Further to our earlier legal update on Section 4(4) Funds registration with CIMA, Cayman Islands’ mutual funds which are currently exempted from registration with the Cayman Islands Monetary Authority (“CIMA”) under Section 4(4) of the Mutual Funds Law (2020 Revision) on the basis that (i) the shares or interests are held by not more than fifteen investors, (ii) a majority of whom are capable of appointing or removing the operator of the fund (“Section 4(4) Funds“) are now required under the Mutual Funds (Amendment) Law, 2020 (the “Law“) which came into force on 7th February 2020, to register with CIMA and fall within CIMA’s regulatory purview.

Existing Funds: Section 4(4) Funds which launched prior to 7th February 2020 have a six (6) months’ period until 7th August 2020 to register with CIMA.

New Funds: Section 4(4) Funds which are launched after 7th February 2020 will need to register with CIMA immediately upon launch.

Registration Requirements
In connection with its registration with CIMA, each Section 4(4) Fund will be required to do the following.

1. File a certified copy of an extract of its constitutional documents with CIMA showing that a majority in number of its investors are capable of appointing or removing the operator of the Fund.
2. File with CIMA such other information as may be required in a prescribed Form.
3. Pay an annual fee to CIMA.

In common with all other CIMA regulated entities, each Section 4(4) Fund that is a company will be required to have at least two Directors appointed who will need to be registered with CIMA under the Directors Registration and Licensing Law.

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For further guidance and assistance with registering your Section 4(4) Fund with CIMA, please contact your usual Loeb Smith attorney or any of:

E: gary.smith@loebsmith.com
E: ramona.tudorancea@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com

A “Private Fund” means 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:

1. the holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments; and
2. 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 company, unit trust or partnership.

A list of “non-fund arrangements” including (i) securitisation special purpose vehicles, (ii) joint ventures, (iii) proprietary vehicles, (iv) holding vehicles, (v) preferred equity financing vehicles, (vi) sovereign wealth funds, (vii) structured finance vehicles, and (viii) single family offices are listed in the Schedule to the Law and are excluded from the scope of the Law.

Single investor Private Funds will be outside the scope of the Law as there would be no pooling of investor funds in this case.

The Law applies to private equity funds, real estate funds, and other types of closed-ended funds set up as Cayman Islands limited partnerships, companies (including SPCs), unit trusts and limited liability companies.

The Law will also apply to non-Cayman Islands private funds carrying on business or attempting to carry on business in or from the Cayman Islands. As stated above, there is a separate registration regime for mutual funds under the Mutual Funds Law (2020 Revision) as amended and the Law will not apply to a regulated mutual fund or a regulated EU Connected Fund.

The Law creates a category of Private Funds called a “restricted scope private fund” and this defined as (i) an exempted limited partnership; (ii) that is managed or advised by a person who is licensed or registered by CIMA or authorised or registered by a recognised overseas regulatory authority; and (iii) in which all of the investors are non-retail in nature, being either high net worth persons or sophisticated persons. The Law does not state what the consequences will be for registering with CIMA as a “restricted scope private fund” (e.g. the prescribed details to be filed with CIMA might be less in nature and scope and/or the fees payable to CIMA might be different).

Section 5 of the Law states that a Private Fund is required to:

1. submit an application for registration to CIMA within twenty-one (21) days after its acceptance of capital commitments from investors for the purposes of investments;
2. file prescribed details in respect to the Private Fund with CIMA;
3. pay a prescribed annual registration fee to CIMA in respect of the Private Fund;
4. comply with any conditions of its registration imposed by CIMA; and
5. comply with the provisions of the Law.

In terms of documentation to be filed with CIMA, the Law refers to the filing of “prescribed details” in respect of the Private Fund but there is no requirement to file an offering memorandum or any other offering document. There are also no requirements in the Law on the contents of a Private Fund’s offering document, if any. Regulations stipulating the exact nature of the “prescribed details” to be filed have not yet been published.

Section 5 of the Law indicates that a new Private Fund falling within the scope of the Law will be required to:

1. submit its registration application to CIMA within 21 days after its acceptance of capital commitments from investors for the purposes of investments; and
2. be registered by CIMA before it accepts capital contributions from investors in respect of investments.

Accordingly, the timing of registration with CIMA will be somewhat different from that applicable to mutual funds.

