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Regulatory framework and authorities

How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

The main regulatory body in the Cayman Islands that regulates open-ended investment funds, closed-ended investment funds, fund managers and parties marketing investment funds is the Cayman Islands Monetary Authority (CIMA). The main statutes from which CIMA derives its supervisory powers and duties in respect of investment funds are the Mutual Funds Law and the Private Funds Law, and in respect of fund managers, is the Securities Investment Business Law (the SIB Law).

Fund administration

Is fund administration regulated in your jurisdiction?

A Cayman Islands-domiciled entity that carries on business as a mutual fund administrator is required to have a valid licence for doing so and is required to be regulated by CIMA. There is more than one type of mutual fund administrator licence and CIMA will assess, among other things, whether the applicant has sufficient expertise to administer regulated investment funds (both open-ended and closed-ended) and whether the business as a mutual fund administrator will be administered by persons who are fit and proper to be directors or, as the case may be, managers or officers in their respective positions.

Mutual fund administration is defined in the Mutual Funds Law as the management or administration of a mutual fund to provide the principal office of the mutual fund in the Cayman Islands or the provision of an operator to the mutual fund. An overseas fund administrator that is not established in the Cayman Islands is not regulated by CIMA and may be the administrator of a Cayman Islands investor fund if the administrator is authorised or otherwise permitted to carry out administration activities to investment funds in any non-high risk jurisdiction.

Authorisation

What is the authorisation or licensing process for funds?

What are the key requirements that apply to managers and operators of investment funds in your jurisdiction? The vast majority of open-ended funds will qualify as mutual funds under the Mutual Funds Law (as amended), which requires mutual funds to be licensed or regulated as such. Closed-ended funds (i.e., funds that issue investment interests that are not redeemable at the option of the investor of record), which fall within the scope of the Private Funds Law, are required to register with, and consequently become regulated by, CIMA.

The authorisation process for an open-ended fund will depend on the regulatory category it chooses to register under (e.g., a licensed fund under section 4(1)(a) of the Mutual Funds Law, an administered fund under section 4(1)(b) of the Mutual Funds Law, a registered fund under section 4(3) of the Mutual Funds Law, or a limited investor fund under section 4(4) of the Mutual Funds Law). For closed-ended funds, the authorisation process requires the private fund to:

submit an application for registration to CIMA within 21 days after its acceptance of capital commitments from investors for the purposes of investments;

file prescribed details in respect of the private fund with CIMA;

pay a prescribed annual registration fee to CIMA in respect of the private fund;

comply with any conditions of its registration imposed by CIMA;

and comply with the provisions of the Private Funds Law.

A Cayman Islands-domiciled fund manager will have to either apply to CIMA for a licence to undertake business as such under the Securities Investment Business Law (as revised) or apply to CIMA to be registered under a less regulatory onerous regime as a Registered Person. An overseas fund manager can provide services to a Cayman Islands investment fund and there is no requirement for the overseas fund manager to be licensed by or registered with CIMA unless that fund manager establishes itself in the Cayman Islands. Operators of mutual funds, and private funds falling within the scope of the Private Funds Law, such as directors, are subject to registration or licensing requirements under the Director Registration and Licensing Law and are required to register with CIMA.

Territorial scope of regulation

What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

The laws in the Cayman Islands (e.g., Mutual Funds Law, Private Funds Law and the Securities Investment Business Law (the SIB Law)) are not extraterritorial in scope and effect. An overseas fund manager can provide services to a Cayman Islands investment fund and there is no legal requirement for the overseas fund manager to be licensed by or registered with CIMA unless that fund manager establishes operations in the Cayman Islands.

Acquisitions

Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

There is no requirement for an overseas fund manager to be licensed by or be registered with CIMA unless that fund manager establishes itself in the Cayman Islands. Accordingly, there would be no need for any prior notification to, or authorisation by, CIMA of a change in controlling or non-controlling stake in a fund manager established overseas. A fund manager regulated in the Cayman Islands (ie, whether as a CIMA licensee or a registered person) under the SIB Law is prohibited from issuing, voluntarily transferring or disposing of any shares or partnership interests (as applicable) without the prior approval of CIMA, but CIMA may grant an exemption from this prior approval requirement where the fund manager’s securities are publicly traded on a recognised securities exchange.

Restrictions on compensation and profit sharing

Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

There are no regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements.

Authorisation

Does the marketing of investment funds in your jurisdiction require authorisation?

