Cayman Islands: Law of Offshore
Mutual Fund Law
Cayman Islands mutual funds are regulated under the Mutual Fund Law 1996 (revised in 2007 and 2009), and as regards listing they fall under the Stock Exchange Company Law 1996. The Mutual Fund Law requires mutual funds to be licensed, or to be administered by a licensed mutual funds administrator. There are the following exemptions from the requirement to license:
- A fund listed on a recognised stock exchange;
- A fund with a minimum purchasable aggregate equity interest of KYD40,000;
- A fund with not more than 15 investors holding voting equity interests;
- A closed-end fund
A mutual fund administrator must be licensed; he must have a registered office on Cayman, must be competent, and must have a net worth of at least KYD400,000.
Mutual funds must be audited annually, and the financial statements must be filed with the Monetary Authority within six months of the end of an accounting period.
There are no restrictions on the investment policy of funds in Cayman, whether listed or not.
For listing on the Stock Exchange, certain other originating jurisdictions are 'approved': Bermuda, Canada, all EU member states, Guernsey, Hong Kong, Isle of Man, Japan, Jersey, Malaysia, Singapore, Switzerland, and the USA. For funds which have primary listings on recognised stock exchanges, a secondary listing may be acquired in Cayman quite simply; the services of a listing agent are not mandatory.
Funds to be listed must appoint a custodian who is a separate legal entity from the fund, its operators or its administrators, but may be an associate of any of them. The fund must have an independent auditor. There are some shareholder disclosure requirements; and information is required about the fund's main broker and the regulatory regime applying, in particular for segregation of fund assets. In order to be listed, a fund must have at least 25% of listed securities in public hands, or restrict trading to professional investors. There are detailed rules specifying the contents of the Listing Document.
Listing is possible both for open- and closed-end funds; funds may take various corporate forms, including: investment company, unit trust and partnership. In Cayman Island terms, the entities that may be used include the exempted company, the limited duration exempted company, the ordinary non-resident company, the exempted trust, and the exempted limited partnership. See Forms of Company for details of these entities.
NB: The above is an abbreviated summary of some aspects of the Cayman Islands Stock Exchange listing regime, given for general information only.
In September 2002, Cayman introduced a new law requiring licensing for any one conducting securities investment business except where an exemption is available.
The Securities Investment Business Law, 2001 (the "Law") was passed in March 2002 and came into force in 2003. The aim of the Law is to regulate the business of securities investment in the Cayman Islands and provide an appropriate structure for the regulation of securities brokers, including market makers, arrangers, investment advisors and investment managers. The fundamental objective of the law is to define activity that requires a licence and then to ensure that such activity is undertaken by fit and proper persons in accordance with accepted supervisory standards of conduct for securities investment business. The Cayman Islands Monetary Authority is directly responsible for the licensing, supervision and enforcement of such licences.
The definition of securities investment business ("SIB") includes managing the securities of another person in circumstances involving the exercise of a discretion and advising a person on securities if:
- the advice is given to that person in their capacity as an investor or as an agent for an investor; and
- the advice is on the merits of dealing in the security or of exercising a right conferred by a security to deal in securities.
The Law applies to any person, company, foreign company or partnership that is resident in, incorporated in or registered in the Cayman Islands or which has established a place of business in the Cayman Islands and is carrying on SIB. For example, an investment adviser or investment manager that is a Cayman Islands entity or has a physical presence in the Cayman Islands and is conducting SIB from the Cayman Islands, will be covered by the Law. Such an entity will require to be licenced under the Law unless its activities are covered by one of the exemptions contained within the Law.
- a group company that carries on SIB exclusively for one or more companies within the same group; and
- an entity that carries on SIB exclusively for a "sophisticated person" or a "high net worth person". A sophisticated person includes a person:
- regulated by the Monetary Authority (which would include a Cayman Islands regulated mutual fund);
- regulated by a recognised overseas regulatory authority;
- any of whose securities are listed on a recognised securities exchange; or
- who by virtue of knowledge and experience in financial and business matters is to be reasonably regarded as capable of evaluating the merits of a proposed transaction; and participates in a transaction with a value or in monetary amounts of at least USD1,000,000 in the case of each single transaction.
- a high net worth person means an individual whose net worth is at least USD1,000,000 or has total assets of not less than USD5,000,000.
Entities falling within these exemptions will be required to file an annual declaration with the Cayman Islands Monetary Authority confirming that they fall within such an exemption and pay an annual fee of USD1,250. The declaration must be signed by a director or partner of the entity and electronic filing of the form will be accepted on the basis that original forms will be forwarded within one month. When submitting the form, the Monetary Authority must be advised who will be responsible for dealing with queries and the payment of annual fees. If none of the exemptions apply the SIB provider must apply to the Cayman Islands Monetary Authority for a licence otherwise it commits an offence and is liable on summary conviction to a fine and/or imprisonment.
On August 14 2002, the Securities Investment Business Law, 2002 (Commencement) Order 2002 was approved by the Cayman Islands Executive Council. In practical terms this means that the application of the excluded person/registrant regime of the Law came into force from August 14, 2002. It obliges anyone carrying on SIB to examine their status under the Law and consider whether they should now apply for one of the exemptions under the Law, or potentially be subject to its licensing requirements.
Two practical examples of the application of this regime are where:
- a restricted mutual funds administrator (which can provide services for up to 10 related funds) is carrying on SIB exclusively for a sophisticated person (which includes a regulated mutual fund). In these circumstances, that entity will be able to register under the Law's excluded person/registrant regime and will not be required to be licenced under the Mutual Funds Law.
