Cayman Islands moving toward mandatory registration for all open-ended and close-ended funds
The Cayman Islands Government is in the process of making legislative changes to enhance its monitoring and oversight when it comes to open-ended and closed-ended funds. These changes will impact both hedge funds and private equity funds.
The Cayman Islands Monetary Authority (CIMA) regulates mutual funds in accordance with the Mutual Funds Law (2019 revision). Per Section 4(4) of the Mutual Funds Law, a Cayman Islands mutual fund is currently exempt from registration if the number of investors in the fund is 15 or less and a majority of those investors can appoint or remove the fund’s operators. Private equity funds are not currently required to register with CIMA.
The proposed legislative changes would make it mandatory for all funds that are currently exempt to register under Section 4(4) of the Mutual Funds Law with CIMA. In other words, funds with 15 or fewer investors, and if those investors are capable of appointing and removing the operators, would be required to register with CIMA and to be regulated in accordance with the Mutual Funds Law. Private equity funds would also be required to register with CIMA. These changes may take place due to two bills proposed by the government of the Cayman Islands, the Mutual Funds (Amendment) Bill, 2020, and the Private Funds Bill, 2020.
The Mutual Funds (Amendment) Bill, 2020, amends the Mutual Funds Law (2019 Revision) to enhance the regulatory framework for regulated funds. In addition to requiring funds domiciled in the Cayman Islands with fewer than 15 investors to register, the bill also requires them to submit an annual return “in respect of each financial year.” Per the bill, registered funds’ financial statements should be prepared in accordance with the generally accepted accounting principles of the U.S., Japan, Switzerland, or any non-high risk jurisdiction, or with the International Financial Reporting Standards. The annual audit shall be carried out in accordance with the International Standards on Auditing or the generally accepted auditing standards of the U.S., Japan, Switzerland, or a non-high risk jurisdiction.
The Private Funds Bill, 2020, would apply to private funds that are domiciled in the Cayman Islands but are not considered regulated mutual funds or regulated EU Connected Funds. It also puts responsibility for compliance with the law on the operator of the fund and provides details with regards to potential fines in circumstances where the operator commits an offense. The bill permits non-Cayman Islands domiciled private funds to carry on a business in or from the Cayman Islands without registration if certain conditions are met. Per the bill, private funds will be subject to continued and ongoing risk-based monitoring. They should be audited annually by auditors approved by CIMA, and, like for mutual funds, their financial statements should be prepared in accordance with generally accepted accounting principles of the U.S., Japan, Switzerland, or another non-high risk jurisdiction, or with the International Financial Reporting Standards. The audit shall be carried out in accordance with the International Standards on Auditing or the generally accepted auditing standards of the U.S., Japan, Switzerland, or a non-high risk jurisdiction. The bill also discusses areas such as valuation, safekeeping of fund assets, and cash monitoring, among others.
The Mutual Funds (Amendment) Bill, 2020, is expected to be in force immediately after the enactment of the Private Funds Law, 2020. Neither bill has been signed into law as of this time, and we will continue to update you on changes in the upcoming months.
William Pidgeon, CPA, Partner, Financial Services Industry Co-leader
Marc Wolf, CPA, Partner, Financial Services Industry Co-leader
Gary Berger, CPA, Partner, Financial Services Industry Leader – Northeast
Joshua Blumenthal, CPA, Partner
John Stomper, CPA, Partner
Raza Ashfaq, CPA, Senior Manager