Investment funds (whether structured as an exempted company or a limited liability company (LLC)) are restricted from making an offer of shares of the company or interests of the LLC to the public in the Cayman Islands to subscribe for such securities unless those securities are listed on the Cayman Islands Stock Exchange. This restriction on the public offer of securities is contained in the Companies Law and the Limited Liability Companies Law, but there are no similar restrictions in the laws governing limited partnerships or unit trusts. The term ‘public in the Islands’ excludes certain entities and residents, including other Cayman Islands exempted companies, LLCs, exempted limited partnerships, any exempted or ordinary non-resident companies, foreign companies registered in the Cayman Islands and foreign limited partnerships. The Private Funds Law separately states that the term ‘public in the Islands’ does not include sophisticated persons and high net worth persons (as defined under the Securities Investment Business Law (the SIB Law)), which means that making an offer of securities to ‘private funds’ (as defined in the Private Funds Law) in the Cayman Islands is not restricted. Private funds would most likely qualify as sophisticated persons or high net worth persons, or both.

An overseas investment fund that wishes to make an offering of its securities to the public in the Cayman Islands will need to either (1) register with the Cayman Islands Monetary Authority (CIMA) as a mutual fund under the Mutual Funds Law or a private fund under the Private Funds Law or (2) market its securities through a person who is appropriately licensed or authorised by CIMA under the terms of the SIB Law (provided that the securities being offered to the public in the Cayman Islands are listed on a stock exchange approved by CIMA or the investment fund is regulated by a recognised overseas regulatory authority approved by CIMA).

What marketing activities require authorisation?

Arranging deals in securities with a view to another person dealing in securities, or participating in the arrangements for dealing in securities are regulated under the SIB Law and, therefore, would require prior authorisation from CIMA.

Territorial scope and restrictions

What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

An entity that is performing marketing activities for an investment fund from within the Cayman Islands is required by the terms of the SIB Law to obtain a licence from, or otherwise register with, CIMA, prior to engaging in such activities.

If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

There is no legal requirement for a local entity to be involved in the fund marketing process.

Commission payments

What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

There are no legal restrictions on intermediaries earning commission payments in relation to their marketing activities in the Cayman Islands.

Available vehicles

What are the main legal vehicles used to set up a retail fund? How are they formed?

The statutory and regulatory frameworks that apply to investment funds in the Cayman Islands do not distinguish between retail funds and non-retail funds as the Cayman Islands is not primarily known as a retail fund jurisdiction. Its laws and regulations applicable to investment funds are geared mainly towards attracting institutional investors. Accordingly, the legal vehicle used for an investment fund is typically based on whether the fund’s strategy will be open- ended or closed-ended. The exempted company (which includes the segregated portfolio company) is the most commonly used legal vehicle for open-ended funds and the exempted limited partnership is the most commonly used legal vehicle for closed-ended funds. Both types of legal vehicles are formed by filing formation documents with the Companies Registry and paying the requisite government fee. There are no special requirements that apply to managers or operators of retail funds (which for present purposes are taken to mean funds that permit an investor to invest an initial minimum amount of less than US$100,000).

Laws and regulations

What are the key laws and other sets of rules that govern retail funds?

The statutory and regulatory frameworks that apply to investment funds in the Cayman Islands do not distinguish between retail funds and non-retail funds. Under section 4(1)(b) of the Mutual Funds Law, a mutual fund can register with the Cayman Islands Monetary Authority (CIMA) and permit its investors to each invest an initial minimum amount of less than US$100,000. This type of fund is often referred to as a ‘retail’ fund. However, the regulatory framework that applies to this category of mutual fund (referred to as an administered fund) is pretty much the same as is applicable to other mutual funds registered with CIMA. Closed-ended funds that fall within the scope of the Private Funds Law and are, therefore, registered with, and regulated by, CIMA do not have a minimum initial investment threshold set by law and, therefore, investors will simply have to comply with the investment limits and restrictions set by the manager or operator of the fund.

The Retail Mutual Funds (Japan) Regulations are an exception to the above in that they effectively make a distinction between retail funds and non-retail funds by providing a compliance framework for certain licensed funds under section 4(1)(a) of the Mutual Funds Law that will market to retail investors in Japan, enabling these funds to automatically comply with the applicable securities laws and regulations in Japan. However, these funds are merely a sub-set of licensed funds, which themselves only comprise approximately 1 per cent of Cayman Islands’ mutual funds.

Authorisation

Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

All mutual funds and all closed-ended funds that fall within the scope of the Private Funds Law are required to be registered with, and be regulated by, CIMA.

Marketing

Who can market retail funds? To whom can they be marketed?

