Welcome to a brand new year! 2020 is off to a busy start on the regulatory front. Appleby Cayman's first quarterly publication of the year focuses on the topics making waves now, including investment funds legislative reform, the end of the transition period for Excluded Person re-registration, the latest on economic substance, proposed changes to beneficial ownership reporting and AEOI updates. We hope you will find its contents useful.
THE NEW PRIVATE FUNDS LAW AND AMENDMENT TO THE MUTUAL FUNDS LAW IN FORCE NOW
For the purposes of the Private Funds Law, a 'private fund' is a company, unit trust or partnership 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; funds whose investment interests are listed on a specified stock exchange; sovereign wealth funds; and single family offices.
Registration and Audit
A private fund 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 with CIMA by a local auditor 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.
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, at least annually (e.g. 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; by 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.
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 fund, the custodial fund assets; and verify, based on information provided by the 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 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 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).
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
Under the Private Funds Regulations, an 'alternative investment vehicle' means a company, unit trust, partnership or other similar vehicle that (a) is 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.
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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.