- A promoter of a Cayman Islands fund wishes to establish a Cayman based investment manager. Previously this would have fallen under the definition of mutual fund administration under the Mutual Funds Law and required such an entity to be licensed under that law. With the proposed exemptions, provided that the manager only manages funds which are: in the same group of companies as the manager; or have a minimum subscription for an investor in the fund of USD100,000, then an exemption can be applied for.
In November, 2003, CIMA introduced new mutual fund regulations in order to make funds domiciled in the jurisdiction more attractive to Japanese fund distributors. Legal experts explained that the changes were deemed necessary, as although the Japan Securities Dealer's Association had not objected to the distribution of Cayman-registered funds, the guidelines for the selection of foreign unit trusts were vague with regard to the required standards for foreign regulatory regimes, meaning that some Japanese fund distributors had opted not to take the risk.
Although this was by no means a universal position, demonstrated by the fact that currently around 20 funds domiciled in the Cayman Islands are sold to the Japanese public, CIMA decided to introduce new regulations to soothe the fears of more wary distributors. From November 19, fund prospectuses for Japanese markets must reveal the rights and restrictions attached to securities, such as the terms of their issue and redemption, and the method of calculating redemption prices. Funds domiciled in the Cayman Islands and selling to the Japanese public must also be audited in accordance with the standards set out in the new rules.
However, CIMA included a clause in the new regulations exempting existing Cayman funds registered in Japan from the obligation to adopt the more stringent rules if the fund manager does not see the need.
In 2008, funds licensed in the Cayman Islands became subject to three new rules issued by the Cayman Islands Monetary Authority (CIMA) to further enhance regulation of the retail-funds sector.
The rules, which were recently approved by the government, became effective on April 28, 2008, with their publication in the Cayman Islands Gazette. They are: the Rule on the Contents of Offering Documents, which outlines the information to be included in offering documents; the Rule on the Calculation of Asset Values, which requires funds to specify their policy for calculating the funds asset values, and the Rule on the Segregation of Assets for Licensed Funds.
The rules are intended to ensure that prospective retail investors are able to make informed investment decisions, and enhance the overall protection of investors and their assets in the licensed funds. The rules apply to all funds licensed pursuant to s.4(1)(a) of the Mutual Funds Law (2007 Revision) - except those subject to the Retail Mutual Funds (Japan) Regulations 2003 (as amended).
The new rules formalise what has been common practice among Cayman-licensed funds. In codifying these practices, Cayman is now officially in line with the Objectives and Principles of Securities Regulation, the standard issued by the International Organization of Securities Commissions (IOSCO). The new measures also fill regulatory gaps, with respect to the IOSCO principles, that the International Monetary Fund (IMF) identified in its assessment of the Cayman financial sector in 2003.
CIMA's Managing Director, Cindy Scotland, noted that the Authority has a consistent focus on complying with appropriate international regulatory standards and practices - and suggested that this is the latest example.
"These rules meet the relevant IOSCO principles with respect to retail funds, while being adaptable enough to provide for competitive flexibility. The rules also leave the successful regulatory framework for non-public funds unchanged," explained Mrs Scotland.
The Rule on the Contents of Offering Documents stipulates that a fund's offering document describe the fund's equity interests in all material respects. Additionally, the document must contain such other information as is necessary to enable a prospective investor to make an informed decision as to whether or not to subscribe to or purchase the fund's equity interest. It also strengthens the Mutual Funds Law requirements by setting out the minimum information that must be included in an offering document for a licensed fund.
Under the Rule on the Calculation of Asset Values, licensees must now also establish, implement and maintain a net asset value (NAV) calculation policy, and must outline the scope of such a policy. This rule mandates that the policy be "fair, reliable, of high quality and verifiable".
Finally, the Rule on the Segregation of Assets for Licensed Funds calls for a fund's portfolio (i.e., all financial assets and liabilities) to be segregated and accounted for separately from any assets of any service provider.
Also, licensed funds must ensure that service providers do not use the portfolio to finance their own or any other operations in any way. Another requirement is that funds ensure, by contract, that service providers who hold or manage the portfolio are regulated by CIMA or by a recognised overseas regulatory authority or another regulator approved by CIMA.
Changes to the Cayman Islands Monetary Authority’s (CIMA) Guidance Notes with regard to Prevention and Detection of Money Laundering and Terrorist Financing in 2009 mean that funds must appoint at management level a Compliance Officer and a Money Laundering Reporting Officer, who can be the same person, who:
- Should have sufficient skills and experience;
- Will report directly to the fund's governing body;
- Should have sufficient seniority and authority so that the governing body can react to and act upon any recommendations made;
- Should have regular contact with the governing body so that it is able to satisfy itself that statutory obligations are being met and that sufficiently robust measures are being taken to protect itself against the risk of money laundering and terrorist financing;
- Should have sufficient resources, including sufficient time and, where appropriate a Deputy Compliance Officer and support staff; and
- Should have unfettered access to all business lines, support departments and information necessary to appropriately perform the function.
The Guidance Notes provide that the role of the Compliance Officer is to:
- Develop and maintain systems and controls (including documented policies and procedures) in line with evolving requirements;
- Ensure regular audits of the fund’s anti-money laundering (AML) and countering the financing of terrorism (CFT) program;
- Advise the Operator of the fund of AML/CFT compliance issues that need to be brought to its attention;
- Report periodically, as appropriate, on the fund’s systems and controls; and
- Respond promptly to requests for information by the relevant authorities.
Accordingly, regulated funds may wish to consider undertaking an administrative/legal audit of their present AML/CFT program to ensure that they have appropriate systems and expertise in place to support the Compliance Officer role.