Investment funds (whether structured as an exempted company or a limited liability company (LLC)) are restricted from making an offer of shares of the company or interests of the LLC to the public in the Cayman Islands to subscribe for such securities unless those securities are listed on the Cayman Islands Stock Exchange. There are no similar restrictions in the laws governing limited partnerships or unit trusts. The term ‘public in the Islands’ excludes certain entities and residents, including other Cayman Islands exempted companies, LLCs, exempted limited partnerships, any exempted or ordinary non-resident companies, foreign companies registered in the Cayman Islands and foreign limited partnerships. It also excludes sophisticated persons and high net worth persons (as defined under the Securities Investment Business Law), which means that making an offer of securities to ‘private funds’ (as defined in the Private Funds Law) in the Cayman Islands is not restricted. Private funds would most likely qualify as sophisticated persons or high net worth persons, or both. An overseas investment fund that wishes to make an offering of its securities to the public in the Cayman Islands will need to either (1) register with the Cayman Islands Monetary Authority (CIMA) as a mutual fund under the Mutual Funds Law or a private fund under the Private Funds Law or (2) market its securities through a person who is appropriately licensed or authorised by CIMA under the terms of the SIB Law (provided that the securities being offered to the public in the Cayman Islands are listed on a stock exchange approved by CIMA or the investment fund is regulated by a recognised overseas regulatory authority approved by CIMA). However, there is no legal requirement for a local entity to be involved in the fund marketing process.

Managers and operators

Are there any special requirements that apply to managers or operators of retail funds?

The statutory and regulatory framework that apply to investment funds in the Cayman Islands do not distinguish between retail funds and non-retail funds. There are no special requirements that apply to managers or operators of retail funds.

Investment and borrowing restrictions

What are the investment and borrowing restrictions on retail funds?

There are no specific legal investment and borrowing restrictions on retail funds under Cayman Islands laws.

Tax treatment

What is the tax treatment of retail funds? Are exemptions available?

The tax treatments and exemptions available to non-retail funds apply equally to retail funds.

Asset protection

Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

There are no legal requirements in the Cayman Islands for assets of a mutual fund to be held by a separate custodian located in the Cayman Islands. Closed-ended funds that fall within the scope of the Private Funds Law are required to appoint a custodian:

to hold the private fund’s assets that 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

to verify title to, and maintain records of, fund assets. However, there is no legal requirement for the custodian to be located in the Cayman Islands.

Governance

What are the main governance requirements for a retail fund formed in your jurisdiction?

Mutual funds regulated by CIMA must, as long as there is a continuing offering, update their offering documents and prescribed particulars within 21 days of any material change, and are required to file the updated offering document or the prescribed particulars with CIMA within this 21-day period.

A private fund is required under the Private Funds Law to notify CIMA of any change that materially affects any information submitted to CIMA and of any change of its registered office or the location of its principal office.

The private fund will have 21 days after making the change or becoming aware of the change to file details of the change with CIMA.

All funds regulated by CIMA (mutual funds and private funds) are required to have their accounts audited annually and such audited financial statements must be filed with CIMA within six months of the year end of the fund, along with a financial annual return form including prescribed details, signed by a director. These audited financial statements must be signed off by a CIMA approved Cayman Islands-based audit firm.

Reporting

What are the periodic reporting requirements for retail funds?

Mutual funds regulated by CIMA must, as long as there is a continuing offering, update their offering documents and prescribed particulars within 21 days of any material change, and are required to file the updated offering document or the prescribed particulars with CIMA within this 21-day period.

A private fund is required under the Private Funds Law to notify CIMA of any change that materially affects any information submitted to CIMA and of any change of its registered office or the location of its principal office.

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

All funds regulated by CIMA (mutual funds and private funds) are required to have their accounts audited annually and such audited financial statements must be filed with CIMA within six months of the year end of the fund, along with a financial annual return form including prescribed details, signed by a director. These audited financial statements must be signed off by a CIMA approved Cayman Islands-based audit firm.

Issue, transfer and redemption of interests

Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

Restrictions can be contained in the constitutive documents of a fund or otherwise in the terms of issue of the relevant equity interests or investment interests of the fund.

Available vehicles

What are the main legal vehicles used to set up a non-retail fund? How are they formed?

Open-ended funds

Exempt companies

Exempt companies are the most common legal vehicle for open-ended funds. The exempted company limited by shares and the exempted segregated portfolio companies (SPCs) make up the overwhelming majority of open-ended funds and accounted for over 85 per cent of total open-ended funds registered with the Cayman Islands Monetary Authority (CIMA) as at the end of 2019.

