The new regulations apply to traditional and crypto funds
Recently, the Cayman Islands Government Ministry of Financial Services and Home Affairs approved and adopted the Private Funds Law, 2020 and the Mutual Funds (Amendment) Law, 2020. The goal of the laws is to modernize regulation for open-ended funds (i.e. mutual funds, close-ended funds and private funds), in the Cayman Islands while providing transparency for investors and managers of Cayman Islands investment funds and enhancing the regulatory and supervisory framework.
If your fund is a traditional asset fund or a crypto fund, these new laws apply to you. However, it is premature to forecast how these laws will affect existing funds and fund managers, as well as its impact on new fund launches.
The most significant part of the laws enacted on February 7, 2020 is to place previously non-registered and unregulated private funds, as well as certain mutual funds (i.e. fifteen or fewer investor criteria), under the jurisdiction of the Cayman Islands Monetary Authority (“CIMA”). These funds were previously beyond the scope of the Cayman Islands Mutual Funds Law.
What is a private fund? In Cayman law, a “private fund” means a company, unit trust or partnership whose principle 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 diversifying investment risks and generating profits, or investments appreciation to its investors. The Private Funds Law has three key focus which are (1) registration, (2) operational regulation and (3) supervision and enforcement.
On the other hand, a “mutual fund” is similar to a private fund, but the primary difference is a mutual fund is an open-ended fund for which redemption is allowed like a hedge fund.
Private Funds Law, 2020:
- Provides new legislation for the registration and regulation of most private, closed-ended funds formed in the Cayman Islands and setting the supervisory and enforcement powers of the Cayman Islands Monetary Authority (CIMA) in relation to such private funds.
- Provides transitional rules whereby the private funds carrying on or commencing to carry on business in or from the Cayman Islands on or before August 7, 2020, have a six-month period (from February 7, 2020) to comply, or such further period as may be specified by CIMA. Any private funds launched after February 7, 2020 is required to register with CIMA.
- Prohibits unregistered private funds from conducting business in the Cayman Islands, but allows solicitation of eligible investors, including receipt of subscription documents. However, upon receipt or acceptance of investors’ capital commitments, these private funds must register with CIMA within 21 days of receipt of such capital contributions.
- Requires private funds to file audited accounts (financial statements) confirmed by a local audit firm for the first full financial year following registration. For example, a private fund with a year-end of December 31, 2020, must submit its audited financial statement by June 30, 2021.
- Requires private funds to file its fund annual return (FAR) with their audited financial statements within six months of the funds’ fiscal year end.
- Requires private funds to maintain adequate records and make records accessible, as required by Section 34 of the Monetary Authority Law.
- Requires private funds to have in place an investment valuation policy and procedure.
- Requires private funds to appoint an individual to hold the custodial fund assets and verify the fund holds title to other assets. The person can be a custodian, or, if the private funds let CIMA know, the private funds can appoint an administrator, fund manager or an independent third party to perform such verification.
Note: The Cayman Islands Government indicated there will be no fee charged upon initial registration of a private fund on or before August 7, 2020. Thereafter, registration and annual fees will be charged at rates to be advised by the Cayman Islands Government. Other fees may apply.
Mutual Funds (Amendment) Law, 2020:
- Requires mutual funds, formed in the Cayman Islands, which have 15 or fewer investors who have the ability to appoint or remove the operator of the fund, to register with CIMA. These mutual funds were previously referred to as “exempted funds” or “section 4(4) funds.”
- Provides transitional rules whereby mutual funds carrying on or commencing to carry on business in or from the Cayman Islands on or before August 7, 2020, have a six month period (from February 7, 2020) to comply, or such further period as may be specified by CIMA. Any mutual funds launched after February 7, 2020 is required to register with CIMA.
- Requires mutual funds to file audited accounts (financial statements) confirmed by a local audit firm for the first full financial year following registration. For example, a mutual fund with a year end of December 31, 2020, its audited financial statements are due by June 30, 2021.
- Requires mutual funds to file its fund annual return (FAR) with their audited financial statements within six months of the funds’ fiscal year end.
- Existing Section 4(4) mutual funds may need to review the current makeup of their board of directors or governing bodies to ensure the mutual funds have at least two natural persons as operators and that these persons are registered under the Directors Registration and Licensing Law, 2014.
BPM LLP is a CIMA-approved local, independent auditor in the Cayman Islands and can assist with your needs. We have experience working with Cayman Islands-based funds and CIMA registered funds. Please contact Mark Li, Financial Services Industry Group Partner, as we work through the transition with you and your fund.