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Guide to Investment Funds in the Cayman Islands

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WHY THE CAYMAN ISLANDS? Cayman Islands, or if outside the Cayman Islands, managed from the Cayman Islands, which issues The Cayman Islands is a British overseas territory equity interests redeemable at the option of the and has a history of stable government. It enjoys investor, the purpose of which is the pooling of one of the highest standards of living in the investors’ funds with the aim of spreading Caribbean. investment risk and enabling investors to receive profits or gains from investments. Therefore, Cayman Islands law derives from English common closed-end investment funds, whose equity law, supplemented by local legislation. The court interests are not redeemable at the option of the system is well developed and experienced. Major investor, fall outside the definition of a mutual fund civil cases are heard in the Grand Court with appeals (considering these are regulated separately, as to the Cayman Islands Court of Appeal and stated below). CIMA is charged with the supervision ultimately to the Privy Council in London. and regulation of mutual funds and mutual fund administrators. There are no exchange control restrictions or regulations in the Cayman Islands. Funds can be Closed-end investment funds are regulated under freely transferred in and out of the territory in the Private Funds Law, as amended from time to unlimited amounts. The Cayman Islands dollar is time (the “PFL”). Any Cayman Islands company, tied to the US dollar and the latter is freely accepted trust or partnership (i) which offers and issues (or and used within the local economy. has issued) investment interests, (ii) with the purpose or effect of pooling investor funds and (iii) Many of the world’s leading banks have a presence enabling investors to receive profits or gains from in the Cayman Islands and all the leading the investment activities of such entity, will be accountancy firms are represented as well. regarded as a private fund. Further requirements Investors and asset managers doing business in the are that the investors do not have control over the Cayman Islands also benefit from top quality investment activities and that the investments are professional service providers (legal counsels, fund managed as a whole by or on behalf of the operator. administrators, trust companies, company Lastly, the investment interests are not redeemable managers, etc.) with extensive experience. at the option of the investors. CIMA is also charged with the supervision and regulation of private funds. Today, the Cayman Islands is one of the world’s leading offshore jurisdictions and is particularly renowned for the establishment of investment The goal of the MFL and the PFL is to apply an funds. Cayman Islands entities are customarily used appropriate level of regulation to each type of for transactions of all types, including equity, debt, investment fund carrying on business in or from the insurance, capital markets transactions, mergers Cayman Islands, depending on its circumstances and acquisitions and joint ventures. and ultimate investor market. There are no prohibitive licensing and regulatory provisions calling for local custodians, managers or directors as The Cayman Islands Monetary Authority (“CIMA”) the legislation recognises that most service supervises and regulates a wide range of financial providers engaged in the industry are already services, including banking, insurance and licensed or regulated in their home jurisdiction. All investment management. regulated investment funds must qualify under the

MFL or PFL before starting business. To do so, any REGULATORY FRAMEWORK mutual fund may either obtain its own license,

appoint a licensed mutual fund administrator in the The regulation of open-end investment funds Cayman Islands to provide its principal office, established under Cayman Islands law, or which are register if the target is a sophisticated investor (i.e. administered or managed in the Cayman Islands, is with a minimum investment of USD 100,000 (or governed by the provisions of the Mutual Funds equivalent in any other currency) per investor) or Law, as amended from time to time (the “MFL”). register in case the mutual fund is prohibited to The MFL defines a mutual fund as a company, trust or partnership, incorporated or established in the