It is possible to incorporate an exempted company limited by shares (including an SPC) on either a standard basis (which takes four to five business days after submission of formation documents to the Registrar of Companies) or on an express (same day) basis subject to paying an additional express fee. Incorporation is effected by filing the company’s memorandum and articles of association and an affidavit sworn by the subscriber to the memorandum of association with the Registrar of Companies. Unless the company proposes to use a restricted word in its name (eg, ‘bank’ or ‘insurance’) no prior consent or approval is required from CIMA or any other government agency. The memorandum of association is required to contain certain basic information about the company, including its registered office address, its authorised share capital and the objects for which it is incorporated. Shares can be denominated in any currency and denomination. There is no minimum or maximum amount prescribed for authorised, issued or paid-up share capital (although at least one share must be in issue at the time of incorporation)

LLCs

An LLC is a corporate entity that has separate legal personality to its members. Formation of an LLC requires the filing of a registration statement with the Registrar of Companies and payment of the requisite government fee. The LLC must have at least one member and it can be member managed (by some or all of its members) or the LLC agreement can provide for the appointment of persons (who need not be members) to manage and operate the LLC. The liability of an LLC’s members is limited, and members can have capital accounts and can agree among themselves (in the LLC agreement) how the profits and losses of the LLC are to be allocated and how and when distributions are to be made (similar to a Cayman Islands exempted limited partnership). An LLC may be formed for any lawful business, purpose or activity and it has full power to carry on its business or affairs unless its LLC agreement provides otherwise. An LLC may (but is not required to) use one of the following suffixes in its name: Limited Liability Company, LLC or L.L.C.

The LLC structure is an attractive option for certain Cayman closed-ended investment funds (eg, they facilitate aligning the rights of investors in onshore and offshore investment funds in a main fund and sub-fund structures) as well as for general partner entities and other carried interest distribution vehicles.

Limited partnerships

Exempted limited partnerships (ELPs) are most commonly used for closed-ended funds and, to the extent that they fall within the scope of the Private Funds Law, are required to be registered with CIMA.

Unit trusts

Unit trusts are based on English trust law, but are modified by the Trusts Law of the Cayman Islands for suitability as investment fund vehicles. Under a unit trust arrangement, investors contribute funds to a trustee that holds those funds on trust for the investors and each investor is directly entitled to share pro rata in the trust’s assets. An advantage of the unit trust is that it may be structured as an ‘umbrella’ unit trust so that different investments may be allocated to different ‘sub-trusts’ with investors subscribing for units in a particular sub-trust. Unlike SPCs, however, there is no statutory segregation of assets and liabilities of each sub-trust.

A unit trust is formed through a declaration of trust by the trustee alone or by a trust deed executed by both the trustee and the investment manager.

Closed-ended funds

The legal vehicles that can be used for closed-ended funds are the same as for open-ended funds. The most popular vehicle used for closed-ended funds is the ELP. Cayman ELPs are governed by a combination of equitable and common law rules (based on English common law) and also statutory provisions, pursuant to the Exempted Limited Partnership Law (as revised). An ELP may be formed for any lawful purpose to be carried out and undertaken either in or from within the Cayman Islands or elsewhere upon the terms, with the rights and powers, and subject to the conditions, limitations, restrictions and liabilities set forth in the Exempted Limited Partnership Law.

An ELP is a legal arrangement and does not have separate corporate personality. The terms of the ELP are set out in a limited partnership agreement and registered in the Cayman Islands by filing a registration statement with the Registrar of Exempted Limited Partnerships containing the following details:

the name of the partnership;

the general nature of the business and term of the partnership;

the address of the registered office of the partnership;

the name and address of its general partner;

and a declaration that the partnership shall not undertake business with the public in the Cayman Islands other than so far as may be necessary to conduct business outside the Cayman Islands.

Laws and regulations

What are the key laws and other sets of rules that govern non-retail funds?

Open-ended funds

The Mutual Funds Law (for open-ended funds) and the Private Funds Law (for closed-ended funds) are the two main statutes relevant to the regulation of investment funds in the Cayman Islands. CIMA is the regulatory body responsible for compliance with these laws and related regulations and has broad powers of enforcement.

The Mutual Funds Law defines a mutual fund as ‘a company, unit trust or partnership that issues equity interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors in the mutual fund to receive profits or gains from the acquisition, holding, management or disposal of investments…’ The reference to ‘equity interests’ means that debt instruments (including warrants, convertibles and sukuk instruments) are excluded and funds issuing such instruments will not be required to register with CIMA as a mutual fund. The scope of regulation extends to Cayman incorporated or established master funds that have one or more CIMA-regulated feeder funds and hold investments and conduct trading activities. Recent changes to the Mutual Funds Law means that certain mutual funds, which were previously exempted from registration with CIMA under section 4(4) of the Mutual Funds Law because they had 15 investors or less, the majority of whom have the power to appoint or remove the operators of the investment fund (the operator being the directors, the general partner or the trustee, as is relevant given the legal vehicle used for the fund), are no longer exempt from registration with CIMA. These limited investor funds are now required to be registered with, and are regulated by, CIMA.

Each CIMA-registered mutual fund is 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 months of the end of each financial year of the mutual fund (along with a financial annual return in CIMA’s prescribed form).

Mutual funds that are established for a sole investor and do not involve the pooling of investor funds fall outside the regulatory framework of the Mutual Funds Law. Nonetheless, a mutual fund with a single investor can apply for voluntary registration to, among other things, benefit from the status of being a regulated fund.

