Continuing obligations of Cayman Islands private funds

17 October 2022

The Private Funds Act (2021 Revision) (PFA) of the Cayman Islands requires certain Cayman Islands-domiciled, closed-ended investment funds (private funds) to submit an application to register with the Cayman Islands Monetary Authority (CIMA) as a private fund within 21 days of acceptance of capital commitments, and before accepting capital contributions from investors for the purposes of investment.

The PFA also requires any alternative investment vehicle (AIV) that meets the definition of a private fund and is: (1) formed under the constitutional documents of a private fund to make, hold and dispose of one or more investments wholly or mainly related to the business of the private fund; and (2) only has as its members, partners or trust beneficiaries, persons that are members, partners or trust beneficiaries of the private fund to register with the CIMA.

Private fund operations

Once a private fund has received capital contributions from investors, following Part 3 of the PFA, it is required to comply with the requirements below.

Valuation. A private fund is required to implement a net asset value calculation policy, which sets out appropriate and consistent procedures to value its assets. A valuation should be carried out: (1) at least once per year, or at greater frequency that is appropriate to the assets held by the private fund; and (2) the frequency of valuations of the private fund’s assets should be consistent with its constitutional document and marketing materials to investors.

The valuation of assets of a private fund is required to be performed by either: (1) an independent third party that is appropriately qualified to carry out the valuations in a non-high-risk jurisdiction (i.e. a jurisdiction that is not on the list of high-risk jurisdictions issued by the Financial Action Task Force); or (2) the manager or operator or a person with a control relationship with the manager of the private fund (connected person).

Safekeeping of fund assets. Unless it is neither practical nor proportionate to do so (e.g. owing to the asset class), a private fund is required to: (1) appoint a custodian to hold the custodial fund assets in a segregated account in the name of or for the account of the private fund; and (2) verify that the private fund holds title to any other fund assets, and maintain a record of those other fund assets based on information provided by the private fund and available external information (title verification).

If a private fund does not appoint a custodian, it must notify the CIMA and appoint: (1) an administrator or another independent third party; or (2) the manager or operator or connected person to perform title verification of the private fund’s assets.

If the private fund appoints a connected person to carry out title verification, this function must be independent from the portfolio management function of the private fund, and potential conflicts of interest must be properly identified, monitored and disclosed to the investors.

All financial assets of a private fund must be segregated and accounted for separately from any assets held by the person carrying out the custodian or title verification role. However, this does not prohibit prime brokerage or custody arrangements that, following established and accepted industry practice, allow a custodian or sub-custodian to hold all client assets in a commingled client omnibus account, along with the assets of other clients.

Cash monitoring. A private fund is required to appoint either: (1) an administrator, custodian or another independent third party; or (2) the manager or operator or a connected person to perform cash monitoring for the private fund.

A person appointed by a private fund to provide the cash monitoring function should: (1) monitor the cash flows; (2) ensure that all cash has been booked in cash accounts for the account of the private fund; and (3) ensure that all payments made by investors to the private fund in respect of investment interests have been received.

Where the valuation of assets, title verification and/or cash monitoring of a private fund is not performed by an independent third party, the CIMA may require the private fund to have such a function verified by an independent third party.

Identification of securities. A private fund that regularly trades or holds securities is required to maintain a record of the identification codes.

Reporting obligations

A private fund is required to have its accounts audited annually, signed-off by a CIMA approved auditor and submitted to the CIMA with a fund annual return within six months of the end of each financial year. The audited accounts must be prepared in accordance with International Financial Reporting Standards, or the generally accepted accounting principles of a non-high-risk jurisdiction.

Elizabeth Kenny is a senior associate at Loeb Smith Attorneys in the Cayman Islands

Contact details:
Tel: +1 345 749 7594
Email: [email protected]

This Article was first published in the Asia Business Law Journal - https://law.asia/obligations-cayman-islands-private-funds/