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Expansion of the scope of the private funds regime

10 Jul 2020

A framework to regulate Cayman Islands private funds was introduced this year as part of the Cayman Islands’ commitment to remain a leading investment funds jurisdiction, to provide investors in private funds with greater transparency and confidence and to meet the requirements of the wider international community.

In pursuit of these goals, the Cayman Islands government has made changes to the Private Funds Law to clarify the treatment of certain structures and to expand registration requirement to others. The key change is an amendment to the definition of a "private fund".

The ongoing requirements for a private fund where there is a potential conflict of interest for certain service providers has also been expanded.

What is the new definition of a "private fund"?

A private fund is now considered to be any Cayman Islands company, partnership, unit trust or limited liability company:

  • that offers or issues or has issued investment interests, the purpose or effect of which is the pooling of investor funds with the aim of enabling investors to receive profits or gains from the vehicle’s investments; and
  • the investment interest holders do not have day to day control over the investments; and
  • investments are managed as a whole by or on behalf of the operator of the fund, directly or indirectly.

The exemption for certain licensed entities and non-fund arrangements remains in place.

What are the changes to the definition?

The expanded definition now explicitly includes any entity that offers, issues or has issued investment interests. Before the change, the Cayman Islands Monetary Authority had made it clear that they viewed the law as capturing entities which were not in an active offering period but some doubt existed in the industry. The change makes it clear that those entities that are not actively offering, or no longer issuing, interests no longer have an argument that they may be exempt on this basis.

There is no longer a requirement that there be a spreading of investment risk, so those entities with a single investment will most likely now be within scope. It is now not necessary for the operator of the entity to manage the investments for reward based on its assets, profits or gains. This change is intended to capture the entire multi-fund structure where management fees are only paid at one level.

Which structures will this change primarily impact?

These changes will primarily impact single investment structures, alternative investment vehicles, master funds and those structures where no fees are paid or fees are only paid at one level.

It will also impact those entities that are not engaged in an active sales process and those that have issued investment interests but will no longer do so.

What should I do now?

The deadline for registration is 7 August 2020 and we have been liaising with numerous clients to finalise their registration by the deadline. However, in light of these changes if you believe that you now fall within the expanded scope of a "private fund" please contact your usual Harneys representative as soon as possible.

Additional requirement to manage and monitor potential conflicts of interest

Under the private funds regime a private fund must ensure that proper valuations of fund assets are carried out and there are procedures in place for the safekeeping of fund assets and cash monitoring. Generally, these obligations may be performed by an independent administrator, custodian, other third party, manager of the private fund, operator of the private fund or person in a control relationship with the manager.

Where the obligation is performed by the manager, operator or a person in a control relationship with the manager the potential conflict of interest must be properly identified and disclosed to the investors of the private fund.

The Cayman Islands Government has expanded this specification to require the private fund to also manage and monitor any such conflicts of interest.

Please contact your usual Harneys representative as soon as possible if you believe any of these changes may impact you. If you have any other questions, visit www.harneys.com/Cayman.