Cayman Islands laws and regulations do not impose restrictions on, or prescribe rules for investment strategies of open-ended funds, or their use of leverage, shorting or other techniques.

Closed-ended funds

The Private Funds Law requires the registration of closed-ended funds (typically, investment funds that do not grant investors with a right or entitlement to withdraw or redeem their shares or interests from the fund upon notice) with CIMA. The Private Funds 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 Private Funds Law also applies to non-Cayman Islands private funds carrying on business or attempting to carry on business in or from the Cayman Islands.

In addition to registration with CIMA, the Private Funds Law also imposes the following regulatory requirements to be met by private funds.

Audit

Each private fund is 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 months of the end of each financial year of the private fund (along with a financial annual return in CIMA’s prescribed form).

Valuation of assets

A private fund must 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 Private Funds 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.

Safekeeping of fund assets

The Private Funds Law requires a custodian: (1) to hold the private fund’s assets that 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 (2) to verify title to, and maintain records of, fund assets.

Cash monitoring

The Private Funds 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;

to ensure that all cash has been booked in cash accounts opened in the name, or for the account, of the private fund;

and to ensure that all payments made by investors 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 that it trades and holds and make this available to CIMA upon request.

Directors of mutual funds structured as exempted companies, managers of investment funds structured as LLCs and directors of general partners of investment funds structured as an exempted limited partnership (in each case, wherever in the world these persons are located, not just to Cayman Islands-based directors) regulated by CIMA are required to register with CIMA under the Directors Registration and Licensing Law (DRLL). The DRLL enables CIMA to verify certain information in respect of directors or managers of CIMA-registered funds. There is currently no requirement for registration of directors with CIMA under the DRLL who are directors of closed-ended funds that fall within the scope of the Private Funds Law. However, this may change in the future.

All investment funds are required to comply with Cayman Islands anti-money laundering legislation and regulations, including appointing an anti-money laundering compliance officer, a money laundering reporting officer, and a deputy money laundering reporting officer. The Cayman Islands government and CIMA actively work with the European Union, the Organisation for Economic Co-operation and Development, the Financial Action Task Force and regulators in numerous jurisdictions to observe and maintain international standards on transparency and good corporate governance.

Authorisation

Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

The statutory and regulatory frameworks that apply to investment funds in the Cayman Islands do not distinguish between retail funds and non-retail funds. All mutual funds (except for those that are single investor funds) are required to be registered with CIMA and fall within its regulatory framework. Closed-ended funds that fall within the scope of the Private Funds Law are required to be registered with, and regulated by, CIMA.

Marketing

Who can market non-retail funds? To whom can they be marketed?

Investment funds (whether structured as an exempted company or a limited liability company (LLC)) are restricted from making an offer of shares of the company or interests of the LLC to the public in the Cayman Islands to subscribe for such securities unless those securities are listed on the Cayman Islands Stock Exchange. There are no similar restrictions in the laws governing limited partnerships or unit trusts. The term ‘public in the Islands’ excludes certain entities and residents, including other Cayman Islands exempted companies, LLCs, exempted limited partnerships, any exempted or ordinary non-resident companies, foreign companies registered in the Cayman Islands and foreign limited partnerships. It also excludes sophisticated persons and high net worth persons (as defined under the SIB Law), which means that making an offer of securities to ‘private funds’ (as defined in the Private Funds Law) in the Cayman Islands is not restricted. Private funds would most likely qualify as sophisticated persons or high net worth persons, or both. An overseas investment fund that wishes to make an offering of its securities to the public in the Cayman Islands will need to either (1) register with the Cayman Islands Monetary Authority (CIMA) as a mutual fund under the Mutual Funds Law or a private fund under the Private Funds Law or (2) market its securities through a person who is appropriately licensed or authorised by CIMA under the terms of the SIB Law (provided that the securities being offered to the public in the Cayman Islands are listed on a stock exchange approved by CIMA or the investment fund is regulated by a recognised overseas regulatory authority approved by CIMA). However, there is no legal requirement for a local entity to be involved in the fund marketing process.

Ownership restrictions

Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

The legal requirement to be an eligible investor in a registered mutual fund with more than 15 investors is a minimum initial investment of US$100,000 (or its equivalent in any other currency); otherwise no other investor-qualification criteria apply to such funds. This minimum initial investment requirement does not apply to registered mutual funds with 15 or fewer investors and also does not apply to closed-ended funds falling within the scope of the Private Funds Law.

Managers and operators

Are there any special requirements that apply to managers or operators of non-retail funds?

