Insight 1 April 2020

Cayman Islands Private Funds Law

On Friday, 7 February 2020, the Private Funds Law (PFL) went into force in the Cayman Islands, introducing new requirements for Private Funds to register with the Cayman Islands Monetary Authority (CIMA or the Authority).

Such funds will also be subject to supervision by CIMA and will need to comply with various governance and filing requirements. The initial transitional period for registration and compliance with the PFL will last until Friday, 7 August 2020.

Funds in scope

Both private funds incorporated or established in the Cayman Islands and those seeking commitments from Cayman investors are in scope. A private fund is defined as a company, unit trust or partnership whose principal business is:

  • Offering of, and participation by investors in non-redeemable investment interests.
  • Pooling of investor funds with the aim of spreading investment risks and enabling investors to receive profits or gains from such a vehicle's investment activity, where
  • holders of investment interests do not have day-to-day control over investment activities; and
  • investments are managed as a whole, by or on behalf of the fund operator, for reward based on the vehicle asset profits or gains.

The following entities are excluded from the scope of the PFL:

  • A person licensed under the Bank and Trust Companies Law (2018 Revision) or the Insurance Law 2010.
  • A person registered under the Building Societies Law (2014 Revision) or the Friendly Societies Law (1998 Revision).
  • Any non-fund arrangements[1].

Restricted Scope Private Funds

CIMA has included a sub-category of private funds called restricted scope private funds.

These are defined as a private fund under the below conditions:

  • It is an exempted limited partnership;
  • It is managed or advised by a person who is licensed or registered by the Authority, or authorised or registered by a recognised overseas regulatory authority; and
  • All of the investors are non-retail in nature, being either high-net worth individuals or sophisticated persons.

Section 2 of the Securities Investment Business Law (SIBL) defines a "sophisticated person" as a person who:

  • Is regulated by the Authority;
  • Is regulated by a recognised overseas regulatory authority;
  • Has securities listed on a recognised securities exchange; or
  • Who by virtue of knowledge and experience in financial and business matters can be reasonably regarded as capable of evaluating the merits of a proposed transaction, and
  • participates in a transaction with a value, in monetary amounts, of at least US $97,561 (CI$80,000) in the case of each single transaction.

Registration Requirements

An application for registration, along with a US $366 (CI$300) fee, must be submitted within 21 days after acceptance of capital commitments (for the purpose of investments) from investors.

Registration access is limited to CIMA’s REEFS portal and requires the following documents:

  • REEFS Application Form (APP-101-77)
  • Certificate of Incorporation/Registration (as applicable)
  • Constitutive Documents (Memorandum & Articles of Association/Trust Deed/Declaration of
  • Partnership (as applicable)
  • Offering Memorandum/Summary of Terms/Marketing Material (as applicable)
  • Auditor’s letter of consent (if a CIMA approved auditor has been appointed)
  • Administrator’s letter of consent (if applicable)
  • Structure Chart

Ongoing Obligations

The below table shows some of the main requirements of private funds.

Specific requirements surrounding these funds have not yet been published by CIMA. It is expected that guidance will be issued shortly after which an update to this commentary will be provided.

Requirement

Detail

Annual audits

All audited financial statements require a Cayman Islands auditor’s sign-off and must be submitted to CIMA within six months of fund financial year end. A list of CIMA approved auditors is in the “useful links” section.

Annual returns

Submission to CIMA of a Fund Annual Return (FAR) within six months of a private fund financial year end.

Annual fee

US $4,268 (CI$3,500) and US $305 (CI$250) for each alternative investment vehicle setup, up to a maximum of 25 vehicles. Annual fee for 2020 will be waived if the registration application is submitted before Friday, 7 August 2020; first annual registration fee falling due thereafter in January 2021.

Valuations

Funds must have appropriate and consistent valuation procedures. Assets must be valued at least annually. Valuations to be carried out by:

  • An independent qualified third party; or
  • The manager/operator itself (the valuation function must be independent from the portfolio management); or
  • An administrator appointed by the fund.

Cash monitoring

Appointment of a monitor to verify fund cash flows. Those qualified for this obligation can be:

  • an administrator, custodian or another independent third party; or
  • the manager/operator itself to ensure:
  • all fund cash has been booked appropriately, in cash accounts opened in the name, or for the account, of the private fund; and
  • all payments made by investors to the private fund in respect of investment interests have been received.

N.B. to the extent the manager/operator choses to fulfil this role, potential conflicts of interest must be identified, managed, monitored and disclosed to investors.

Safekeeping of assets

(Custodial Assets)

Appointment of a custodian to:

  • hold in custody, in defined segregated accounts opened in the name of or for the account of the private fund, all custodial fund assets; and
  • verify, based on information provided by the private fund and available external information, the private fund holds the title to all fund assets and maintains a record of all fund assets.

Safekeeping of assets

(Other Assets)

Where the private fund notifies that it is neither practical nor proportionate to appoint a custodian, having regarded the nature of the private fund and the type of asset it holds, the private fund shall appoint the following:

  • an administrator or another independent third party; or
  • the manager, operator or a person with a control relationship with the manager of the private fund, in order to verify, based on information provided by the private fund and available external information, the private fund holds title to all fund assets and maintain a record of all fund assets.

N.B. As with cash monitoring, the manager or operator can act as safekeeper provided title verification function is independent from the portfolio management function; potential conflicts of interest must be properly identified, managed, monitored and disclosed to the investors of the private fund.

It must be noted that such requirements shall not apply to an alternative investment vehicle, which is defined as a company, unit trust, partnership or other similar vehicle:

  • Formed in accordance with the constitutional documents of a private fund for the purposes of making, holding and disposing of one or more investments wholly or mainly related to the business of that private fund.
  • Only has as its members, partners or trust beneficiaries, persons that are members, partners or trust beneficiaries of the private fund.

How can SANNE help?

Through the acquisition of Inbhear, a leading CIMA licenced Cayman fund services business, SANNE now offers a fully integrated ‘one-stop-shop’ solution in an ever-changing Cayman environment. This acquisition will further enhance our ability to deliver fully integrated solutions to our clients, continuing the SANNE tradition of providing services which add value to our clients' offerings and building partnerships over the long term.

Our newly placed office ensures local capability and on-site expertise to assist you in dealing with your requirements under the PFL. Please do not hesitate to contact your relationship manager or one of our experts below to discuss how we can help prepare your fund entities for these changes in regulation.

[1] Full list provided in Appendix 1

Appendix I – Non fund arrangements

  1. pension funds;
  2. securitisation special purpose vehicles;
  3. contracts of insurance;
  4. joint ventures;
  5. proprietary vehicles;
  6. officer, manager or employee incentive, participation or compensation schemes, and programmes or schemes to similar effect;
  7. holding vehicles;
  8. individual investment management arrangements;
  9. pure deposit-based schemes;
  10. arrangements not operated by way of business;
  11. debt issues and debt issuing vehicles;
  12. common accounts;
  13. franchise arrangements;
  14. timeshare and long-term holiday product schemes;
  15. schemes involving the issue of certificates representing investments;
  16. clearing services;
  17. settlement services;
  18. funeral plan contracts;
  19. individual pension accounts;
  20. structured finance vehicles;
  21. preferred equity financing vehicles;
  22. a fund of whose investment interests are listed on a stock exchange (including an over-the-counter-market) specified by the Authority by notice in the Gazette;
  23. occupational and personal pension schemes;
  24. sovereign wealth funds;
  25. single family offices.

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