Changes to regimes for closed-end and 4(4) funds in the Cayman Islands
The Cayman Islands has recently introduced legislation that will have a substantial impact on closed-end and 4(4) funds. Closed-end funds, being funds where the investors cannot redeem at their own discretion, will need to register with the Cayman Islands Monetary Authority (“CIMA”) and are subject to ongoing obligations as well.
Similar measures are introduced for 4(4) funds, which funds may have a maximum of 15 investors, the majority of which can remove the fund’s principals. With the introduction of both regimes, the Cayman Islands is responding to recommendations from the EU and other jurisdictions.
The new closed-end funds regime is implemented by way of the Private Funds Law 2020. As for 4(4) funds, the new regime is introduced in the Mutual Funds Law via the Mutual Funds (Amendment) Law, 2020. Both have become effective as of February 7, 2020.
The regime for 4(4) funds will remain in existence next to the regimes for 4(1)(a), 4(1)(b) and 4(3) funds. Going forward, 4(4) funds will need to register with CIMA and will need to file (i) a certified copy of its constitutional documents which evidences that a majority of the investors is able to appoint or remove the fund’s principals and (ii) certain other particulars. An offering document and / or any changes thereto are not required to be filed however.
An annual registration fee needs to be paid (also at the initial registration process). Furthermore, an annual return needs to be filed (together with the audited financial statements). 4(4) funds need to appoint at least two persons in management roles as well and each director or manager needs to be registered in accordance with the Directors Registration and Licensing Law, 2014.
Financial statements will need to be prepared in accordance with IFRS or the generally accepted accounting standards of any non-high risk jurisdiction. Such financial statements will need to be audited and a local sign-off will be required. Audited financial statements will need to be filed with CIMA 6 months after the financial year end.
Existing 4(4) funds must comply with the registration requirements by August 7, 2020. For new 4(4) funds however, the registration requirements are effective immediately.
Going forward, closed-end funds will qualify as private funds (separate from open-end funds, which are regarded as mutual funds). All closed-end funds set up as partnerships, companies and trusts are within scope of the regime. Certain categories are however excluded from the private fund definition. Furthermore, closed-end funds with one investor will not be regarded as private funds and do not need to comply with the requirements.
Private funds are required to register with CIMA and will need to file certain particulars. The timeline is that a private fund needs to submit its registration within 21 days after its acceptance of capital commitments from investors and that it needs to be registered before accepting capital contributions. However, the private fund may enter into oral and written communications and agreements with high net worth persons or sophisticated persons prior to submitting the registration with CIMA. If there are any changes in the information provided to CIMA during the registration or if a private fund changes its registered office, CIMA needs to be informed within 21 days after making the changes.
On an annual basis, a private fund is required to pay an annual registration fee (to be paid upon registration as well, although not in case of a transitional private fund). It also needs to file an annual return. A private fund’s financial statements will need to be prepared in accordance with IFRS or the generally accepted accounting standards of any non-high risk jurisdiction. Financial statements need to be audited by a Cayman Islands based auditor (so a local sign off is required). The audited financial statements will need to be filed with CIMA 6 months after the financial year end, which needs to be done as of its first full financial year following registration.
Ongoing requirements for a private fund are:
- Valuation: it should have a valuation policy and must have at least annually a net asset valuation;
- Custody: a custodian needs to be appointed to safe keep its assets. However, a custodian does not need to be appointed if CIMA is notified that it is neither practical nor appropriate to do so, having regard to the nature of the private fund and the type of assets it holds. In case of the latter, title verification needs to take place by the administrator (or certain other designated third parties);
- Cash monitoring: the administrator (or certain other designated third parties) must monitor the cash flow, must ensure that the cash is booked in a cash account in name of the private fund and must verify if all required payments from investors have been received; and
- Securities identification: it must keep a record of identification codes of the securities it trades (which may also be the LEI of the issuer if none is available).
Private funds that are carrying on business (meaning receiving capital contributions from investors) before August 7, 2020 will have to be registered on or before that date and must also comply with the ongoing requirements. Afterwards, private funds need to comply immediately.