There is no requirement for the manager of a Cayman Islands fund to be resident or domiciled in the Cayman Islands. There are no Cayman Islands laws that seeks to regulate overseas managers of Cayman investment funds. Fund managers established in the Cayman Islands need to comply with the provisions of the Securities Investment Business Law and such fund managers must either be licensed or registered with the CIMA.

Directors of mutual funds structured as exempted companies, managers of investment funds structured as LLCs and directors of general partners of investment funds structured as exempted limited partnerships (in each case, wherever in the world these persons are located, not just to Cayman Islands-based directors) regulated by CIMA are required to register with CIMA under the Directors Registration and Licensing Law (DRLL). The DRLL enables CIMA to verify certain information in respect of directors or managers of CIMA-registered funds. There is currently no requirement for registration of directors with CIMA under the DRLL who are directors of closed-ended funds that fall within the scope of the Private Funds Law. However, this may change in the future.

Tax treatment

What is the tax treatment of non-retail funds? Are any exemptions available?

Cayman Islands tax treatment is the same for both retail funds and non-retail funds. The Cayman Islands has no direct taxation of any kind. There are no income, corporation, capital gains or withholding taxes or death duties. It is possible for all types of Cayman legal structures (exempted company, LLC, unit trust and ELP) to apply to the Cayman Islands government for a tax undertaking that the legal structure will not be subject to direct taxation, for a minimum period, which in the case of a company is 20 years, and in the case of an LLC, unit trust and an ELP is 50 years.

Asset protection

Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

There are no legal requirements in the Cayman Islands for assets of a mutual fund to be held by a separate custodian located in the Cayman Islands. Closed-ended funds that fall within the scope of the Private Funds Law are required to appoint a custodian (1) to hold the private fund’s assets that 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 (2) to verify title to, and maintain records of, fund assets. However, there is no legal requirement for the custodian to be located in the Cayman Islands.

Governance

What are the main governance requirements for a non-retail fund formed in your jurisdiction?

The Mutual Funds Law (for open-ended funds) and the Private Funds Law (for closed-ended funds) are the two main statutes relevant to the regulation of investment funds in the Cayman Islands. CIMA is the regulatory body responsible for compliance with these laws and related regulations and has broad powers of enforcement. Depending on the legal structure of the investment fund, there are also various continuing filing obligations and annual registration fees to be paid.

Reporting

What are the periodic reporting requirements for non-retail funds?

Mutual funds regulated by CIMA must, as long as there is a continuing offering, update their offering documents and prescribed particulars within 21 days of any material change, and are required to file the updated offering document or the prescribed particulars with CIMA within this 21-day period.

A private fund is required under the Private Funds Law to notify CIMA of any change that materially affects any information submitted to CIMA and any change of its registered office or the location of its principal office.

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

All funds regulated by CIMA (mutual funds and private funds) are required to have their accounts audited annually, and these audited financial statements must be filed with CIMA within six months of the year end of the fund, along with a financial annual return form including prescribed details, signed by a director. These audited financial statements must be signed off by a CIMA-approved Cayman Islands-based audit firm.

Structure

How are separately managed accounts typically structured in your jurisdiction?

Separately managed accounts are not typically structured using Cayman entities. The investment manager entity that provides managed account services may itself be a Cayman-domiciled entity and be regulated by CIMA.

Key legal issues

What are the key legal issues to be determined when structuring a separately managed account?

There are no specific Cayman Islands legal requirements to be determined when structuring a separately managed account unless the managed account is structured using a Cayman legal vehicle, in which case the same issues applicable to a mutual fund or a private fund may apply.

Regulation

Is the management or marketing of separately managed accounts regulated in your jurisdiction?

The manager or entity marketing the separately managed account is regulated in the same manner as fund management.

Proposed reforms

Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

The recent introduction of (1) the requirement to register with the Cayman Islands Monetary Authority (CIMA), mutual funds that were previously exempted from registration, and (2) the registration of private funds with CIMA under the terms of the Private Funds Law has expanded the regulatory landscape for Cayman investment funds considerably. It is anticipated that there will be accompanying regulations that will set out in more detail how this expanded regulatory landscape will apply.

Public listing

Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

The listing of investment funds on the Cayman Islands stock exchange covers all types of legal vehicles (eg, exempted company (including segregated portfolio companies), LLC, unit trust or limited partnership) and every type of strategy (closed-ended funds, open-ended funds, stand-alone and master-feeder funds, real estate funds or umbrella funds) can apply to be listed. Funds based in both the Cayman Islands and in other jurisdictions are permitted under the listing rules to apply.

Overseas vehicles

Is it possible to redomicile an overseas vehicle in your jurisdiction?

Yes.

Foreign investment

Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

There are no special rules.

Funds investing in derivatives

Are there any special requirements in your jurisdiction relating to funds investing in derivatives?

See www.lexology.com/gtdt.

