The Cayman Islands government will shortly be introducing new legislation to regulate and require registration of closed-ended funds (which will become known as "private funds") with the Cayman Islands Monetary Authority (CIMA), for the first time. The Private Funds Bill, 2020 (the Bill) will be debated by the Legislative Assembly in its 30 January sitting. As a result, the exact terms are subject to change but the major components of the legislation are broadly agreed upon.
The Bill has been developed 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. The contents of the Bill are similar to requirements in other major fund jurisdictions such as Luxembourg and Ireland.
It includes suggestions from the EU Code of Conduct Group as set out in technical guidance issued by them on 27 March 2019 (found here).
A copy of the Bill can be found here.
What is a private fund?
A private fund is any Cayman Islands company, partnership, unit trust, limited liability company 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 the vehicle’s investments; and
Investments are managed as a whole by or on behalf of the operator of the fund, directly or indirectly, for reward based on the assets, profits or gains of the entity.
The Bill also applies to non-Cayman Islands private funds which fall within the definition and which make an invitation to the public in the Cayman Islands.
Are there any exemptions from the definition or any of the requirements of the Bill?
The Bill contains a list of “non-fund arrangements” which will fall outside of the definition of a private fund and will therefore not be registered with CIMA. These include securitisation special purpose vehicles, joint ventures, proprietary vehicles, holding vehicles, preferred equity financing vehicles, sovereign wealth funds and single family offices. In addition, as the definition refers to "pooling of investor funds", closed-ended funds with single investors will not fall within the definition of a private fund.
Also, the requirement for the entity to be "offering and issuing" its investment interests means that some types of vehicles in typical private equity fund structures may also fall outside of the definition.
Under the terms of the Bill, alternative investment vehicles will not be subject to the audit, valuation, custody and cash monitoring requirements of the Bill and their exact definition will be contained in further regulations to be published during 2020.
What are the registration requirements?
A new private fund must:
Make a registration application within 21 days after acceptance of capital commitments from investors for the purpose of investments; and
Be registered by CIMA before it accepts capital contributions from investors in respect of investments.
This is important to note, as a private fund could apply for registration and would still be permitted to make and receive capital calls to meet formation expenses and management fees before the registration is approved.
For existing private funds, there will be a transition period for them to register with CIMA, but the timing of that period is not yet known and will be subject to secondary legislation.
What documents are needed for the registration?
Registration will be made through CIMA’s online filing portal and will require certain basic information to be provided in a similar way to mutual funds. If the private fund is required to have an auditor, then an auditor’s consent letter is very likely to be required as will be other information or disclosure regarding valuation, custody and cash monitoring arrangements. More details on the requirements will be published by CIMA in due course.
There is no requirement for a private fund to have or file an offering document.
What are the obligations of a private fund once registered?
The key continuing requirements for private funds subject to the Bill include provisions relating to audit, valuation, custody, cash monitoring and identification of securities. As noted above, these provisions of the Bill will not apply to alternative investment vehicles.
Audit: private funds will need to have their financial statements audited by a Cayman Islands-based auditor annually and they must be filed with CIMA within 6 months of the private fund’s financial year end along with an annual return. Both of these will be filed by the fund’s auditor with CIMA.
Valuation: asset valuation will need to be conducted by private funds on an appropriate and consistent basis and must be done at least annually.
Custody: a private fund must appoint a custodian to (i) hold 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 asset held; and (ii) verify title to, and maintain records of, assets.
Cash Monitoring: the Bill requires a private fund to monitor cash flows, cash account receipts and payments to investors.
Identification of securities: for those private funds that regularly trade securities or holds them on a consistent basis, the Bill requires them to maintain records of the identification codes (eg ISIN or LEI) of the relevant securities.
For each of valuation, custody and cash monitoring, these can be done by an independent provider, administrator, or the manager or operator of the private fund subject to appropriate operational independence (ie the same people cannot do portfolio management and valuation, for example) and disclosure of the potential conflicts of interest to investors.
When do private funds need to register and start implementing the requirements of the Bill?
As noted, the Bill has not yet been passed and will only come into force with further implementing legislation. The Bill does not contain any timing provisions for new funds or details of transitional periods for funds that are in existence when the Bill is enacted and comes into force.
We expect further legislation and regulations during the course of 2020 which will contain these details and we will be issuing alerts on that when we have the information. Given the large numbers of private funds in existence already and being formed daily the logistical exercise that registration will entail will mean that these periods will take that into account.
CIMA will be issuing guidance and rules in relation to registration of private funds and updating their online portal to provide for registration in the coming months.
Harneys Investment Funds and Regulatory team
Harneys Investment Funds and Regulatory team is well versed in all aspects of the formation, operation and regulation of Cayman Islands private funds, so please contact your usual Harneys representative if you would like to discuss the requirements proposed in the Bill. If you have any other questions, visit harneys.com/Cayman.