The Securities Investment Business Act (as amended, the "SIBA"), which is supervised by the Cayman Islands Monetary Authority ("CIMA"), provides for the regulation of entities carrying on "securities investment business". Typical examples of persons carrying on securities investment business include investment managers, investment advisors, arrangers of deals and broker-dealers.
This advisory provides a round-up of recent developments in relation to the SIBA, including administrative fines, ongoing compliance obligations, single family offices and virtual assets.
Who does the SIBA apply to?
Any type of company or partnership incorporated, established or registered in the Cayman Islands that carries on, or purports to carry on, "securities investment business" (and any other person that is otherwise regarded as having established a place of business in the Cayman Islands through which "securities investment business" is carried on) is an "In-scope Entity". The SIBA applies to In-scope Entities conducting "securities investment business" anywhere in the world.
Does the SIBA apply to individuals?
Individuals (ie natural persons) are prohibited from carrying on "securities investment business" in or from within the Cayman Islands, except in certain narrow circumstances where they are "Non-registrable Persons" (please see further below).
What is "securities investment business"?
The term "securities investment business" includes a number of defined regulated activities, such as "dealing in securities", "arranging deals in securities", "management of securities" and "advising on securities" in the course of business (except in specific excluded circumstances). It also includes managing, marketing or acting as depositary in respect of certain investment funds managed from or marketed in the EU.
What are "securities"?
The term "securities" is further defined widely in the SIBA and includes shares, partnership interests, trust units, debt instruments, warrants, options, futures, contracts for differences (for example, cash-settled derivatives such as interest rate or stock index futures, forward rate agreements and swaps) and, further to an amendment discussed below, certain forms of "virtual assets".
Is it necessary to be registered or licensed in order to conduct securities investment business?
In-scope Entities are prohibited from conducting securities investment business unless they are either registered with, or licensed by, CIMA in respect of such activity under the SIBA (or are exempt from the requirement to be registered or licensed).
Penalties for non-compliance
Contravention of the prohibition above is an offence under the SIBA that is punishable by a fine of CI$100,000 (US$122,000) or by imprisonment of one year (or both) and, in the case of a continuing offence, to a fine of CI$10,000 (US$12,200) for each day during which the offence continues.
In addition, CIMA has the power to impose additional fines for a breach of the SIBA under the Cayman Islands Monetary Authority Act and the Monetary Authority (Administrative Fines) Regulations (together and each as amended, the "Administrative Fines Regime"). In particular, pursuant to the Administrative Fines Regime, carrying on or purporting to carry on securities investment business without being registered with, or licensed by, CIMA under the SIBA (or being exempt from the requirement to be registered or licensed) is categorised as a "very serious" breach, in relation to which CIMA has the discretion to impose a fine of up to CI$1,000,000 (US$1,220,000) on a corporate body in breach. Administrative fines may also be imposed by CIMA in relation to various other minor, serious and very serious breaches of the SIBA and of the AML Regulations (as defined below), where CIMA is imposing significant fines for failures relating to AML systems and controls. By way of example, CIMA recently fined a Registered Person (as defined below) CI$250,000 (US$305,000) for multiple failures to comply with the AML Regulations.
Registered Persons
In-scope Entities may conduct securities investment business without a full licence from CIMA if they are eligible and apply to CIMA to become a "Registered Person". In-scope Entities that are eligible to become Registered Persons include, in brief summary, persons providing securities investment business on an intra-group basis, persons providing securities investment business to defined "high net worth" and "sophisticated" clients and persons regulated by a recognised overseas regulator in an overseas jurisdiction in which such securities investment business is being conducted.
While Registered Persons need only register with CIMA rather than obtaining a full licence, CIMA may impose conditions on a Registered Person, refuse an application and employ its enforcement powers against it. In addition, it is important to note that Registered Persons are subject to a number of ongoing compliance obligations in the Cayman Islands, not all of which applied under the predecessor SIBA regime for "Excluded Persons", which ceased to exist in 2020. These obligations include the following:
- maintaining a minimum number of directors (or equivalent, which
in certain cases must be registered with CIMA under the Cayman
Islands Directors Registration and Licensing Act (as
amended));
- notifying CIMA within 21 days after any material change;
- having policies and procedures in place to comply with
CIMA's Statement of Guidance on Corporate Governance, Statement
of Guidance on Outsourcing, Rule and Statement of Guidance on
Cybersecurity and Statement of Guidance on the Nature,
Accessibility and Retention of Records;
- establishing policies and procedures to comply with the Cayman
Islands Anti-Money Laundering Regulations (as amended, the
"AML Regulations") and designating
natural persons as its Money Laundering Reporting Officer, Deputy
Money Laundering Reporting Officer and Anti-Money Laundering
Compliance Officer;
- complying with the Cayman Islands Data Protection Act (as
amended);
- maintaining adequate economic substance in the Cayman Islands
(if the Registered Person is regulated to carry on the
"management of securities" and does so on behalf of one
or more investment funds);
- complying with FATCA and CRS as implemented in the Cayman
Islands (if the Registered Person is a "Financial
Institution"); and
- notifying its registered office provider of its exemption from the requirement to establish and maintain a private register of its beneficial owner(s) (specifically where the Registered Person is a Cayman Islands incorporated company, limited liability company or limited liability partnership).