Recent developments

Are there any other current developments or emerging trends in your jurisdiction that should be noted? Please include reference to world-wide regulatory concerns, such as high-frequency trading, commodity position limits, capital adequacy for investment firms and ‘shadow banking’.

There are no updates at this time.

LAW STATED DATE

Correct on 23 May 2020

On 9 February 2016, Clifford J., sitting in the Financial Services Division of the Grand Court of the Cayman Islands gave Judgment in In Re Torchlight Fund L.P. (unreported) reaffirming the principles which the Court will take into account in determining whether to grant a validation order. This article seeks to provide a summary of these factors, which will be of particular interest to the directors of a solvent company or the general partner of a solvent exempted limited partnership against whom a petition for winding-up has been made but not yet granted. This typically arises where shareholders or limited partners are in dispute with the management of the entity and have filed a petition on just and equitable grounds. It should be noted that pursuant to section 95(3) of the Companies Law (2013 Revision) (the “Law”), upon the presentation of a petition on such grounds, the Court has a number of alternative remedies available to it other than insolvency and include, for example, an order regulating the conduct of the entity’s affairs in the future (s.95(3)(a)).¹

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A validation order is one made pursuant to section 99 of the Law which provides as follows:

“When a winding-up order has been made, any disposition of the company’s property and any transfer of shares or alteration of the status of the company’s members made after the commencement of the winding up is, unless the Court otherwise orders, void.”

By section 100(2) of the Law, the winding-up of a company, and by extension an exempted limited partnership, is deemed to commence at the time of the presentation of the petition to the Court for winding up. As a consequence, directors and general partners need to take care that they do not fall foul of section 99 of the Law in the twilight between the presentation of the petition for winding up to the Court and the granting of the winding-up order by the Court, for which they may become personally liable.

It is therefore common for executives of solvent entities to apply to the Court for a prospective validation order in respect of payments and dispositions which are to be made in the ordinary course of business and in order to enable the entity to continue trading in the interim.

Clifford, J., reviewed the authorities in the area which have their origin in relation to the interpretation of equivalent statutory provisions at English law.² The learned Judge cited the dicta of Henderson, J., in the Grand Court in In Re Fortuna Development Corporation [2004-2005] CILR 533 in which the Court held that “there are four elements which must be established before an applicant is entitled to a validation order”. These may be summarised as follows:

1. the proposed disposition must appear to be within the powers of the directors;
2. the evidence must show that the directors believe the disposition is necessary or expedient in the interests of the company;
3. it must appear that in reaching the decision the directors have acted in good faith (the burden of establishing bad faith is on the party opposing the application); and
4. the reasons for the disposition must be shown to be ones which an intelligent and honest director could reasonably hold.

Clifford J. held that these elements:

“have to be established by evidence, even if this has the effect in relation to the third element, of shifting the burden of establishing bad faith on the party opposing the application. There has to be a body of evidence relevant to the required elements for the Court to consider in exercising its discretion.”

In In Re Torchlight Fund L.P. the partnership’s evidence was found to be insufficient for these purposes. For example, the partnership failed to produce specific information concerning the inflow of money and details of the proposed payments to be made. In that case, the Petitioners were particularly concerned about payments being made to related parties.

Clifford J., went on to note that these four “elements” had been taken a stage further by the Chief Justice of the Grand Court in In Re Cybervest Fund [2006] CILR 80 in which the Court had refused to make a validation order in respect of management fees on the footing that, where there could be shown to be irregularities in the conduct of the company’s affairs, it by no means followed that because the company was solvent and able to pay its debts as they fell due the conduct of the company’s business should be continued, potentially at the expense of its investors. The Chief Justice held:

“There is another consideration to add to this list, in light of the concerns raised in the matter, although arguably it is subsumed within the third and fourth elements. This would be whether irregularities in the conduct of the affairs of the company can be shown, even of the company is clearly solvent, as is alleged here.”

Indeed, in both In Re Cybervest Fund and In Re Torchlight Fund L.P., the Grand Court that those cases concerned irregularities in the conduct of the affairs of the company and exempted limited partnership respectively which went to the very core of the question of what can properly be regarded as being in the ordinary course of business that it would not be proper to make a general validation order in the form sought.

Notes:
1. The provisions relating to the winding-up of companies under Part V of the Law apply (with a few exceptions) to exempted limited partnerships pursuant to s.36(3) of the Exempted Limited Partnership Law, 2014.
2. See, for example, Re Burton & Deakin Ltd [1977] 1 All ER 631 and Re a company (No 005685 of 1988), ex parte Schwarcz and another [1989] BCLC 424 (both cited by Clifford, J., in his learned Judgment).