New Funds: A Private Fund that begins to carry on business in or from Cayman at any time during the period of six (6) months beginning on 7th February 2020 may continue to carry on business in or from Cayman without registering with CIMA until 7th August 2020 or such further period as may be specified by CIMA.

Existing Funds: A Private Fund that immediately before 7th February 2020 was carrying on business in or from Cayman may continue to carry on business in or from Cayman without registering with CIMA until 7th August 2020 or such further period as may be specified by CIMA.

Neither the CIMA REEFS portal nor CIMA forms have as yet been configured or published to deal with the registration of new or existing Private Funds’ registration.

A Private Fund is required under the Law to notify CIMA:

(a) of any change that materially affects any information submitted to CIMA;

(b) of any change of its registered office or the location of its principal office.

The Private Fund will have twenty-one (21) days after making the change or becoming aware of the change to file details of the change with CIMA.

Fees

Regulations stipulating the fees payable to CIMA in respect of registration of Private Funds have not been published.

The Law requires that Private Funds that are subject to the Law have in place certain mechanisms and safeguards relating to audit, valuation of assets, safekeeping of fund assets, cash monitoring, and identification of securities.

Audit

Each Private Fund is required to (i) have its accounts audited annually by a firm of auditors on the CIMA approved list of auditors and (ii) file such audited accounts with CIMA within six (6) months of the end of each financial year of the Private Fund (along with an Financial Annual Return in CIMA’s prescribed form).

Audited accounts will be required to be prepared in accordance with the International Financial Reporting Standards or the generally accepted accounting principles of the United States of America, Japan or Switzerland or any non-high risk jurisdiction. The Law defines a “non-high risk jurisdiction” as any jurisdiction that is not on the list of high risk jurisdictions issued by the Financial Action Task Force.

CIMA may, in relation to the whole or part of any financial year of a Private Fund, grant an exemption to the Private Fund from the requirement to submit audited accounts to CIMA either absolutely or subject to such conditions as CIMA may deem appropriate. The circumstances in which such an audit exemption may be granted have not yet been published by CIMA but might be the same as, or similar to, the circumstances currently applicable to regulated mutual funds.

Valuation of assets

The Law requires a Private Fund to have appropriate and consistent procedures for the purposes of proper valuations of its assets, which ensures that valuations are conducted in accordance with the requirements in the Law. Valuations of the assets of a Private Fund are required to be carried out at a frequency that is appropriate to the assets held by the Private Fund and, in any case, on at least an annual basis.

Valuations of the Private Fund’s assets can be performed by:

(a) an independent third party that is appropriately professionally qualified to conduct valuations in a non-high risk jurisdiction;

(b) 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:

i. the valuation function is independent from the portfolio management function; or

ii. potential conflicts of interest are properly identified and disclosed to the investors of the private fund; or

(c) an administrator not falling under paragraph (a) above who is appointed by the Private Fund.

Where the valuation of the Private Fund’s assets is not performed by an independent third party professionally qualified to conduct valuations in a non-high risk jurisdiction, CIMA may require the Private Fund to have its valuations verified by an auditor or independent third party.

The Law empowers CIMA to waive the valuation requirements, either absolutely or subject to such conditions as CIMA deems appropriate.

Safekeeping of fund assets

The Law requires a custodian (i) to hold the Private Fund’s assets which are capable of physical delivery or capable of registration in a custodial account except where that is neither practical nor proportionate given the nature of the Private Fund and the type of assets held; and (ii) to verify title to, and maintain records of, fund assets.

Where having a custodian is neither practical nor proportionate given the nature of the Private Fund and the type of assets held, title verification can be carried out by any of (i) the manager or operator of the Private Fund (subject to functional independence or conflicts management requirements), (ii) an independent administrator, or (iii) another independent third party.

Where the title verification is not performed by a custodian, an administrator or another independent third party appointed, CIMA may require the Private Fund to have its title verification verified by an appropriately professionally qualified independent third party.

Cash monitoring

The Law requires a Private Fund to appoint an administrator, custodian or another independent third party (or the manager or operator of the Private Fund) to:

• monitor the cash flows of the Private Fund;

• ensure that all cash 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 in respect of investment interests have been received.

When the cash monitoring function is not performed by an administrator, custodian or another independent third party, the cash management function established by the manager or operator of the Private Fund is required to be independent of the portfolio management function or the potential conflicts of interest must be properly identified and disclosed to investors.