Licensees
An In-scope Entity that is conducting securities investment business, but which is not eligible to become a Registered Person (typically because it wishes to provide services to retail customers), must apply for a full licence from CIMA under the SIBA. Licensees are also subject to the various requirements outlined above and, in addition, must comply with all of CIMA's Rules, Statements of Guidance and Regulatory Policies and Procedures. It should be noted that CIMA has very wide enforcement powers in relation to licensees.
Inspections
Registered Persons, as well as licensees, are now subject to routine on-site inspections by CIMA. It is important to ensure that all required Cayman Islands-compliant policies and procedures are in place and that compliance can be demonstrated and client due diligence files are in good order as these will need to be provided to CIMA on very short notice. Inspections will focus on compliance with the SIBA, the AML Regulations and CIMA's associated regulatory measures. Walkers can assist with all aspects of inspections on a legal professional privileged basis.
Non-registrable Persons
In brief summary, "Non-registrable Persons" include natural persons conducting securities investment business only in the context of acting in the capacity of a director, partner or liquidator (or certain other specified capacities), where that person is not separately remunerated for, and does not hold themselves out as conducting, securities investment business. In addition, certain persons carrying on securities investment business in the context of a joint enterprise or in the exercise of their capacity as a specified government body also fall within the scope of "Non-registrable Persons". Non-registrable Persons may conduct securities investment business without being registered with, or licensed by, CIMA under the SIBA.
Single Family Offices
Single family offices were for a short period of time classed as "Non-registrable Persons". However, this exemption has been repealed by the Securities Investment Business (Amendment of Schedule 2A and Repeal of Schedule 4A) Order, 2020 and is no longer available. However, although not automatically exempt from registration or licensing, CIMA has confirmed that single family offices will only be required to be registered with, or licensed by, CIMA under the SIBA if they are conducting securities investment business (which may not be the case in practice, depending on certain considerations). Persons operating single family offices are, nevertheless, subject to the AML Regulations.
EU Connected Managers
An investment fund manager which is the alternative investment manager of an investment fund which is to be marketed in one or more EU member states may be required to arrange for an attestation by CIMA before such marketing is permitted. The SIBA provides a framework whereby the investment fund manager may apply for an attestation.
Virtual Assets
The Virtual Asset (Service Providers) Act (as amended, the "VASP Act") establishes a framework for the regulation of "virtual asset service providers" in the Cayman Islands. However, pursuant to the Securities Investment Business (Amendment) Act, 2020, certain types of "virtual assets" are within scope of the SIBA definition of "securities" (specifically, virtual assets which can be sold, traded or exchanged that represent or can be converted into any of the traditional "securities" within scope of the SIBA, or which represent a derivative of any of those securities). As a result, carrying on "securities investment business" with respect to these "virtual assets" can necessitate registration and/or licensing under the SIBA (as well as under the VASP Act).
Insider dealing
The SIBA also establishes a category of offences relating to creating a false or misleading market and insider dealing (subject to certain applicable defences). Any person (not necessarily registered or licensed by CIMA under the SIBA or otherwise) who creates a false or misleading appearance of active trading in any securities listed on the Cayman Islands Stock Exchange or a false or misleading appearance in respect of the market for, or the price of, any such securities is guilty of an offence. In addition, any person who has information as an insider is guilty of insider dealing if they deal (or encourage another person to deal) in price-affected securities or discloses inside information to another person otherwise than in the proper performance or functions of that person's employment, office or profession.
Any person who commits an offence of creating a false or misleading market or an offence of insider dealing under the SIBA is punishable by a fine of up to CI$10,000 (US$12,200) and to a term of imprisonment of up to seven years on conviction on indictment.
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.
