Marc Parrott examines the constant efforts of the Cayman Islands to maintain its world-wide appeal to sophisticated financial industry participants by constantly evolving its regulatory system.
The Cayman Islands’ reputation as a world-class financial centre is well known.
It continues to be known as a leading jurisdiction in the offshore banking, investment funds, captive insurance and structured finance sectors and also appeals to clients seeking offshore aircraft and vessel registration, private trusts and company and partnership holding structures.
The jurisdiction is not, however, complacent and makes constant efforts to maintain its appeal to sophisticated financial industry participants. This has led to a number of legislative and regulatory changes to ensure that the Cayman Islands remain highly competitive against other offshore jurisdictions. Some of the changes in this constant evolution are discussed below.
Mutual Funds Law
First announced in June 2011, after a period of consultation between the Cayman Islands’ Government and financial services industry participants over the precise wording of draft legislation, the proposal to require master funds in which other Cayman Islands’ regulated feeder funds invest to become separately registered with the Cayman Islands’ Monetary Authority (CIMA) ultimately became law by the passage, and implementation in December 2011, of the Mutual Funds (Amendment) Law 2011.
Prior to this, such master-feeder structures were almost universally structured in such a way that only the Cayman domiciled feeder fund – and not the master fund - would need to be registered with CIMA. The legislative amendment resulted in a significant number of existing Cayman domiciled master funds being required to register with CIMA. However, existing master funds were provided a grace period within which to comply and become CIMA registered.
Unfortunately, due to some of its defined terms, the initial implementation of the Mutual Funds (Amendment) Law 2011 led to some industry confusion over the specific circumstances in which a master fund would be required to register. As a result of this, a further period of consultation between the Cayman Islands’ Government and financial services industry participants led to the eventual passage, and implementation in January 2013, of the Mutual Funds (Amendment) Law 2012. This further legislative amendment altered certain defined terms in the Mutual Funds Law and results in a more appropriate application of the law to Cayman domiciled master funds.
In brief, master funds are now required to register with CIMA in circumstances where they: (a) issue redeemable shares; (b) have one or more CIMA regulated feeder funds investing into them either directly or indirectly through an intermediary entity established to invest in such master fund; and (c) hold investments and conduct trading activities for the principal purpose of implementing the overall investment strategy of a regulated feeder fund.
Master funds that are required to register with CIMA are required to make filings (using Form MF4), pay an annual fee of CI$2,500 (US$3,048), and have a CIMA-approved auditor file their audited financial statements annually as part of their Fund Annual Return (FAR) filings, generally within six months of their fiscal year end.
Notwithstanding the requirement that they separately register with CIMA, a Cayman domiciled master fund is still not required to prepare or file any offering document separate from the offering document of any relevant CIMA-regulated feeder fund.
It is also notable that CIMA recently completed its move to a system of electronic filing of both feeder fund and master fund registrations, known as “CIMA-Connect”. It is expected that this electronic filing will enable the jurisdiction to provide an even more efficient and timely service in affecting investment fund registrations.
Of less significance are a number of recent changes to annual fees payable by entities domiciled in the Cayman Islands. In the case of CIMA-registered feeder funds the annual fees increased from the previous CI$3,000 (US$3,659) per year to CI$3,500 (US$4,269).
Corporate Governance and Regulated Mutual Funds
CIMA recently began a consultation process with financial industry participants on proposals that aim to enhance and clarify appropriate corporate governance and transparency standards relating to the regulated mutual funds sector. CIMA intends to use the feedback from this consultation process to formulate policy regarding potential future regulation of corporate governance and transparency standards for Cayman Islands regulated mutual funds.
CIMA has stated in connection with this consultation process:
“…the Authority is proposing to develop a public database providing high level information on regulated [mutual fund] entities. Our proposals seek to provide limited information that facilitates the due diligence process [for potential fund investors] …
The proposals [also] include a recommendation to amend the Companies Management Law to enable the regulation and supervision of individuals offering themselves or acting as directors of six or more Cayman Islands-registered [mutual fund] entities … the regulatory framework should allow for a supervisory structure that adequately regulates the standard of services being provided [by mutual fund directors].”
