Today two draft bills (the “Bills“) were published by the Cayman Island’s Government which make certain amendments to the Mutual Funds Law (“MFL“) and Securities Investment Business Law (“SIBL“).
The Bills are designed to put in place two separate opt-in regimes (together, the “AIFMD Regimes“) for prudential regulation of both EU connected funds and EU connected managers which are consistent with the Alternative Investment Fund Managers Directive (“AIFMD“). The AIFMD Regimes will give Cayman Islands based funds and managers the option of electing for an additional layer of regulation (which is consistent with the relevant requirements of AIFMD) to apply where certain types of marketing in the EU, or managing of EU funds, or depositary activity is contemplated.
The broad framework for the AIFMD Regimes is included in the Bills, which it is anticipated will pass into law during August 2015. The specifics of the AIFMD Regimes will be set out in detailed regulations which are currently being finalised and will, we anticipate, be issued by shortly after the changes made by the Bills come into force.
The AIFMD Regimes, combined with the long-standing reciprocity of access for EU funds and managers to investors in the Cayman Islands, will put Cayman in an excellent position to secure an extension of the AIFMD passport to the Cayman Islands. This will be of particular interest to those seeking to market Cayman funds in the EU whether using existing national private placement regimes (“NPPRs“) or, once extension to Cayman is approved, the AIFMD passport mechanism.
The fact that the AIFMD Regimes are optional means that it is business as usual for the rest of the funds and managers using the Cayman Islands.
ESMA Recommendation to the European Commission
On 22 July 2015, the European Securities Markets Authority (“ESMA“) is due to provide its initial recommendation to the European Commission (“EC“) as to which jurisdictions should be considered for a “third country passport” under AIFMD.
ESMA has decided to take a “country by country” approach to such recommendations to the EC. Whether to grant any actual extension of the passport to any country will be determined separately by the EC who have 3 months from 22 July, 2015 to reach a decision on the countries recommended on 22 July.
Given that ESMA is working its way through reviewing a significant number of non-EU jurisdictions, we would anticipate that there will be other recommendations to the EC from ESMA following relatively shortly after 22 July 2015.
New Opt-in AIFMD Regimes
The Bill amending the MFL introduces the concept of an opt in designation as a “regulated EU Connected Fund”, being any type of investment fund (whether open-ended or closed-ended) which (i) is either managed from or marketed in a Member State of the European Economic Area (“EEA“) as contemplated under AIFMD and (ii) elects to fall within CIMA’s new regulated EU Connected Fund regime.
The Bill amending SIBL introduces the concept of an opt in designation as an “EU Connected Manager”, being a person who: (i) falls within the existing scope of SIBL; (ii) conducts management, marketing or depositary activities as contemplated under AIFMD; and (iii) elects to fall within CIMA’s new EU Connected Manager regime.
Under the AIFMD Regimes (i) both open ended and closed ended EU Connected Funds will be able to elect to be regulated by CIMA, but under a new regime tailored to EU Connected Funds, and (ii) EU Connected Managers will be able to elect, despite being “excluded persons” under SIBL, to become fully licensed under SIBL and in addition to be governed by new regulatory standards which are consistent with AIFMD.
Both of the Bills make clear that the existing supervisory duties and powers of CIMA under the MFL and SIBL will extend to EU Connected Funds and EU Connected Managers which opt in to the AIFMD Regimes.
The Cayman Islands are home to over 11,000 investment funds, with the vast majority of the top 100 managers outside of the EEA using Cayman Islands vehicles in their fund structures. Permitting extension of the passport to the Cayman Islands would be of significant benefit to EU investors, providing them with access to world-class investment options across a diverse range of different investment products and strategies. Given this dynamic, Cayman Finance believes that there is a compelling case for ESMA and the EC to properly and promptly consider extension of the AIFMD passport to the Cayman Islands.
Timing of the Opt-in AIFMD Regimes
It is anticipated that the Bills will be passed into law in August 2015 and that the detailed regulations will be approved shortly thereafter
The AIFMD Regimes will place Cayman ideally for consideration for AIFMD passport extension by ESMA and the EC. We are confident that Cayman’s AIFMD Regimes, plus on-going reciprocity, will enable Cayman to secure extension of the AIFMD passport to the Cayman Islands by the EC later this year.
Cayman Finance CEO Jude Scott commented that “The Cayman Islands Government, the Cayman Islands Monetary Authority and the Cayman Islands financial services industry all recognize Cayman’s important role in the global investment funds market, and these new AIFMD Regimes are the latest example of the jurisdiction continuing to evolve its legislation and regulation in a balanced and robust manner to meet the needs of investors and managers around the world.”