The Cayman Islands is changing the way it regulates funds. Two new measures - the Mutual Funds Law (Revision, Amendment 2020) and the Private Funds Law and Regulations 2020 - have been implemented.
The changes are in response to pressure from the EU and Caribbean Financial Action Task Force on the Cayman Islands to improve transparency; and demand from private equity investors for fully independent asset verification, valuation and audits.
The new laws require private equity and mutual funds - those with 15 or fewer investors – to register with the Cayman Islands Monetary Authority (CIMA). "This focus on closed ended and smaller open-ended funds brings equality to the governance of funds on the Islands," says Paul Gorman, Solutions Architect, TMF Group Fund Services. "Previously, many funds with fewer than 15 investors enjoyed lower costs while keeping things simple. These laws put everyone on an equal footing."
The laws also address EU recommendations for investment fund oversight set out in a report in May 2019 from the EU Code of Conduct Group (Business Taxation).
All regulated mutual funds must now meet annual obligations to CIMA to pay a registration fee, comply with return requirements, retain accessible records and have audits issued or undertaken by a CIMA-approved local auditor in accordance with international audit standards.
Obligations for private funds are similar. There are also requirements relating to the valuation of and safekeeping of fund assets, cash monitoring and identification of securities. There must be adequate internal procedures for the valuation of fund assets in pursuit of greater clarity for investors. There is a six-month transition period to register, by 7 August. Registering by this date will save a fund an amount of USD 4,268 on application fees otherwise due after the transition period.
Equally important, CIMA requires these funds to appoint two natural persons to the "Operator" of the funds (e.g. director, manager, general partner, trustee).
There are a few exceptions for private funds e.g. single investor closed ended investment vehicles or any non-fund arrangements such as, but not limited to, structured finance or debt issuing vehicles, joint ventures, securitization SPV vehicles, holding vehicles and single-family offices vehicles as listed here (p.29).
Closed ended investment vehicles or similar vehicles that only hold one portfolio, one investment or one type of investment would not be exempt.
CIMA provides ongoing guidance and clarity on these regulations by the issuance of notices which are published on their website.
The new legislation authorizes CIMA to enforce special measures against a private fund it believes is carrying out business in a fraudulent or detrimental manner. This should improve the policing of funds – and enhance the Cayman Islands' reputation internationally. On the other hand, CIMA can impose fines of non-compliance e.g. not registering a fund could result in a fine of US$122,000.
Gorman explains: "Understanding the fine print of the changes is vital for clients, accountants and third-party vendors. Fund managers should experience no disruption from these laws if correctly advised by specialist compliance experts.
"Fund managers want to focus on doing what they do best. TMF Group ensures clients' compliance needs are taken care of, so they can concentrate on their core business, without distractions." TMF can provide independent directors, fund administration and depositary services (cash flow monitoring, ownership verification & record keeping etc.) to ensure that a fund meets the legal and operating requirements, as well as the ongoing obligations of a Cayman vehicle.
About TMF Group
TMF Group is one of the world's leading providers of structuring and administrative services to the funds industry. Our large, dedicated funds team, located in all significant financial centres, facilitates global and cross-border investment operations through a network of more than 120 offices worldwide. We work with a wide range of established players in private equity, real estate, securitisation and private debt. Our teams tailor their services to the requirements of the industry and the jurisdictions concerned, helping clients with the structuring, formation and administration of investment funds and their underlying investment structures.
TMF Group's fund services are an integrated part of a €2 billion independent global multinational with 7,800 in-house experts in 80-plus jurisdictions. We deliver a broad portfolio of consistent, integrated but localised services in accounting, tax, HR, payroll, corporate secretarial, regulatory compliance, capital markets transactions and investments. Whether you operate across one border or many, with a handful of staff or several thousand, we have all the flexible, coordinated, business-critical support clients need to open up new opportunities, build strong businesses, invest globally and stay nimble, efficient and in good standing everywhere.
Over 60% of the Fortune Global 500 and FTSE 100, and almost half the top 300 private equity firms, use us. www.tmf-group.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.