Asset management alert: cayman mutual funds bill and private funds bill

Mutual Funds Bill [Amendments to the Mutual Funds Law (2019 Revision)]

• The Mutual Funds Law previously exempted funds with 15 or fewer investors (the majority of whom are capable of approving or removing the operator of the fund) from registration with the Cayman Islands Monetary Authority (“CIMA”). Section 4 of the law is now amended to remove that exemption.
• Funds that previously relied on the 15 or fewer investor exemption will need to register with CIMA and be subject to regulatory obligations such as an annual audit by a CIMA-approved local auditor, annual returns, and pay an annual registration fee.
• Funds that are not incorporated or established in the Cayman Islands, that solicit equity subscriptions from the public in the Cayman Islands with the provisions listed in section (4)(4)(b) of the Mutual Funds Law (2019 Revision), will continue to be exempt from registration under this new bill.
• Transition – A fund that was carrying on business in, or from, the Cayman Islands without registration under the Mutual Funds Law because the equity interests in the mutual fund are held by not more than 15 investors, may continue to carry on business without registration for a period of not more than six months after the date of commencement of this Law or such further period as may be specified by the Authority.

Private Funds Bill

Definition of a private fund (per the Private Funds Bill) – This means a company, unit trust or partnership 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 such entity’s acquisition, holding, management or disposal of investments, where:

1. The holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments; and
2. The investments are managed as a whole by, or on behalf of, the operator of the private fund, directly or indirectly, for reward based on the assets, profits or gains of the company, unit trust or partnership.

This does not include —

1. A person licensed under the Banks and Trust Companies Law (2018 Revision) or the Insurance Law 2010;
2. A person registered under the Building Societies Law (2014 Revision) or the Friendly Societies Law (1998 Revision); or
3. Any non-fund arrangements.

• All private funds (as defined above), will be required to register with CIMA. Without registration, a private fund will not be able to receive capital contributions from investors. They can solicit eligible investors, pending registration. However, they must ensure that they apply to register with CIMA within 21 days of accepting capital commitments.
• All private funds will be subject to regulatory obligations such as an annual audit by a CIMA-approved local auditor, annual returns, and pay an annual registration fee.
• All private funds will value their assets consistently and appropriately, and valuations shall take place at least on an annual basis (and more frequently if appropriate for the asset class). In addition, the valuations must be performed by either:
  • An independent qualified third party;
  • The manager/operator of the fund if the valuation function is independent of the portfolio management function (or the possible conflicts of interest are appropriately identified, monitored, and disclosed to investors); or
  • An administrator appointed by the fund.
• All private funds must appoint a custodian to:
  • Hold in custody the fund assets in segregated accounts opened in the name (or for the account of) the private fund.
  • Verify that the private fund holds title to the fund assets and maintain a record of those fund assets.
• If it is not practical to appoint a custodian (depending on the nature of the private fund and the asset class), the private fund shall appoint one of the following, to verify the title of the fund assets (as noted above):
  • An independent, qualified third party or an administrator.
  • The manager/operator of the fund, if the title verification function is independent of the portfolio management function (or the possible conflicts of interest are appropriately identified, monitored, and disclosed to investors).
• All private funds shall appoint one of the following to (a) monitor the cash flows of the fund, (b) ensure that all cash of the fund is booked in the accounts of the fund, and (c) ensure that all payments made by investors to the private fund are received.
  • An independent, qualified third party, custodian, or an administrator.
  • The manager/operator of the fund if cash monitoring function is independent of the portfolio management function (or the possible conflicts of interest are appropriately identified, monitored, and disclosed to investors).
• Private funds do not have to comply with the Trade and Business Licensing Law (2019 Revision), as in the past.

Please contact your Mazars professional for additional information.

Published on: February 20, 2020

The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.