The Cayman Islands Fund Administrators Association is one of the leading voices of the Cayman funds industry. Darren Stainrod explains.
The Cayman Islands Fund Administrators Association (CIFAA ) is a forum for administrators with a physical presence on the Island to meet, network, discuss global and local industry issues, promote the industry, provide training programmes locally, and liaise with the Cayman Islands Monetary Authority (CIMA ) and the Cayman government on draft regulations and legislation.
There is also a social element: various events are held during the year, including an annual golf tournament (which a local law firm had the cheek to win last year). In 2011, CIFAA took an evolutionary step forward by becoming an incorporated legal entity, helping it to crawl out of the morass of unincorporated anonymity and into the forest of regulation that has sprung up around the globe.
From Europe, the Alternative Investment Fund Managers Directive (AIFMD ) continues to take shape as European nations work on enacting the required legislation by the July 2013 deadline. From a Cayman perspective, the jurisdiction continues to strengthen its regulatory framework and has signed tax information agreements with most of the world’s developed nations, as well as a memorandum of understanding with the US Securities and Exchange Commission (SEC), as it continues to position itself to be accepted as a third country if, and when, AIFMD is extended to third countries in 2015.
In the meantime, the tsunami of re-domicilings from Cayman to more AIFMD -relevant jurisdictions that was anticipated by some observers remains, at most, a small trickle. Undertakings for Collective Investment in Transferable Securities (UCITs) have grown in popularity following the global financial crisis, but not noticeably at the expense of the hedge fund industry, which is enjoying a record high tide at the time of writing. Cayman itself continues to capture the lion’s share of the market and remains the jurisdiction of choice in the industry.
While CIFAA watches these developments in Europe with interest, it is monitoring developments from the US more actively. The Volcker rule has affected our bank members as they begin to shut down their proprietary trading desks. This has seen some talent flow into the hedge fund space and spawn new funds, but barriers to entry and the difficulty of raising capital for new managers in an industry undergoing noticeable consolidation has lured most of this talent to the comfort of the larger and more established hedge funds.
Dodd-Frank, and the new SEC requirements for the registration of investment managers and advisors of private funds, have affected some CIFAA members which have been busy developing solutions to assist their newly registered clients with completing Form PF (private fund).
By far the most significant of the recent global developments to the CIFAA membership has been the US Foreign Account Tax Compliance Act (FATCA). No doubt other nations will follow suit, with the EU
Savings Directive possibly morphing into something similar (we already have Switzerland agreeing to compensatory tax payments and withholding arrangements with the UK and Germany). Although the FATCA deadlines have been extended, the rules have been softened and the Internal Revenue Service has assured us that it is not a witch hunt, the affect on administrators is challenging nonetheless.
Not only do thousands of existing investors need to be categorised and assessed, data-scrubbed and searched for indications of US investors, but systems and processes need to be modified to ensure ongoing compliance. This is a huge, but largely one-off, exercise. The bigger challenges could prove to be in meeting the requirements of calculating the US -sourced income and pass-through payment percentage, withholding tax on recalcitrant investors (if, indeed, any are allowed to remain in the funds) and reporting to the IRS.
“Apart from the registered office of the company and the principal office of a registered fund being in Cayman, the only requirement is for the audit sign-off to be performed in Cayman.”
Of all the international regulations and legislation, it is FATCA that CIFAA has spent the most time on, keeping members informed as new developments arise, discussing the practicalities of implementation and hosting events where subject matter experts give presentations on FATCA issues and field questions from the members. For those CIFAA members that don’t administer US entities already (and many of us do) FATCA is possibly their first experience of tax issues since they left their home country. It’s true that death and taxes are the only two inevitable things in life.
While the explosion of global regulatory change in the post-credit crisis era has certainly given CIFAA much to focus on, this has been largely in terms of issues surrounding implementation of the new rules. Other associations or groups with larger resources and a more global reach, such as the Alternative Investment Management Association, are better placed to lobby regulators along with the Cayman government and CIMA. CIFAA members therefore seek to influence pending regulations and legislation that affect the global industry through these other routes.
However, in the case of Cayman laws and regulations, CIFAA is more directly involved in consultations with the Cayman authorities at the drafting and review stage. Recently this has included the registration of Master Funds, as Cayman looks to tighten its regulatory framework. In addition to the lengthy discussions that took place between the announcement of the rule in the summer of 2011 and its eventual passage into law at the end of the year, there was also a lot of input as to the Form MF4 which the Master Funds must use. The initial proposed version of the Mutual Funds Law (2011 Revision) included several other bills in addition to the registration of Master Funds, that were subsequently amended, delayed or removed, due partly to the feedback provided by CIFAA during the consultation period.
This plethora of regulatory change in Cayman is due to its positioning itself to be a globally more accepted financial jurisdiction—in particular, by the EU. However, it must walk the tightrope between having a strong regulatory framework that passes international acceptance without damaging the industry-leading products that it has developed over the years.
One of the strengths of the Cayman fund product is undoubtedly the flexibility it allows in where the service providers are located. Apart from the registered office of the company and the principal office of a registered fund being in Cayman, the only requirement is for the audit sign-off to be performed in Cayman (although the bulk of the audit work can be done elsewhere). There are audit firms, law firms, independent directors and, of course, investment managers and advisors all over the world that rely on Cayman-domiciled funds for a living.
However, probably the biggest trend in this respect over the past five years has been for administration services to migrate from Cayman. The trend started before the credit crisis as the booming demand for administration services stretched the Island’s ability to absorb such rapid growth, especially with a small domestic workforce and immigration laws designed to protect them that made it hard to scale up quickly.
Then, as the crisis hit, causing poor hedge fund returns and outflows fuelled by the Madoff fraud, there was a global squeeze on administration fees. At the same time the costs associated with doing business increased as the Cayman government, like governments around the world, looked to local industry to help balance the budget. This combination of reduced fees, increased costs and a rise of educated workers in cheaper locations drove much of the work to other domiciles.
This trend was helped along by the industry evolving to a more daily processing model, utilising a global operating framework that arbitrages across different time zones, all made possible by technology advances that allow teams to work together without being physically located together. Having said that, there are certain structures that still work very well when serviced from Cayman, such as fund of funds, private equity and high-touch complex funds that need attention to detail rather than a global framework. As long as this continues to be the case CIFAA will be here to support the industry, liaise with government and keep its members informed of developments.
One thing we can always rely on is a steady supply of professional accountants attracted by zero income taxes in a tropical paradise coupled with challenging work experience in a pulsating industry.
Darren Stainrod is chairman of the CIFAA. He can be contacted at: firstname.lastname@example.org
Darren Stainrod is head of UBS Fund Services, Americas, and managing director of UBS Fund Services (Cayman) Ltd. He is responsible for the overall management and development of the fund services business in the Americas region. The views and commentary in this article are those of the CIFAA chairman and not of UBS.