1 Regulatory Framework
1.1 What legislation governs the establishment and operation of Alternative Investment Funds?
The Mutual Funds Law (2015 Revision) (the “MF Law“) provides for the regulation of open-ended investment funds and mutual fund administrators. Responsibility for regulation under the MF Law rests with the Cayman Islands Monetary Authority (“CIMA“). In addition, the Retail Mutual Funds (Japan) Regulations (2007 Revision) as amended by the Retail Mutual Funds (Japan) (Amendment) Regulations, 2012 (together, the “Japan Regulations“), provide a regulatory regime for retail mutual funds that are marketed to the public in Japan.
Although not Cayman Islands law, the broad scope and extraterritorial effect of the EU Directive on Alternative Investment Fund Managers (“AIFMD“) will capture most types of Cayman Alternative Investment Funds, regardless of whether they are open-ended or closed-ended and regardless of their legal structure and investment strategy, with very few exceptions, to the extent that they are being marketed or managed in Europe (as such terms are defined for the purposes of the AIFMD). The Cayman Islands has published regulations creating two new AIFMD-consistent regulatory regimes, which will enable Cayman Islands AIFs and AIFMs to take full advantage of the AIFMD if and when the AIFMD passport is extended to the Cayman Islands. The new AIFMD regulations will be brought into force by way of a separate commencement order, which is anticipated to be published and take effect sometime this year.
1.2 Are managers or advisers to Alternative Investment Funds required to be licensed, authorised or regulated by a regulatory body?
A manager or adviser which is established in or, in the case of a foreign company, registered in the Cayman Islands and which conducts “securities investment business”, whether or not that securities investment business is carried on in the Cayman Islands, will fall within the scope of the Securities Investment Business Law (2015 Revision) (“SIBL“).
“Securities investment business” is defined as being engaged in the course of business in any one or more of the activities set out in Schedule 2 to SIBL. Those activities include managing securities belonging to another person on a discretionary basis and advising in relation to securities, but only if the advice is given to someone in their capacity as investor or potential investor or in their capacity as agent for an investor or a potential investor and the advice is on the merits of that person (whether acting as principal or agent) buying, selling, subscribing for or underwriting a particular security or exercising any right conferred by a security to buy, sell, subscribe for or underwrite a security. “Securities” are defined to include most forms of shares and stock, debt instruments, options, futures, contracts for differences, and derivatives.
Schedule 3 to SIBL specifically excludes certain activities from the definition of securities investment business, although those exclusions are unlikely to apply to a person conducting discretionary investment management or investment advisory activities.
Any person within the scope of SIBL conducting securities investment business must be licensed by CIMA, unless that person is exempt from holding a licence. A licence may be restricted (meaning that securities investment business may only be transacted with particular clients) or unrestricted. A licence may also be issued subject to conditions or may be unconditional.
A person carrying on securities investment business may be exempt from the requirement to obtain a licence but will still be subject to certain provisions of SIBL. In the case of the exemptions referred to below, which are the exemptions likely to apply to fund managers or advisers, an “Excluded Person” is required to register with CIMA by filing a declaration and paying a fee of CI$5,000 (approximately US$6,097.56), prior to carrying on securities investment business and annually thereafter, confirming that they are entitled to rely on the relevant exemption.
An “Excluded Person” includes:
(a) a company carrying on securities investment business exclusively for one or more companies within the same group;
(b) a person, whose registered office in the Cayman Islands is provided by a licensee under the law, carrying on securities investment business exclusively for one or more of the following classes of person:
(i) a sophisticated person (a person regulated by CIMA or a recognised overseas regulatory authority or whose securities are listed on a recognised securities exchange or who by virtue of knowledge and experience in financial and business matters is reasonably to be regarded as capable of evaluating the merits of a proposed transaction and participates in a transaction with a value or in amounts of at least US$100,000 in each single transaction); or
(ii) a high-net-worth person (an individual whose net worth is at least US$1,000,000 or any person that has any assets of not less than US$5,000,000); or
(iii) a company, partnership or trust of which the shareholders, limited partners or unit-holders are all sophisticated persons or high-net-worth persons; or (c) a person who is regulated by a recognised overseas regulatory authority in the country or territory (other than the Cayman Islands) in which the securities investment business is being conducted.
1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a regulatory body?
Subject to the section 4(4) fund exception described below, an investment fund qualifies as a “mutual fund” and is required to be regulated under the MF Law if:
(a) it is a company, partnership or unit trust carrying on business in or from the Cayman Islands;
(b) it issues “equity interests” to investors (i.e. shares, partnership interests or trust units that carry an entitlement to participate in profits or gains and which may be redeemed or repurchased at the option of those investors prior to winding up); and
(c) its purpose or effect is the pooling of investor funds with the aim of spreading investment risks and enabling investors to receive profits or gains from investments.
There are three categories of mutual funds:
1. a licensed fund under section 4(1)(a) of the MF Law;
2. an administered fund under section 4(1)(b) of the MF Law;
3. a registered fund under section 4(3) of the MF Law.
1. A mutual fund licence will be granted if CIMA considers that the promoter is of sound reputation, there exist persons of sufficient expertise to administer the fund, who are of sound reputation, and that the business of the fund and any offer of equity interests will be carried out in a proper way. Detailed information is required concerning the directors, trustee or general partner (“GP“) of the mutual fund (as the case may be) and the service providers. However, few investment funds are fully licensed under the MF Law, as this is generally only necessary for retail funds. From the statistics published on CIMA’s website, at the end of 2016 there were only 90 licensed funds.