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 (e.g. ISIN codes or CUSIP codes) of the securities that it trades and holds and make this available to CIMA upon request.

The penalty for failing to comply with Section 5 of the Law (registration with CIMA) is liability on conviction to a fine of CI$100,000 (approximately US$122,000). The “operator” (e.g. the board of directors where the Private Fund is structured as a company or a general partner where the Private Fund is structured as a limited partnership) of a Private Fund will be responsible for securing the compliance by that Private Fund with the Law. The operator of a Private Fund that fails to discharge its responsibility for securing the Private Fund’s compliance with the Law commits an offence and is liable on conviction to a fine of CI$20,000 (approximately US$24,400).

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on the new registration requirements for Cayman closed-ended funds and compliance generally with the Private Funds Law, 2020, please contact your usual Loeb Smith attorney or any of:

E: gary.smith@loebsmith.com
E: ramona.tudorancea@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com

Each Section 4(4) Fund will also be required to have its accounts audited annually by a firm of auditors on the CIMA approved list of auditors and file such audited accounts with CIMA within six (6) months of the end of each financial year of that Fund (along with an Financial Annual Return in CIMA’s prescribed form).
Audited accounts will be required to be prepared in accordance with the International Financial Reporting Standards or the generally accepted accounting principles of the United States of America, Japan or Switzerland or any non-high risk jurisdiction. The Bill defines a “non-high risk jurisdiction” as any jurisdiction that is not on the list of high risk jurisdictions issued by the Financial Action Task Force.

The Bill proposes that existing Section 4(4) Funds will have six (6) months from the date on which the Bill becomes law to register with CIMA and to comply with the new requirements.

An existing Section 4(4) Fund that registers with CIMA in 2020 will not be required to file its audited accounts in respect of any prior financial year.

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on the registration requirements for Cayman exempted mutual funds, please contact your usual Loeb Smith attorney or any of:

E: gary.smith@loebsmith.com
E: ramona.tudorancea@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com

Alternatives to voluntarily achieving the conclusion of operations and dissolution of Cayman companies

There are two principal routes to voluntarily dissolving a Cayman Islands company after the conclusion of its operations. Dissolution can be achieved either through (i) voluntary liquidation or (ii) a strike-off. The dissolution will mean that the company is removed from the Register maintained by the Registrar of Companies in the Cayman Islands and cease to exist ultimately. If the company has entered into any agreements with clients, customers and suppliers and/or undertaken any trading activities since its incorporation, the more common and appropriate choice is to undertake a formal liquidation of the company by way of a shareholders’ voluntary liquidation. If the company has not entered into any agreements and/or undertaken any trading activities since its incorporation then it might consider a strike-off. However, a strike- off is only suitable as an alternative to a voluntary liquidation for companies that have never actually traded or have not traded for a long period of time because any shareholder or creditor, during the period of two years (see further details below) of the strike-off, can apply to have the company restored to the Register maintained by the Registrar of Companies in the Cayman Islands.

Assessment

1. The main advantage of seeking dissolution of the company via the strike-off route is that this would be a simpler legal process (even though not necessarily a simpler process for the company’s Directors as they have to deal with paying, settling and discharging all liabilities and distributing any remaining company assets prior to a strike-off) and is normally quicker than a shareholders’ voluntary liquidation of the company.

2. There are risks associated with achieving a dissolution via the strike-off route, including:

i. the strike-off process is more suited to companies which have never traded because it does not deal with the company’s liabilities to creditors and is not suitable for companies with extensive trading operations or valuable assets;

ii. in cases where there are any dissatisfied creditors or shareholders of the company, they can apply to the Cayman Islands Court at any time within a period of up to 2 years (this period may be extended by the Governor of the Cayman Islands for up to 10 years from the strike-off date) after the strike-off to have the company restored to the Companies’ Register. The Court will normally order a restoration if it feels that the company was at the time of the strike-off, carrying on business, or was in operation, and it is “just” to restore it – for example, in cases where the Court feels that creditors should be allowed to take proceedings to recover assets. If the company is restored to the Register it is deemed to have continued in existence as if its name had not been struck off but the Court can also make other orders as seem “just” for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been subject to a strike-off;

iii. unless the company has properly distributed all residual assets prior to strike-off, any assets held by the company at the time of strike-off will pass to the Financial Secretary of the Cayman Islands government (and will be subject to being disposed of by the Governor of the Cayman Islands or being retained for the benefit of the Cayman Islands) upon dissolution;

iv. the strike-off process, therefore, does not cut off creditors’ options in the way that a properly executed voluntary liquidation process would, and the creditors who wish to challenge distributions made to the shareholders prior to a strike-off, for example, may be able to apply to the Court to have the company restored and raise claims well after the strike-off and dissolution.