have no more than 15 investors. A private fund Administered mutual funds – Section 4(1)(b) of the must register with CIMA as well. MFL Instead of applying for its own license, a mutual All Cayman investment funds are subject to fund may seek to rely on the existing license of a applicable anti-money laundering laws and licensed mutual fund administrator based in the regulations in the Cayman Islands. As such, they Cayman Islands. This type of mutual fund is need to appoint named individuals as Anti-Money favoured by investment managers who wish to have Laundering Compliance Officer (“AMLCO”), Money a minimum initial subscription per investor that is Laundering Reporting Officer (“MLRO”) and Deputy lower than USD 100,000, but who prefer not to go Money Laundering Reporting Officer (“DMLRO”). through the approval process outlined above. The AMLCO can also be either the MLRO or the DMLRO (but the MLRO and DMLRO must be An administered mutual fund is the only type of separate individuals). Each fund must have mutual fund which must appoint a mutual fund appropriate policies and procedures in place in line administrator based in the Cayman Islands; licensed with the aforementioned laws and regulations. mutual funds, registered mutual funds and limited These policies must be proportionate with the investor funds may appoint an administrator in any business of the fund, and must refer to, among jurisdiction. others, investor due diligence measures, transaction monitoring, record and log keeping, For an administered mutual fund, the selected employee screening and trainings. The AMLCO has administrator undertakes the responsibility of being general oversight of the fund’s compliance function. satisfied of the same matters that CIMA considers The MLRO and DMLRO are responsible, inter alia, for a licensed fund and provides the principal office for assessing suspicious activity in relation to money of the mutual fund at that administrator’s office in laundering and reporting such suspicious activity to the Cayman Islands. A licensed administrator must the Cayman Islands Financial Reporting Authority. report to CIMA if it has reason to believe that a fund for which it provides the principal office is acting in Categories of regulated funds breach of the MFL or may be insolvent or is Four categories of open-end mutual funds are otherwise acting in a manner prejudicial to its required by the terms of the MFL to subject creditors or investors. themselves to regulation by CIMA. Such mutual funds are referred to in this briefing as: (a) the Registered mutual funds – Section 4(3) of the MFL licensed mutual fund, (b) the administered mutual This is a common type of investment fund fund, (c) the registered mutual fund and (d) the registered with CIMA. Registered mutual funds are limited investor fund. Closed-end private funds are exempt from the requirement to be licensed or also regulated by CIMA. administered locally on the basis that either (i) each investor must subscribe for equity interests in an Licensed mutual funds – Section 4(1)(a) of the MFL amount not less than USD 100,000 (or the This is the least common type of mutual fund. A equivalent in any other currency) or (ii) the equity licensed mutual fund may offer its equity interests interests of the fund are listed on a stock exchange to the general public without any minimum recognised by CIMA. subscription amount. The licensing process is therefore the strictest of all mutual funds. Limited investor funds – Section 4(4) of the MFL Investment funds with a maximum of 15 investors In granting a license, CIMA will consider whether: can be registered as limited investor funds. In such • each promoter is of sound reputation; case, the majority of the investors must be capable • the administration of the mutual fund will be undertaken by persons who have sufficient of appointing or removing the operators of the fund expertise and who are fit and proper to be (i.e. directors, general partners and trustees). To directors, managers or officers (as the case may meet this requirement, the power to appoint or be); and remove the fund’s operators must be vested in a • the business of the fund and the offer of equity majority in number of investors, rather than a interests will be carried out in a proper manner. majority in terms of the value of the equity interests. A limited investor fund does not have a

prescribed minimum subscription amount. purpose vehicles, holding vehicles, individual Furthermore, a limited investor fund is not required investment management arrangements, debt to have or file an offering document (although a issues and debt issuing vehicles, structured finance copy of the fund’s constitutional documents must vehicles and single family offices. be filed which evidences the aforementioned power of the majority of the investors). A private fund must submit an application for registration with CIMA within 21 days after General requirements for mutual funds accepting capital commitments from investors and All mutual funds are required to: it needs to be registered before accepting capital • have a current offering document, which must contributions from investors. However, the private describe the equity interests of the mutual fund fund may enter into oral and written in all material respects and must contain all communications and agreements with high net material information to enable a prospective worth persons or sophisticated persons prior to the investor to make an informed decision as to filing of an application. Once registered, a private whether or not to subscribe (this requirement fund must inform CIMA of any material changes does not apply to limited investor funds); within 21 days after making such changes or • file the prescribed particulars of the fund, as set becoming aware of them. out in the relevant forms, together with the offering document insofar applicable: On an ongoing basis, a private fund is required (i) to o licensed fund: Form MF3; pay an annual registration fee (to be paid upon o administered fund: Form MF2 and MF2A; application as well), (ii) to have its annual financial o registered fund: Form MF1; statements audited by a Cayman Islands based o registered master fund: Form MF4; or auditor in accordance with International Financial o limited investor fund: Form MF1A; Reporting Standards or the generally accepted • update their offering documents (insofar accounting standards of any non-high risk applicable) and/or prescribed particulars within jurisdiction, which audited annual financial 21 days of any material change and file the statements must be filed with CIMA within 6 updated offering documents and/or prescribed months after the financial year end and (iii) to file a particulars with CIMA within such 21 day fund annual return together with its audited annual period; financial statements. However, a private fund is not • have their accounts audited annually and to file required to have an offering document in place. such audited financial statements with CIMA, accompanied by a fund annual return; and Further ongoing requirements for private funds are • pay an application fee and a recurring annual that: fee in January. • it must have a valuation policy in place for a proper valuation of its assets, with at least an CIMA has released a Statement of Guidance which annual net asset valuation; establishes key principles of good governance which • normally a custodian is appointed to safe keep must be observed by each mutual fund. the fund’s assets, unless CIMA is notified that it is neither practical nor proportionate to do so Private funds – Section 5 of the PFL with regard to the nature of the fund and the Closed-end funds will need to be registered as assets it holds. In such a case, the administrator private funds. Certain investment vehicles that do (or certain other designated third parties) must not meet the definition will be out of scope of the verify that the fund holds title to the assets; PFL. This applies for example to investment vehicles • the administrator (or certain other designated third parties) of the fund must monitor the cash with one investor, in which case there is no pooling flow, must ensure that the cash is booked in an of investor funds (although investment vehicles account in name of the fund and must verify with one investment typically will qualify as a that all payments from investors have been private fund). The PFL furthermore specifically received; and excludes in its schedule certain non-fund • a record must be kept of identification codes of arrangements from the private fund definition, the securities it trades (such as an ISIN of the which includes, inter alia, securitisation special security or a LEI of the issuer).

