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

This publication is not intended to be a substitute for specific legal advice or a legal opinion. If you require further advice relating to the matters discussed in this Legal Update, please contact us. We would be delighted to assist.

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E. elizabeth.kenny@loebsmith.com
E: cesare.bandini@loebsmith.com
E: vivian.huang@loebsmith.com
E: faye.huang@loebsmith.com

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Guidance for Directors registered with the Cayman Islands Monetary Authority under The Directors Registration and Licensing Law

Renewal of Director Registration for 2019

Directors who are registered with the Cayman Islands Monetary Authority (“CIMA”) in accordance with The Directors Registration and Licensing Law, 2014 (“DRLL”) in connection with being a Director of an entity that is registered with CIMA (e.g. registered Mutual Fund or an investment management or investment advisory entity that has “Excluded Person” status under the Securities Investment Business Law (2015 Revision)) (a “Covered Entity”) should be aware of the requirement to renew registration via the CIMA portal https://gateway.cimaconnect.com/. A Director should renew his or her registration with CIMA if he or she will continue to be a Director of one or more Covered Entity that either (1) will carry on business for some or all of 2019, or (2) is in the process of economically winding down and legally liquidating such business but the process will not cease prior to 31 December 2018.

Resignation from a Covered Entity

CIMA has stated^[i] that if a Director no longer wishes to be registered or licensed as a Director of a Covered Entity, the Director must liaise with the Covered Entity’s registered office and ensure that CIMA receives written resolutions or an updated register of directors, stamped by the Cayman Islands Companies Registry, to duly notify CIMA of the Director’s resignation from that Covered Entity.

Resignation of a Director from a Covered Entity will not automatically result in a surrender of the Director’s registration or licence under the DRLL.

Surrender of Director Registration

CIMA has also stated^[ii] that if a Director no longer wishes to be registered or licensed as a Director in accordance with the DRLL, he or she is required to first resign as a Director of all Covered Entities, then log into the CIMA portal (see link above), complete the requisite information under “Surrender”, and pay the relevant surrender fee (US$731.71).

Once the Director has paid the surrender fee, CIMA will check its records to confirm that the Director is no longer listed as a Director on any Covered Entity. If he or she remains as a Director of a Covered Entity, CIMA will be unable to process the Director’s surrender application.

In addition to submitting the surrender fee, the Director is required to submit a formal letter which MUST contain the following information:

1. that he or she has resigned as a Director of all Covered Entities;
2. that he or she no longer plans to act as a Director on any Covered Entity; and
3. that if he or she would like to act on any other Covered Entity or wishes to resume directorship services after he or she has surrendered his or her registration or licence, he or she will re-apply under the DRLL.

The Director is responsible for updating his or her records accordingly and must complete the requirements to surrender his or her registration or licence before the 31st December in order to avoid accruing annual fees for 2019, as well as penalties calculated at 1/12th of the annual fee for every month or part of a month after the 15th of January in each year that the fee is not paid

As stated above, Directors who will continue to provide directorship services and wish to remain current with their registration or licence status under the DRLL MUST, on or before the 15th of January in each calendar year, renew their registration or licence through the CIMA portal.

For specific advice on renewal or surrender under the DRLL or resignation from a Covered Entity, please contact any of:

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

[i] CIMA’s Supervisory Issues & Information Circular– Second Edition issued in October 2016
[ii] CIMA’s Supervisory Issues & Information Circular– Second Edition issued in October 2016