3. Unlike the strike-off process, the ability to restore the company is not available to creditors or shareholders after the conclusion of a properly executed voluntary liquidation.

4. In determining whether to (i) seek a voluntary liquidation or (ii) a strike-off, the directors of a Cayman Islands company should assess, among other things:

i. the nature and extent of the assets and liabilities of the company and deal with these accordingly (i.e. discharge any and all creditors and transfer out all assets);

ii. whether or not there is a real risk of, for example, a shareholder or creditor seeking a restoration of the company in the future if the company is dissolved by strike-off.

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1. The main advantage of seeking dissolution of the company via the strike-off route is that this would be a simpler legal process (even though not necessarily a simpler process for the company’s Directors as they have to deal with paying, settling and discharging all liabilities and distributing any remaining company assets prior to a strike-off) and is normally quicker than a shareholders’ voluntary liquidation of the company.

2. There are risks associated with achieving a dissolution via the strike-off route, including:

• • the strike-off process is more suited to companies which have never traded because it does not deal with the company’s liabilities to creditors and is not suitable for companies with extensive trading operations or valuable assets;
  • in cases where there are any dissatisfied creditors or shareholders of the company, they can apply to the Cayman Islands Court at any time within a period of up to 2 years (this period may be extended by the Governor of the Cayman Islands for up to 10 years from the strike-off date) after the strike-off to have the company restored to the Companies’ Register. The Court will normally order a restoration if it feels that the company was at the time of the strike-off, carrying on business, or was in operation, and it is “just” to restore it – for example, in cases where the Court feels that creditors should be allowed to take proceedings to recover assets. If the company is restored to the Register it is deemed to have continued in existence as if its name had not been struck off but the Court can also make other orders as seem “just” for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been subject to a strike-off;
  • unless the company has properly distributed all residual assets prior to strike-off, any assets held by the company at the time of strike-off will pass to the Financial Secretary of the Cayman Islands government (and will be subject to being disposed of by the Governor of the Cayman Islands or being retained for the benefit of the Cayman Islands) upon dissolution;
  • the strike-off process, therefore, does not cut off creditors’ options in the way that a properly executed voluntary liquidation process would, and the creditors who wish to challenge distributions made to the shareholders prior to a strike-off, for example, may be able to apply to the Court to have the company restored and raise claims well after the strike-off and dissolution.

3. Unlike the strike-off process, the ability to restore the company is not available to creditors or shareholders after the conclusion of a properly executed voluntary liquidation.

4. In determining whether to (i) seek a voluntary liquidation or (ii) a strike-off, the directors of a Cayman Islands company should assess, among other things:

• the nature and extent of the assets and liabilities of the company and deal with these accordingly (i.e. discharge any and all creditors and transfer out all assets);
• whether or not there is a real risk of, for example, a shareholder or creditor seeking a restoration of the company in the future if the company is dissolved by strike-off.

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Any information relating to an individual who can be identified, directly or indirectly, from that data (including online identifiers such as IP addresses and cookies may qualify as personal data if they are capable of being linked back to the individual).

A Data Controller is a person who, alone or jointly with others determines the purposes, conditions and manner in which any personal data are, or are to be, processed. The DPL applies to any Data Controller if (a) the Data Controller is established in the Cayman Islands³ and the personal data are processed in the context of that establishment; or (b) the Data Controller is not established in the Cayman Islands but the personal data are processed in the Cayman Islands otherwise than for the purposes of transit⁴. In this case, Art. 6(2) of the DPL requires the appointment of a local representative which shall be considered a Data Controller.

At the time of collection of the data, individuals must be informed of the purposes and details behind the processing, the details of transfers of data and any security and technical safeguards in place. This information is generally provided in a separate privacy notice.

Individuals have the right to obtain confirmation that their Personal Data is processed and to have access to it. Data Controllers must respond within a month of the access request. The DPL permits a reasonable fee to be charged in certain cases.