Financial industry representatives will be responding in detail to the consultation and at this point it is too early to speculate on the changes that may ultimately occur in respect of the matters addressed in the CIMA consultation process. However, it is expected that the Government and CIMA will listen to industry concerns and arrive at proportionate and appropriate solutions.
Exempted Limited Partnership Law
Whilst the changes to the Mutual Funds Law and the CIMA consultation process in relation to corporate governance and transparency standards for regulated mutual funds were the main focus of recent attention for sponsors and investment managers of open ended investment funds, one of the recent changes to the Exempted Limited Partnership Law will be of more interest to sponsors, investment managers and general partners of closed ended Cayman Islands’ private equity funds. Of course, exempted limited partnerships are also used on a regular basis as master funds in open ended investment fund structures.
For a long time there has been a disconnect between the ability of a Cayman Islands’ exempted company to keep its register of members (ie, shareholders’ register) either at its registered office in the Cayman Islands or elsewhere and the requirement for a Cayman Islands’ exempted limited partnership to keep its register of partnership interests at its registered office in the Cayman Islands.
In the context of investment funds, where the register of partnership interests is actually maintained by an administrator or by the general partner itself in an onshore locale, inadvertent breaches of the Exempted Limited Partnership Law have occurred.
This unfortunate, and often overlooked, point of differentiation between exempted companies and exempted limited partnerships has now been addressed by the recent passage of the Exempted Limited Partnership (Amendment) Law 2013. An exempted limited partnership is now able to maintain its register of partnership interests at its registered office in the Cayman Islands or at such other place as the general partner may determine.
Whilst this is a fairly discrete technical amendment, certainly relative to the wholesale overhaul of the regulation of Cayman Islands’ domiciled master funds, this amendment does show that the Cayman Islands’ regulatory framework is adaptive to providing required flexibility to reflect the real world operation of these Cayman Islands’ structures.
Further miscellaneous changes were made to ensure that a general partner maintaining the register of partnership interests (or the books of account of the limited partnership) outside the Cayman Islands would be required to provide a copy of this to the relevant Cayman regulator in circumstances where inter-regulator disclosure is required under a Tax Information Exchange Agreement (TIEA).
The annual fees payable to the Registrar of Limited Partnerships were also increased to CI$2,000 (US$2,439) per year (or, alternatively, to CI$1,200 (US$1,463) per year where the limited partnership is also registered with CIMA under the Mutual Funds Law).
Tax Information Exchange Agreements
In addition to the types of legislative and policy changes, which are designed to ensure that the Cayman Islands’ regulatory framework remains flexible and yet robust, the Cayman Islands continues to exhibit its willingness to cooperate as a good global citizen by the signing of further TIEAs with various G20 nations, EU Member States and members of the Organisation for Economic Cooperation and Development.
Further information regarding the TIEAs executed by the Cayman Islands at this time can be found at the website referenced in the Cayman Islands fact file in this publication. It is this willingness to engage in best practices in the fight against unlawful tax evasion that continue to ensure that the Cayman Islands is well regarded by sophisticated participants in the financial sector, and their regulators, on a global basis.
The Future for the Cayman Islands
There are a number of anticipated changes to the regulatory landscape in Cayman worth mentioning. Financial industry participants continue to watch closely as CIMA liaises with onshore regulators regarding the implementation of the Alternative Investment Fund Managers Directive (AIFMD) in the European Union and the Foreign Account Tax Compliance Act (FATCA) in the United States.
The Cayman Islands continues to show its willingness to evolve and adapt to meet the demands of sophisticated participants in the financial sector on a global basis, as it has now done successfully for over forty years. As the jurisdiction continues to respond to the changing landscape of client demands, onshore regulatory requirements, and the challenges provided by competing jurisdictions, the Cayman Islands will continue to evolve to maintain its leading role as a global financial centre.
Marc is a Senior Associate with Campbells specialising in the area of investment funds of all types, including private equity funds and hedge funds. Marc also advises clients on various other aspects of mainstream corporate, trusts and finance law. He has significant experience in the Cayman Islands having previously practiced with Walkers. In addition, Marc has considerable top-tier international experience having practiced in Australia with Freehills, in London with Linklaters and in Dubai with King & Spalding.