In 2020 the Cayman Islands is launching registration requirements for closed-ended funds with the CIMA, through the introduction of the Private Funds Law. Andrew Linford, chair of the communications committee at AIMA Cayman, reports on the details.
The Cayman Islands is the jurisdiction of choice for the establishment of closed-ended funds outside the US, and remains at the forefront of legal and regulatory developments in this area. This is evidenced by the introduction of the Private Funds Law (PF Law) in 2020.
The Alternative Investment Management Association (AIMA) Cayman is proud to continue its part in the furtherment of best practice in the alternative funds industry. We expect fund sponsors, investors and regulators to benefit from the alignment of law and best market practice in this regard.
As part of the introduction of the PF Law, the Cayman Islands government has granted the industry a transition period until August 7, 2020, for existing and new private funds to register with the Cayman Islands Monetary Authority (CIMA). As a result, fund sponsors should now be taking steps to review their Cayman funds and make the substantive arrangements for compliance with the new regime and, if necessary, registration.
AIMA Cayman will continue its work with the Cayman Islands government, CIMA and key local professional organisations in the spirit of cooperation in implementing the new regime.
The close coordination between private and public sector in Cayman was commented on by the Honourable Tara Rivers, Minister of Financial Services, at an industry meeting held in January, which was attended by over 400 practitioners.
“It is through our constructive and cooperative working relationship, which has significantly strengthened over the past two-and-a-half years, and your commitment to doing what is in the best interests of the jurisdiction as a whole (which in turn, will have a direct positive impact on your respective companies and firms), that we can meet the challenges facing Cayman’s financial services industry; and succeed in ensuring that the Cayman Islands remains as one of the best and highly sought-after places to do business in the world,” Rivers said.
Which funds does this apply to?
The PF Law applies to “private funds”, so named because the majority of new vehicles caught by the legislation are those investing in unlisted, or “private” assets. They are distinguished from “mutual funds” (commonly termed “hedge funds”) because they do not permit their investors to request a withdrawal of their investment during the fund’s life.
Instead, investors will typically receive distributions at the end of the fund’s term (often seven to 10 years after the initial commitment).
In most such structures, the “private fund” for the purposes of the PF Law (and therefore the one most likely to require registration), will be the primary investor-facing vehicle that is offered to investors.
Other vehicles within a typical closed-ended fund structure, such as blockers, employee funds, alternative investment vehicles (AIVs) and co-invests may also need to consider registration depending on their structuring. As a result, it is clear that most closed-ended funds, including most private equity, infrastructure and real estate fund structures, will need to consider the provisions of the PF Law.
The PF Law exempts more structural entities and certain other “non-fund arrangements” from its application. Securitisation and other structured finance vehicles will therefore remain out of scope. The exact scope of these non-fund arrangements is expected
to be clarified in further rules and/or guidance issued by CIMA in due course.
In circumstances where AIVs are required to register (or where their existence is required to be confirmed to CIMA as part of the registration of a private fund in the same structure), they will generally not require duplicative oversight or reporting.
The key features of the PF Law are:
- Private funds formed between now and August 7 will be required to register with CIMA by August 7, 2020.
- Existing private funds will be required to register with CIMA before August 7.
- Private funds that launch after August 7 will need to register within 21 days of their acceptance of capital commitments from investors for the purposes of investments. In practice it is expected most such funds will register at or prior to their first closing.
- CIMA have published registration forms and registration follows the well-established online submission procedure that is applicable to open-ended mutual funds. Funds registering before August 7, 2020, will not have to pay an annual fee for 2020.
Audited financial statements will have to accompany an annual return to CIMA and will need to be audited by a CIMA-approved Cayman-based auditor. Private funds registered before the transition deadline will be required to file their audited financial statements and annual return within six months of the financial year ending December 31, 2020 (if they have a December 31 year-end).
Private funds will be subject to requirements in relation to:
- Cash management
- Identification and record-keeping in respect of certain securities
In practice we expect that most fund sponsors will be able to discharge these obligations with minimal impact on their existing operations, relying on their internal capabilities or using existing outsourcing solutions and making certain straightforward disclosures to investors.
Changes to the scope of the Mutual Funds Law
At the start of this year the scope of the Mutual Funds Law was extended to require pooled vehicles with 15 or fewer investors which were previously exempt from registration, to register with CIMA.
Funds currently relying on the 15-investor exemption will therefore need to register with CIMA by August 7, 2020, either under the long-established registered mutual fund regime, or under the new “limited scope” mutual fund regime.
That in turn will require its directors to register with CIMA (should the vehicle be an exempted company or a limited liability company) as well as requiring its audit to be filed with CIMA each year and signed off by the Cayman Islands branch of the relevant auditor.
Where these closely held investor vehicles have master funds established in the Cayman Islands, these master funds may also be required to register with CIMA.
AIMA thanks Ed Pearson of Walkers and Matt Taber of Harneys for their input. Alternative Investment Management Association. www.aima.org
CIMA, AIMA Cayman, Private Funds Law, Funds, Andrew Linford, Honourable Tara Rivers, Cayman Islands