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Cayman Islands: Law of Offshore

Mutual Fund Law

This page was last updated on 28 June 2019.

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 licence:

  • 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 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 28 April 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.

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.

 

 

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