How Cayman Will Change Investment Funds Classification
FAS CPA & Consultants
Authorities in the Cayman Islands notified the financial services industry of pending changes to the regulation of investment funds. The Government’s Private Funds Bill, 2020 (Private Funds Bill), and its Mutual Funds (Amendment) Bill (2020) enhanced the oversight of close-ended and open-ended funds (Investment Funds) and were became law on January 30th, 2020.
Private Funds Bill
This Bill goes beyond the scope of the current Mutual Funds Law (MFL) by establishing a framework for monitoring closed-ended funds.
⇒ It strengthens investor confidence in Cayman Island Investment funds vehicles.
⇒ Ensures the longevity of the Cayman Islands as the preeminent investment funds jurisdiction.
In its execution, the Bill updates the investment fund framework but remains mindful of industry realities. It also incorporates EU requirements for investment fund oversight.
The Private Funds Bill is based on three foundations:
Registration
⇒ All current vehicles that fall within the scope of the definition and section 3(1) of the Bill must register with CIMA before August 7th, 2020, after which they are subject to the regulatory obligations.
Exemptions to this requirement include:
⇒ Regulated Mutual Funds.
⇒ Regulated EU-connected Funds.
⇒ Non-Fund Arrangements.
⇒ Certain Overseas Funds that solicit the Cayman Island residents for investments.
Private Funds have to provide information upon registration, and pay an annual fee, as well as adhere to yearly audit and return requirements. Records must be retained and include ongoing obligations in respect of the valuation of assets, safekeeping, cash monitoring, and identification of assets.
Private Funds who are not registered yet, must stop all attempts to carry on with business in the Cayman Islands and refrain from receiving any capital contributions from investors pending their registration.
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Operational Regulation
Registered Private Funds must comply with ongoing obligations to meet best practices and fulfill the needs of sophisticated global institutional investors.
Further requirements include:
⇒ Safekeeping.
⇒ Title Verification.
⇒ Cash Monitoring Services.
⇒ Permit the funds to choose the service provider who will provide required valuations, custody, title verification, and cash monitoring services as long as the administrator, custodian, or any third party appointed is independent of the fund’s manager or operator. If a manager, operator, or any affiliates are selected, they have to identify, monitor, manage, and disclose any conflicts of interest.
Supervision and Enforcement
The Bill authorizes CIMA to administer the law, including the examination of registration applications and the determination of application parameters and informational requirements.
When CIMA determines that a private fund is noncompliant with obligations, it can enforce a particular measure, including the performance of an audit or a once-off periodic report. CIMA can impose fines per the seriousness of the provisions breached.
In situations of dishonesty and harmful business practices, CIMA may impose operational restrictions and even appoint an advisor or controller to direct the fund or to deregister it.
CIMA notified the industry that it would apply a risk-based approach in its regulatory oversight.
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Mutual Funds Bill
This Bill regulates certain mutual funds not yet covered by the MFL. Funds that meet the investor criteria exemption set out in section 4(4)(a) of the MFL will now be required to register with CIMA and afterward will be subject to regulatory obligations.
The exemption under MFL from registration requirements for some overseas funds that solicit Cayman Islands residents for investments remains in place.
All regulated mutual funds must provide CIMA with information upon registration and pay an annual fee. It has to comply with yearly return requirements and retain accessible records. CIMA-approved auditors must undertake annual audits of regulated funds per IFRS or GAAP of the US, Japan, or Switzerland or any other non-high-risk jurisdiction.
Implementation
The Cayman Islands Government notified the industry that it is aware of the fact that a successful transition will require preparation and time. New entities must adhere to the prescribed process. For existing funds, the government announced a grace period of six months. As for the local audit requirement and the electronic submission of the Fund Annual Return (FAR) requirement, this is postponed until six months after the first full fiscal year after registration. For most funds with a December 31st, year-end, the first filing will only be due by June 30th, 2022, for the year ending December 31st, 2021.
Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.
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