For more information on shareholder disputes in Cayman Islands’ companies- please contact:

David Harby

Head of Commercial Disputes and Litigation
E david.harby@loebsmith.com
W www.loebsmith.com

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Based on our experience of advising initial coin offerings (ICOs) and security token offerings (STOs) and of undertaking legal due diligence for institutional clients seeking to acquire tokens in ICOs and STOs, in this brief update, we discuss a few of the issues that should be considered when determining which offshore jurisdiction to incorporate a legal vehicle in order (i) to reduce your risk of contravening Cayman Islands law, (ii) to facilitate listing on crypto-exchanges, and (iii) to facilitate better relationships with other participants in the growing digital assets space (e.g. banks to open accounts, institutional investors and investment funds which will undertake due diligence as part of the process of acquiring tokens in an ICO or STO).

The Cayman Islands is a tax neutral jurisdiction. There is no direct taxation of any kind on Cayman entities. Structuring issues will largely be driven by business needs and onshore tax considerations, and onshore regulatory issues. There is no income, corporation, capital gains or withholding taxes or death duties. It is possible for all types of Cayman legal structures (exempted company, LLCs, foundation companies, unit trust, and limited partnerships) to apply to the Cayman Islands government for a tax undertaking that the legal structure will not be subject to direct taxation, for a minimum period, which in the case of a company is 20 years, and in the case of an LLC, unit trust and an ELP is 50 years.

There is no specific existing legislation or regulation regarding cryptocurrency offerings (e.g. ICOs and STOs), cryptocurrency exchanges or investment vehicles investing in cryptocurrency. There are no restrictions or licensing requirements that specifically govern the holding, management or trading of digital assets, whether in a personal capacity or doing so as a manager, trustee or advisor for the account of others. The application of existing laws needs to be considered in relation to this developing digital assets space. It is worth noting that the Cayman Islands Government has published a consultation paper in which it seeks commentary on its proposals for a regulatory framework for virtual asset service providers in order to regulate token offerings and ICOs/ITOs. The consultation paper discusses registration being imposed on issuers prior to the sale, and minimum notice requirements – like a prospectus. Issuances above a certain threshold would have to be undertaken via a licensed or regulated trading platform. Custodial services and trading platforms would be subject to licensing requirements. The regulatory framework would also cover a sandbox license to test out new technologies, which Fintech service providers may apply for.

Until a regulatory framework for virtual asset service providers is introduced, the following existing laws may be applicable in the digital asset space and should be carefully considered by promoters, investors and their advisors:

i. The Cayman Islands Securities Investment Business Law (As Revised) (“SIBL”) defines securities by reference to a list of instruments, including shares and stock of any kind in the share capital of a company, debentures and any other instruments creating or acknowledging indebtedness other than certain exceptions specified, instruments giving entitlements to securities, certificates conferring rights with respect to securities, etc.

The term “instrument” refers to any record and specifically includes an electronic record as defined in the Electronic Transactions Law (2003 Revision), i.e. a record processed and maintained by electronic means.

Accordingly, CIMA may qualify coins/tokens issued on blockchain as stock or debt if the rights attached to the coins/tokens (as represented in the White Paper or the token sale documentation) resemble rights normally attached to equity interests or debt.

ii. In certain circumstances, a registration with or a license from CIMA may be required:

(a) under the Cayman Islands Money Services Law (As Revised), if the coins/tokens issued could give access to money transmission or currency exchange services;

(b) under SIBL, if the coins/tokens may qualify as securities, for all persons engaging, “in the course of business”, in securities investment business, i.e. among other things buying, selling, subscribing for or underwriting securities as agent or principal, arranging deals, managing securities, or advising an investor on buying, selling, underwriting, subscribing for or exercising any right in securities;

(c) under the Cayman Islands Mutual Funds Law (As Revised) if the issuer of the coins/tokens is essentially a collective investment scheme and the coins/tokens are attached to redemption rights for investors; and/or

(d) under the Cayman Islands Private Funds Law, 2020, if the issuer of the coins/tokens is essentially a collective investment scheme and the coins/tokens carry an entitlement to participate in the profits or gains.

The following Cayman Islands statutes and regulations should be considered when structuring a digital asset business through the Cayman Islands:

the Securities Investment Business Law (SIBL);

the Proceeds of Crime Law (PCL), the Anti-Money Laundering Regulations (the AML Regulations) and existing guidance notes, and the Terrorism Law;

the International Tax Co-operation (Economic Substance) Law (the Economic Substance Law).

the Money Services Law (MSL);

the Mutual Funds Law (MFL);

the Private Funds Law (PFL);

the Stock Exchange Companies Law;

the US Foreign Account Tax Compliance Act (FATCA) and the OECD Common Reporting Standard (CRS);

the beneficial ownership regime in the Companies Law and various other statutes; and

the Bank and Trust Companies Law.

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice, please contact either:

E: gary.smith@loebsmith.com

E: ramona.tudorancea@loebsmith.com

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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