The Cayman Islands introduced legislation for collective investment vehicles in February 2020, which included the Private Funds Act (PFA) for closed ended funds. The intention of the Act is to strengthen investor confidence in Cayman Islands fund vehicles and to ensure that the Islands remain competitive for investment fund formation.
Over a year later, we review the current position, consider some of the questions fund managers may have and look at the pitfalls to be avoided in the new regime.
How does it impact private funds?
All investment vehicles falling within the scope of the private funds definition and section 3(1) of the PFA must register with the Cayman Islands Monetary Authority (CIMA) and will be subject to regulatory obligations.
However, some exemptions from registration exist for certain non-fund arrangements and the PFA also includes provisions that relieve the alternative investment vehicles of registered private funds from certain provisions.
What must a fund manager do to ensure compliance with this regulation?
- Private funds must provide CIMA with information upon registration, pay an annual registration fee, comply with annual audit and return requirements and retain accessible records
- Annual audits must be issued or undertaken by a CIMA-approved local auditor
- A registered private fund must also comply with certain ongoing obligations in relation to the valuation of fund assets, safekeeping of fund assets, cash monitoring and identification of securities
- Flexibility is provided as to appointing service providers, including the manager, operator or administrator, to perform the valuation, safekeeping and cash monitoring functions is permitted, provided that conflicts of interest are identified, managed, monitored and disclosed
Has CIMA issued additional rules to provide further clarification to fund managers?
Yes, CIMA has issued several notices, rules and FAQs to clarify some of the operating requirements under the Act.
CIMA has published the Rule on the Contents of Offering Documents – Regulated Mutual Funds, and the Rule on the Contents of Marketing Materials – Registered Private Funds. This set out certain disclosure requirements that must be included in offering documents relating to regulated mutual funds and registered private funds, such as:
- Calculation of Assets Values for Registered Private Funds
- Segregation of Assets – Registered Private Funds
- Marketing Materials – Registered Private Funds
In addition, CIMA has recently issued the Fund Annual Return (FAR) form for funds registered under the Private Funds Act (Revised). Due to the delay in issuing the form the deadline to submit audited accounts has now been moved to 30th September.
What are the penalties/fines in case of non-compliance?
Rules covering breaches and penalties are covered in the Monetary Authority (Administrative Fines) (Amendment) Regulations, 2020.
A breach can be categorised as being 'minor', 'serious' or 'very serious'.
In the case of a minor breach, there will be a 30-day opportunity to reply to the breach notice and to rectify it to CIMA's satisfaction. If CIMA is not satisfied that a minor breach has been rectified, it is required to impose a fine. For 'serious' or 'very serious' breaches, CIMA has the discretion as to whether to impose a fine, and in what amount, up to the cap for the relevant category.
There is a sliding scale of fines from US$6,097 for minor breaches to US$121,951 for individuals and US$1.22 million for entities for very serious breaches. Fines for ongoing minor breaches can be applied at intervals on a continuing basis, up to a US$24,390 cap.
Are there any additional aspects fund managers must be aware of?
The Cayman Economic Substance requirements have just been extended to bring partnerships within their scope.
The majority of private funds in the Cayman Islands use a partnership structure, so it is important to note, as of 30 June 2021, partnerships will have to submit an annual economic substance notification indicating whether or not they are required to meet the economic substance test. It should be expected that most partnerships which operate as investment funds will not be required to meet the test. Partnerships formed after 30 June 2021 will be required to satisfy the test from the date on which it begins carrying on a relevant activity whereas, partnerships in existence prior to 30 June 2021 must satisfy the test from 1 January 2022.
Regarding their returns filing obligations, a partnership conducting relevant economic substance activity will also need to submit an annual return. However, while investment funds, local partnerships (such as businesses that fall under the Trade and Business Licensing Act) and partnerships verified by TIA as tax resident outside of Cayman will be required to notify with TIA, they are not required to file an annual return.
Does it affect mutual funds?
On 7 February 2020, the Cayman Islands Government also enacted the Mutual Funds (Amendment) Act 2020.
Open-ended funds formed in Cayman Islands that have 15 or fewer investors who can appoint or remove the operator of the fund now are required to register with CIMA. These open-ended funds were previously exempted from CIMA registration under section 4(4) of the Mutual Funds Law.
How can IQ-EQ help?
IQ-EQ Cayman has the local expertise to help clients manage the recent changes to legislation and provide guidance on the key operating conditions and reporting requirements under the new regime. In addition to guidance, the Cayman team can ensure clients keep pace and remain compliant with the Cayman Economic Substance requirements.