The Cayman Islands government has passed the changes to the Mutual Funds Law, which we covered in our prior alert on this topic. These previously-exempt, mutual funds must now assess their operational structures and advisors and register with the Cayman Islands Monetary Authority (CIMA) before 7 August 2020.
Which funds must now register with CIMA?
Investment funds that issue redeemable equity interests were previously exempt from the general requirement to register with CIMA under the Mutual Funds Law if they had 15 or fewer investors and a majority of those investors had the power to appoint or remove the operator of the fund (4(4) funds).
That exemption no longer exists and 4(4) funds must now register with CIMA.
When does an existing 4(4) fund need to register?
All 4(4) funds that were carrying on business on or before 7 February 2020 must register with CIMA by 7 August 2020.
New 4(4) funds formed after 7 February 2020 must register with CIMA prior to accepting subscriptions from investors.
4(4) fund didn’t historically have to have auditors - do they now have to appoint auditors?
Yes, a 4(4) fund must now have its financial statements audited annually by an auditor approved by CIMA. This requirement is often referred to as "local audit sign off".
The audited financial statements must then be filed with CIMA together with a prescribed form annual return within 6 months of the fund’s financial year end.
What are the minimum operator requirements for a 4(4) fund?
CIMA operates a “four-eyes” policy in relation to the operators of registered mutual funds.
As a result, a corporate 4(4) fund must have at least two directors. If not already registered with CIMA, the directors must register on the CIMA Director Gateway in accordance with the Directors Registration and Licensing Law before the registration application is made by the 4(4) fund.
The same would apply to a 4(4) fund that is structured as a Cayman LLC, except an LLC would typically have managing members or managers. The fund would need to have at least two managing members or managers, each of which is registered with CIMA.
General partners and trustees of 4(4) funds structured as a limited partnerships or trusts are not required to have their directors or officers register with CIMA, but CIMA will expect the general partner or trustee to least two directors/managers.
Does a 4(4) fund need to appoint AML Officers?
A 4(4) fund should have already appointed an Anti-Money Laundering Compliance Officer, Money Laundering Reporting Officer and a Deputy Money Laundering Reporting Officer as required by the Cayman Islands AML regulations.
We anticipate that a 4(4) fund will be required to file details of those officers with CIMA at the same time as the registration application is made.
What is the CIMA filing and annual fee?
An annual registration fee will be payable to CIMA by 15 January of each year. At this stage, the fee has not been determined by CIMA.
If you manage a 4(4) fund, what must you do now?
As a first step, operators and managers of 4(4) funds must look at their existing operations and service providers and make changes that may be required to meet requirements relating to minimum numbers of directors/managers, the appointment of an auditor and the appointment of AML officers.
Directors/managers must ensure that they are registered with CIMA before the fund makes the registration application with CIMA.
Pending confirmation from CIMA of the registration requirements, we believe that a 4(4) fund will most likely need to obtain an auditor consent letter from the Cayman office of its audit firm and provide that as part of its application in the same way that registered funds currently are required to do so.
Once any structural or service provider changes have been dealt with, the 4(4) fund will then need to make its registration application on CIMA’s online portal before the 7 August 2020 deadline.
CIMA has not yet released the registration form, but we expect it to be a simplified version of a "standard" registered mutual fund registration. As part of the registration application, the 4(4) fund must include a copy of its constitutional documents to show that the majority of investors in number can appoint or remove the operator.
I operate a 4(4) fund, will my Harneys representative contact me?
Yes! Your usual Harneys representative for each 4(4) fund for which Harneys provides legal or fiduciary services, will be contacting fund operators and managers to discuss the next steps in the coming weeks.
In the meantime, if you would like to discuss the new requirements please contact your usual Harneys representative or visit www.harneys.com/Cayman.