish a framework to monitor closed-end funds (aka “private equity funds”), which were previously beyond the scope of the Cayman Islands Mutual Funds Law. In Cayman law, a “private fund” means a company, unit trust, or partnership whose principle 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 investments.
According to the Cayman government, the Private Funds Bill has “three key pillars: Registration, operational regulation, and supervision and enforcement.”
Vehicles that meet the private funds definition of the Private Funds Bill are required to register with CIMA, following which they must meet regulatory obligations.
Registered 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.
Un-registered funds cannot:
Do business in the Cayman Islands, but they can solicit eligible investors, including receipt of subscription documents. But, once they do, they must register with CIMA within 21 days of accepting capital commitments from investors. Also, according to the government, “CIMA will apply a risk-based approach to the regulatory oversight of Private Funds.”
There are basically a half dozen operational regulations that private funds must now follow when doing business in the Cayman islands.
- They must enlist an auditor approved by CIMA to audit their accounts annually.
- The audited financial statements must be filed with CIMA, with a prescribed fund annual return (FAR) within six months of the funds’ fiscal year end.
- Following rules, statements and guidance from section 34 of the Monetary Authority Law, they must maintain accessible records.
- They must put in place procedures for accurate valuation of their assets performed by either an independent third party or the operator/manager of the private fund.
- They must appoint an individual to hold the custodial fund assets and verify the fund holds title to other assets. The person can be a custodian, or, if the fund lets CIMA know, it can appoint the fund manager or an independent third party.
- They must monitor cash accounts, investor payments and cash flow.
Supervision and Enforcement
According to the government, “The Private Funds Bill authorizes CIMA to administer the law. CIMA’s duties include examining registration applications and determining application parameters and other informational requirements.”
MUTUAL FUND BILL 2020
As mentioned, Mutual Fund Bill 2020 amends an existing regulation, Mutual Funds Law (or, MFL, 2019 revision). The difference between a mutual fund and a private fund in Cayman Islands law is that a mutual fund is redeemable at the option of the investor. In other words, it is open-ended, like a hedge fund.
The Cayman Mutual Fund Bill now regulates certain mutual funds that were not covered by the MFL. That is, funds meeting the MFL’s “fifteen or fewer investor criteria now must register with CIMA and follow all regulatory obligations.”
Those requirements include registering with CIMA, paying a yearly registration fee, submitting an annual FAR, informing CIMA of any changes in the information initially submitted, keeping accessible records, and submitting annual accounts audited by a CIMA-approved local auditor.
It should be noted here that Prager Metis, in addition to its many other offices, is also a CIMA-approved local auditor in the Cayman Islands. Our audit partners have much experience working with Cayman Islands-based funds and with CIMA. And while this article truly is an overview, we encourage you to contact us for more insight into these new bills if you are planning to open a fund domiciled in the Cayman Islands.