2. Registration as an administered fund requires the designation of a Cayman Islands licensed mutual fund administrator as the fund’s principal office. The administrator must satisfy itself that the fund’s promoters are of sound reputation, that the fund’s administration will be undertaken by persons with sufficient expertise who are also of sound reputation and that the fund’s business and its offering of equity interests will be carried out in a proper way. The administrator is obliged to report to CIMA if it has reason to believe that a mutual fund for which it provides the principal office (or any promoter, director, trustee or GP thereof) is acting in breach of the MF Law or may be insolvent or is otherwise acting in a manner prejudicial to its creditors or investors. This imposes a quasi-regulatory role and an obligation to monitor compliance on the administrators themselves, and generally higher fees charged by administrators in relation to this category of investment fund. Administered funds have declined in popularity over recent years, from 510 in 2008 to 363 at the end of 2016.
3. Mutual funds registered under section 4(3) of the MF Law are divided into three sub-categories:
(a) where the minimum investment per investor is at least US$100,000;
(b) where the equity interests are listed on a recognised stock exchange; or
(c) where the mutual fund is a “master fund” (as defined in the MF Law) and either:
i) the minimum investment per investor is at least US$100,000; or
(ii) the equity interests are listed on a recognised stock exchange.
A master fund is a Cayman Islands entity that issues equity interests to at least one feeder fund (either directly or through an intermediate entity established to invest in the master fund) that is itself regulated by CIMA under the MF Law that holds investments and conducts trading activities for the principal purpose of implementing the overall investment strategy of the regulated feeder. Based on CIMA’s statistics, at the end of 2016, 2,840 of the 10,586 regulated section 4(3) funds were registered as master funds.
There is also an exception to the need to register with CIMA for funds (other than master funds), known as “section 4(4) funds”, that are open-ended “mutual funds” for the purposes of the MF Law but which have 15 or fewer investors, a majority in number of whom have the power to appoint and remove the fund’s directors, GP or trustee, as applicable.
1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment Funds (or otherwise differentiate between different types of funds) and if so how?
Yes; closed-ended funds are not subject to regulation under the MF Law. The key distinction between open-ended and closed-ended funds is the ability of investors to voluntarily redeem or repurchase some or all of their investment prior to winding up. Cayman Islands practitioners and CIMA generally consider that a lock-up period must be at least five years for an investment fund to be regarded as closed-ended at the outset.
1.5 What does the authorisation process involve?
CIMA has established an online e-business portal, CIMAConnect, which enables the online submission of mutual fund applications and documentation. An application for a section 4(3) fund involves the submission of:
(a) the fund’s offering document, other than in the case of a master fund, which will often not have an offering document separate from that of its feeder fund(s);
(b) the relevant statutory application form;
(c) consent letters from the fund’s auditor and administrator;
(d) the relevant fee (currently US$4,268, initially and annually, other than in the case of a master fund which is currently US$3,049 initially and annually);
(e) an affidavit relating to the authorisation of submission of the online application; and
(f) certain information regarding the fund’s operator (the directors, GP or trustee, as the case may be).
CIMA’s practice with section 4(3) funds is to make the effective date of the application the date on which all application requirements have been submitted and applications must be completed prior to a fund launching in order to be compliant with the MF Law. The authorisation process is more involved for licensed and administered fund applications.
1.6 Are there local residence or other local qualification requirements?
A Cayman Islands regulated mutual fund must appoint a local auditor approved by CIMA.
The Directors Registration and Licensing Law, 2014 (the “DRLL“) requires that the directors (both natural persons and corporate directors) of a corporate mutual fund regulated by CIMA under the MF Law or a certain type of “Excluded Person” registered with CIMA under SIBL be either registered or licensed with CIMA. The registration process is undertaken online at the “CIMA Director Gateway”.
1.7 What service providers are required?
Every regulated mutual fund must have an approved local auditor and will generally have an investment manager/adviser and an administrator (which, for an administered mutual fund, must be a licensed mutual fund administrator).
Although not required, it is becoming market practice for corporate regulated investment funds to appoint independent directors. Such independent directors are not required to be based in the Cayman Islands but often are, due to the depth of the Cayman fiduciary services industry. Based on statistical analysis conducted by Maples and Calder, 89 per cent of funds launched in 2016 by managers based in North America had at least one independent director. The trend is lower for Asia-based managers, where 62 per cent had at least one independent director. The trend is higher for funds with Europe-based managers, with 84 per cent of the funds launched in 2016 having at least one independent director.
The statistics compiled by Maples and Calder reflect a snapshot of the regulated funds established during the relevant period for which Maples and Calder acted as Cayman Islands legal counsel. Although this represents a significant sample size, it is inevitable that these statistics would vary if they were based on all funds established during the relevant period.
1.8 What co-operation or information sharing agreements have been entered into with other governments or regulators?
The Cayman Islands has Tax Information Exchange Agreements and similar bilateral arrangements with 36 countries as of May 2017 and is on the OECD “white list” with respect to the exchange of tax information. In addition, CIMA has entered into bilateral regulatory cooperation agreements pursuant to the AIFMD with the competent authorities of 27 of the EU and EEA Member States. Please also see the description of FATCA/CRS under question 6.6 below.
News source: Mondaq