If there is no compelling reason for a Data Controller to retain Personal Data, a data subject can request its secure deletion.

Should the individual subsequently wish to have his/her data removed and the Personal Data is no longer required for the reasons for which it was collected, then it must be erased. Data Controllers must notify third party processors or sub-contractors of such requests.

International transfers of Personal Data are permitted to third party processors or between members of the same group.

Appropriate technical and organisational measures must be taken to prevent unauthorised or unlawful processing of Personal Data and against accidental loss or destruction of, or damage to, Personal Data⁵.

A Data Processor is any person who processes Personal Data on behalf of a Data Controller (but does not include the employees of the Data Controller). There is no liability for processors under the DPL. However, they may be held liable based on contract or tort law.

In the event of a Personal Data breach, the Data Controller must, “without undue delay” but no longer than five (5) days after the Data Controller should have been aware of that breach, notify the Cayman Ombudsman and any affected individuals⁶.

The notification should describe the nature of the breach, its consequences, the measures proposed or taken by the Data Controller to address the breach, and the measures recommended by the Data Controller to the individual concerned to mitigate the possible adverse effects of the breach.

The DPL contains a similar right, although this is expressed as a general right of “erasure”. Under the UK’s Data Protection Act, the right is limited to processing that causes unwarranted and substantial damage or distress. Under the DPL this threshold is not present. If there is no compelling reason for a Data Controller to retain Personal Data, a data subject can request its secure deletion.

An individual has the right at any time to require a Data Controller to stop processing his/her Personal Data for the purposes of direct marketing. There are no exemptions or grounds to refuse. A Data Controller must deal with an objection to processing for direct marketing at any time and free of charge.

Including an unsubscribe facility in each marketing communication is recommended best practice. If an individual continues to accept the services of the Data Controller without objection, consent can be implied.

Best practice would always be to put in place a contract between a controller and processor. Essentially, the contract should require the Data Processor to level-up its policies and procedures for handling personal data to ensure compliance with the DPL. Use of sub-contractors by the service provider should be prohibited without the prior approval of the Data Controller⁷.

The DPL does not require the appointment of a Data Protection Officer, although this is recommended best practice.

Refusal to comply or failure to comply with an order issued by the Cayman Ombudsman is an offence. Penalties are also included for unlawful obtaining or disclosing Personal Data⁸. Directors may be held liable under certain conditions⁹.

The Data Controller is liable on conviction to a fine up to CI$100,000 (circa US$122,000) or imprisonment for a term of 5 years or both. Monetary penalty orders of an amount up to CI$250,000 (circa US$304,878) may also be issued against a Data Controller.

If you would like to discuss the application of the DPL to your particular Cayman Islands entity, please contact your usual Loeb Smith attorney or any of:

E: gary.smith@loebsmith.com
E: ramona.tudorancea@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com

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1. The Data Protection Law, 2017 (Commencement) Order, 2019
2. This is not a comprehensive analysis of the DPL.
3. Other than residents, fall under this category companies incorporated or registered as a foreign company in the Cayman Islands, partnerships and associations formed in the Cayman Islands, as well as any persons who maintain in the Cayman Islands an office, branch or agency, or a regular practice.
4. See Art. 6 of DPL
5. See Schedule 1 of DPL
6. See Art. 16 of DPL
7. Under DPL, the Data Controller is liable for breaches and non-compliance, whereas processors may not be. It is therefore very im-portant for a Fund’s Board of Directors to ensure that adequate contractual protections are in place.
8. See Arts. 53-54 of DPL
9. See Art. 58 of DPL

The deadline for filing the following AML/CFT Reporting Forms:

AML/CFT Inherent Risks – Securities – AIR-157-75

AML/CFT Risk Controls – Securities – ARC-158-75

with the Cayman Islands Monetary Authority is 15th August, 2019.
Each Form is available on the Regulatory Enhanced Electronic Forms Submission (REEFS) platform. The Guidance Notes for the completion of the AML/CFT Reporting Forms are available on CIMA’s website https://www.cima.ky/reefs-forms-guidance-notes.

For specific advice, please contact your usual Loeb Smith attorney or any of:

E: gary.smith@loebsmith.com

E: ramona.tudorancea@loebsmith.com

E: vivian.huang@loebsmith.com

E: yun.sheng@loebsmith.com

E: elizabeth.kenny@loebsmith.com

E : santiago.carvajal@loebsmith.com