On 7 February 2020, the Cayman government published the Private Funds Law, 2020, the Private Funds (Savings and Transitional Provisions) Regulations 2020, the Private Funds Regulations,2020 (together, the “Law”) and the Mutual Funds (Amendments) Law, 2020. The Law is intended to require certain close-ended funds to register with the Cayman Islands Monetary Authority (“CIMA”). As a supporting measure, the Mutual Funds (Amendment) Law, 2020 proposes to cancel the exemption from registration granted by the earlier Mutual Funds Law to specific open-ended funds.
The Law shall come into force on 7 February 2020. A private fund that begins to carry on business in or from the Islands at any time during the period of six months beginning on date of commencement of that Law may continue to carry on business in or from the Islands without complying with that Law until 7th August, 2020 or such further period as may be specified by the Authority.
We set out below the key features of the new legislation, please contact us for further detailed information.
The Private Funds Law, 2020
1.Regulatory scope
The majority of closed-ended funds with more than one investor are likely to come within the scope of the Law. Specifically, the Law applies to private funds that is carrying on business or attempting to carry on business in or from the Cayman Islands.
'Private fund' means a company, unit trust or partnership whose principal business is the offering and issuing of its investment interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors to receive profits or gains from such entity’s acquisition, holding, management or disposal of investments, where:
a) the holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments; and
b) the investments are managed as a whole by or on behalf of the operator of the private fund, directly or indirectly, for reward based on the assets, profits or gains of the company, unit trust or partnership.
The Law makes special provisions for “Alternative investment vehicle”, which means a company, unit trust, partnership or other similar vehicle that:
a) is 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; and
b) only has as its members, partners or trust beneficiaries, persons that are members, partners or trust beneficiaries of the private fund.
It worth noting that the requirements about audit, valuation, safekeeping of fund assets,cash monitoring and identification of securities applied to private funds shall not apply to such alternative investment vehicle.
2. Registration with CIMA
Under the Law, newly established private funds are required to submit an application to register with CIMA within 21 days after it accepts capital commitments from investors. A private fund may not accept capital contributions from investors until it is registered by CIMA.
In order to apply to be registered with CIMA, a private fund need to: (i) submit an application for registration to the CIMA; (ii) file the prescribed details with the CIMA; (iii) pay the prescribed annual registration fee. Exactly what each fund is required to submit will be confirmed by CIMA in due course.
A restricted scope private fund that applies for registration may elect as part of its registration application to be registered as a registered restricted scope private fund. And the“restricted scope private fund” means a private fund:
a) that is an exempted limited partnership;
b) that is managed or advised by a person who is licensed or registered by the Authority or authorized or registered by a recognized overseas regulatory authority; and
c) in which all of the investors are non-retail in nature, being either high net worth persons or sophisticated persons.
The restricted scope private fund may enjoy certain exemption in the future, but specific applicable rules are not published yet.
In addition to the initial registration, any material change of information submitted by the fund to CIMA shall be filed with CIMA within 21 days.
3. Accounts, annual audit and annual return
Private funds need to prepare accounts in accordance with the International Financial Reporting Standards or generally accepted accounting principles of the United States of America, Japan, Switzerland or a non-high risk jurisdiction and an audited set of accounts must be filed with CIMA within six months of the fund's year end. The audit needs to be undertaken by a Cayman Islands auditor approved by CIMA. In addition to, a private fund shall, in respect of each financial year of the private fund, submit an annual return.
4. Valuation
Private funds must have appropriate and consistent procedures for the proper valuation of its assets. Valuations must be carried out at least once a year. Valuations must be carried out by an independent third party, an administrator or the manager or operator of the fund provided the valuation function is independent of the management function CIMA have the right to require the valuation result to be verified by an independent auditor or other third party.
5. Safekeeping of fund assets
Private funds must appoint a custodian to hold the custodial fund assets. The custodian must verify that the fund holds title to any other fund assets and maintain a record of those assets. A fund may notify CIMA that it is neither practical nor proportionate to appoint a custodian having regard to the nature of the assets which it holds. In this case, the fund must appoint an independent third party or the manager or operator of the fund to carry out the title verification function. If this function is carried out by the manager or operator, it must be independent from the portfolio management function and potential conflicts of interest must be properly identified, managed, monitored and disclosed to investors.
6. Cash monitoring
Private funds must appoint a person to monitor its cash flow, ensure all cash has been booked in cash accounts opened in the name, or for the account of, the private fund and ensure that all payments made by investors have been received. An independent third party may be appointed to perform this role. The manager or operator of the fund may also be appointed provided this function is independent of the management function or that potential conflicts of interest are properly identified, managed, monitored and disclosed to investors.
7. Identification of securities
Private funds which regularly trade securities or hold them on a consistent basis must maintain a record of the identification codes of the securities it trades and holds. This information must be made available to CIMA upon request.
8. Supervision and Enforcement
The Law provides CIMA with new supervisory and enforcement powers to ensure the requirements of the Law are complied with. Failure to comply with the provisions of the Law may result in the imposition of fines on a fund and / or its operators.
The Mutual Funds (Amendments) Law, 2020
Cayman Islands’ mutual funds which were exempt from registration with the CIMA under Section 4(4) of the Mutual Funds Law (2020 Revision) on the basis that (i) the shares or interests are held by not more than fifteen investors, (ii) a majority of whom are capable of appointing or removing the operator of the fund ("Section 4(4) Funds") , which are required to register with CIMA and fall within CIMA’s regulatory purview now.
Each Section 4(4) Fund also be required to have its accounts audited annually by a firm of auditors on the CIMA approved list of auditors and file such audited accounts with CIMA within six (6) months of the end of each financial year of that Fund (along with a Financial Annual Return in CIMA's prescribed form).
It’s worth noting that more details will follow. We will continue to keep you advised of developments in this regard.