Mutual Funds in the Cayman Islands

I. Overview:

The Mutual Funds Law (2020 Revision), as the principal Cayman Islands legislation applicable to investment funds, regulates the establishment, administration and/or management of mutual funds in the Cayman Islands.

The Mutual Funds Law defines a “mutual fund” as (i) a company, unit trust or partnership (ii) that issues equity interests, the purpose or effect of which is the pooling of investor funds (iii) with the aim of spreading investment risks and enabling investors in the mutual fund to receive profits or gains from the acquisition, holding, management or disposal of investments.

“Equity interest” is further defined to include a share, trust unit, partnership interest which is redeemable or re-purchasable at the option of the investor. Accordingly, the Mutual Funds Law applies only to open-ended funds since interests in closed-ended funds are not redeemable at the option of the investor, which shall be governed by the Private Funds Law (2020) of the Cayman Islands.

To comply with the Mutual Funds Law, three categories of mutual funds are required by the terms of the Mutual Funds Law to subject themselves to the regulation by the Cayman Islands Monetary Authority (the “CIMA”). Such mutual funds are referred to as: (a) the licensed fund; (b) the administered fund; and (c) the registered fund. Further information and key requirements about compliance options is set out below.

II. Categories of Regulated Mutual Funds:

A. Licensed Funds – Section 4(1)(a) of the Mutual Funds Law

This is the least common category of mutual funds with fewer than 1% of regulated mutual funds being registered under this category since it involves an approval process by CIMA such that the mutual fund itself is licensed. However, this category benefits large, well-known and reputable financial institutions, which do not propose to appoint Cayman Islands service providers. The grant of a Mutual Fund License is within the discretion of CIMA. In considering an application for a Mutual Fund License, CIMA may require such information as it may deem necessary to satisfy itself that: · each promoter of the applicant fund is of sound reputation; · the administration of the applicant fund will be undertaken by persons who have sufficient expertise to administer the applicant fund and who are fit and proper to be directors or, as the case may be, managers or officers in their respective positions; and · the business of the applicant fund and any offer of equity interests in it will be carried out in a proper way. B. Administered Funds – Section 4(1)(b) of the Mutual Funds Law To be approved as an administered mutual fund, the mutual fund must have a CIMA-licensed mutual fund administrator providing its principal office. An administered mutual fund is the only category of regulated mutual fund which must appoint a mutual fund administrator based in the Cayman Islands. Licensed funds and registered funds may appoint an administrator in any jurisdictions. An administered mutual fund will generally be used if the promoter prefers to have the minimum initial investment for its investors lower than the statutory requirement US$100,000 without going through the approval process. However, the additional role and responsibilities of the administrator may increase administration fees and limit choice. The administrator has the duty to satisfy itself of the matters similar to those that CIMA consider granting a Mutual Fund License (see above) and file a declaration with CIMA confirming that it is so satisfied as soon as the administrator starts to provide the principal office to the mutual fund. On an on-going basis, the administrator must also report to CIMA if it knows or has reason to believe that a mutual fund for which it provides the principal office, or a promoter or operator of such mutual fund (i) is or is likely to become unable to meet its obligations as they fall due, (ii) is acting in breach of the Mutual Funds Law or any other law or (iii) is carrying on business in a manner that is or is likely to be prejudicial to its creditors or investors. C. Registered Funds – Section 4(3) and 4(4) of the Mutual Funds Law A fund registered under Section 4(3) of the Mutual Funds Law is by far the most common category of regulated mutual fund. To qualify for a 4(3) registration, a mutual fund must have either: (i) the minimum initial investment amount purchasable by a prospective investor of US$100,000; or (ii) the equity interests listed on a stock exchange approved by CIMA. Certain mutual funds were previously exempted from regulation under Section 4(4) on the basis that they had 15 or fewer investors, a majority of whom could appoint or remove the operator of the mutual fund. However, the Mutual Funds (Amendment) Bill 2020 has abolished such exemption and the existing 4(4) funds need register with CIMA, but are not subject to subject to the minimum initial investment requirement of a 4(3) fund. Besides, a master fund, as a sub-category of registered funds under Section 4(3)(a)(iii), is a vehicle that facilitates the investment by a regulated feeder fund (which is a mutual fund regulated by CIMA that conducts more than 51% of its investing through a master fund) in the underlying assets pursuant to a particular investment strategy. A master fund must have either: (i) a minimum aggregate equity interest of US$100,000 purchasable by a prospective investor; or (ii) the equity interests listed on a stock exchange approved by CIMA. For example, a typical master-feeder structure may involve a Cayman Islands feeder fund and a U.S. feeder fund being set up to invest in a Cayman Islands master fund. If the Cayman Islands feeder fund were registered or licensed by CIMA, then the master fund would have to register as well. III. Requirements under the Mutual Funds Law:

A. Licensing and Registration Requirements An application form (APP-101-22 form for licensed/administered/registered fund and APP-101-53 form for master fund) for the licensing or registration of a mutual fund is required to be completed on the Regulatory Enhanced Electronic Forms Submission (the "REEFS") portal accompanied with required documents and certificates listed as follows: · a certified copy of certificate of incorporation or registration issued by the Registrar of Companies; · a letter of consent from the administrator; · a letter of consent from the auditor; · a copy of the offering memorandum; · completed and signed personal questionnaires, references and police certificates and other required documents or all operators (only for 4(1)(a) licensed fund); and · fee for licensed, administered and registered funds/fee for master fund; and · administrative fee for the filing an application form. The application for the Mutual Fund Administrator Licence is also required to be completed on the REEFS portal accompanied with other information and particulars to be contained in accordance with the Mutual Fund Administrators Licence (Applications) Regulations. · Administrator (Full) 1-50 mutual funds: APP-101-26a form · Administrator (Full) 51 or more mutual funds: APP-101-26b form · Administrator (Restricted): APP-101-27 form B. Continuing Obligations for Regulated Mutual Funds Under the Mutual Funds Law, the requirement that the 4(1)(a) licensed funds and the 4(1)(b) administered funds have their current offering documents filed with CIMA, and that the 4(3) registered funds have prescribed details in respect of their current offering documents filed with CIMA, is not satisfied unless: · each such offering document describes the equity interests in all material respects, and contains such other information as is necessary to enable a prospective investor to make an informed decision as to whether or not to subscribe for or purchase the equity interests; and · (where there is a continuing offering of equity interests and any promoter, operator of the fund is aware of any change that materially affects any information in the offering document (or the prescribed details) filed with CIMA), the fund files an amended offering document or amended prescribed details, as the case may be, incorporating that change within 21 days of the promoter or operator becoming so aware. Note that the 4(4) registered funds are not subject to the requirement to file an offering document with CIMA now; however, a copy of constitutional documents to show that the majority of investors in number can appoint or remove the operator is a must as part of the registration application. In addition, every regulated fund is required to file accounts audited by an CIMA-approved auditor, together with the annual return, within 6 months of the end of each financial year. Further, all regulated mutual funds must pay an application fee and an annual fee to CIMA on or before 15th January in each year.