The Government of the Cayman Islands has just published a Private Funds Bill and a proposal to amend the Mutual Funds Law (2019 Revision) as a result of pressure from the European Union and other international bodies. The idea is to align the Cayman Islands' regulatory regime for investment funds with those of other jurisdictions.

Cash monitoring. A private fund must appoint a person to: (i) monitor the cash flows of the private fund; (ii) ensure that all cash has been booked in cash accounts opened in the name, or for the account, of the private fund; and (iii) ensure that all payments made by investors in respect of investment interests have been received. To the extent that such a cash monitoring function is not performed by an administrator, custodian or another independent third party, the cash management function established by the manager or operator of the private fund must be independent from the portfolio management function or the potential conflicts of interest must be properly identified, managed, monitored and divulged to investors.

The identification of securities. A private fund that regularly trades in securities or holds them consistently must keep a record of the identifying codes of the securities that it holds and in which it trades and must make this record available to CIMA upon request.

Although the Bill does not say this, CIMA has said that it will require all private funds to have at least two natural persons acting as, or for, the operator (board of directors, general partner etc.) of the private fund.

All operating conditions and procedures ought to be appropriate and proportionate according to the scale and operations of a private fund. If independent third parties are not paid to carry out the above functions, CIMA may call for third-party verification. The Bill says that CIMA's supervision and monitoring of private funds, including the above operating conditions, ought to be risk-based.

The Bill suggests that "alternative investment vehicles" ought not to have to comply with these operating requirements. The Government intends to publish its definition of that term in subsequent regulations.

Does the Bill contemplate different categories of private fund?

The Bill mentions a new type of fund that it calls a "restricted-scope private fund." The Government has not yet decided how a private fund might qualify for this category. It has also not decided on the effect that this type of fund might have on the registration and continuing obligations otherwise applicable to private funds.

The risk-based supervision requirement may allow for CIMA to adapt the registration and supervision requirements for funds with particular profiles.

What do we know about timing and fees?

The Bill proposes to allow the Cayman Islands Government to decide when it, or various sections of it, will come into force and to make regulations for transitional provisions. The Government has stressed that it knows that a smooth and successful transition for existing private funds will require preparation and time.

Details of fees and prescribed forms will also be covered by separate regulations.

The Mutual Funds (Amendment) Bill 2020

Who is to be affected?

The draft amendment, if passed in its present form, will affect open-ended funds that do business in or from the Cayman Islands that were previously exempt from CIMA regulation by section 4(4) Mutual Funds Law (s4(4) funds). This section currently exempts any mutual fund whose equity interests are held by not more than fifteen investors, a majority of whom are capable of appointing or removing the fund's operator, from the need to register.

What is to be required of affected funds?

According to the amendment, a s4(4) fund should be required to register with CIMA by:

(i) sending it a certified copy of its constitutive documents which specify that a majority of investors in number are capable of appointing or removing the operator of the fund;
(ii) sending it such other information as may be required in the prescribed form; and
(iii) paying the prescribed registration fee.

According to the current draft amendment, a s4(4) fund will not have a prescribed minimum initial investment amount nor any obligation to have an offering document or send one to CIMA.

It is expected that s4(4) funds will be required to have at least two people acting as, or for, the operator (board of directors, general partner etc), and that these people will have to register under the Directors Registration and Licensing Law (Revised).

Will there be any audit requirements for s4(4) funds?

A s4(4) fund will be required to have its accounts audited annually by an auditor approved by CIMA.  The MFL amendment suggests that the accounts should be prepared and audited in accordance with International Financial Reporting Standards or US, Japanese or Swiss GAAP or GAAP of a non-high risk jurisdiction.

What is the anticipated timing for the MFL amendment?

The Government has not commented on the likely commencement date for the MFL amendment but the amendment itself suggests a six-month transitional period for compliance once it is in force.

* James Bergstrom can be reached on +1 345 815 1855; Angus Davison can be reached on +1 345 815 1788; Joanne Huckle is on +1 345 815 1895; Bradley Kruger is on +1 345 815 1877; Nick Rogers is on +1 345 815 1844; Justin Savage is on +1 345 815 1816; and Giorgio Subiotto is on +1 345 815 1872; Kate Hodson is on +852 3656 6049; Nicholas Plowman is on +852 3656 6014.