INVESTMENT FUND VEHICLES legal personality distinct from its partners and therefore any property of the ELP will be deemed to The three vehicles commonly used for operating be held on trust by the general partner as an asset mutual funds or private funds are the exempted of the ELP. Limited partners have a liability which is company, the unit trust and the exempted limited limited to the amount of capital committed to the partnership. partnership, unless they would actively take part in the conduct of the business of the ELP. In such case, Exempted company they will risk to become liable for the debts and The most popular form of company for offshore obligations of the ELP in case the ELP becomes operations is the exempted company. Cayman insolvent. Islands exempted companies have distinct legal personality and have a substantial degree of Unit trust flexibility. They only need to have one shareholder The Cayman Islands has a well established and and there is no minimum capital requirement. flexible trust regime allowing for privacy and asset Shares can be issued in any currency and protection, both in the commercial and private denomination. There is no minimum or maximum wealth spheres. Under a unit trust arrangement amount prescribed for authorised, issued or paid up investors contribute funds to a trustee which holds share capital. The exempted company may redeem those funds on trust for the unit holders and each its shares and is therefore typically used for open- unit holder is directly entitled to share pro-rata in ended mutual funds. Closed-ended private funds the trusts’ assets. can also be established using the exempted company, but this is less common. The company’s INVESTMENTS board of directors is responsible for the company’s general management, on the terms of its The MFL, PFL or any other Cayman Islands laws and constitutional documents. regulations do not impose any restrictions on the type of investments that mutual funds or private An exempted company can also be registered as an funds may invest in or on other commercial matters exempted segregated portfolio company (“SPC”) (such as the amount of leverage), given the with protected cells or portfolios. Once registered institutional and sophisticated nature of the as an SPC, a number of segregated portfolios can be investors in Cayman funds. However, the MFL operated by the company, which each have the requires that a fund’s offering memorandum benefit of statutory segregation of their respective describes comprehensively the equity interests and assets and liabilities. Such structures can be used for contains sufficient information to enable an multi-class, umbrella and master-feeder fund investor to make an informed decision. structures, as well as for multi-issuance platforms allowing single managers to establish sub-funds TAXATION with different profiles within a single structure or allowing sponsors to employ a single vehicle into The Cayman Islands has no direct taxes of any kind. which they bring multiple managers to manage There are no corporate, capital gains, income, distinct sub-funds. profits or withholding taxes. Under the terms of the relevant legislation, it is possible for exempted Exempted limited partnership companies, unit trusts and limited partnerships to The exempted limited partnership can be formed as register with and apply to the Cayman Islands easily as the exempted company or the unit trust. government for a written undertaking that they will Exempted limited partnerships are the most remain tax-free for a minimum period (20 years in common vehicle for closed-end private funds, such the case of exempted companies and 50 years in the as private equity or real estate funds. A partnership case of unit trusts and limited partnerships). registered as an exempted limited partnership (“ELP”) must have at least one general partner Relevant legal entities carrying out relevant which is based in Cayman. The general partner is activities need to comply with economic substance responsible for the conduct of the ELP’s business requirements. These requirements have been and is liable for the partnership’s debts and introduced to ascertain that such legal entities have obligations. The ELP does not have any separate sufficient economic substance in the jurisdiction in

which they are tax resident (which jurisdiction often manager, such a manager needs to have either a full subjects corporate profits to a (near) zero tax rate, license under the Securities and Investment such as the Cayman Islands). The most significant Business Law or must register as a registered relevant entities in scope of the requirements are person. exempted companies (including SPCs). Exempted limited partnerships are not regarded as relevant Administrator entities. Investment funds (encompassing both For most investment funds established in the mutual funds and private funds) in general are not Cayman Islands, there is no requirement that the relevant entities and therefore normally do not fund appoints a Cayman Islands based need to comply with the economic substance administrator. Only in case of an administered requirements, unless they perform other relevant mutual fund must a Cayman Islands based activities. Investment managers usually will be administrator be appointed. For both mutual funds relevant entities though and fund management and private funds, CIMA will require the business is a relevant activity. Therefore, an administrator to file a consent letter confirming to investment manager must satisfy the economic CIMA the specific functions for which the substance test, whereby it must (i) conduct Cayman administrator will be responsible. Islands core income generating activities, (ii) be directed and managed in an appropriate manner in Custodian the Cayman Islands and (iii) have sufficient A custodian is appointed by a fund to act as substance (as further detailed in the International guardian of its assets pursuant to the terms of the Tax Co-operation (Economic Substance) Law) in the relevant custodian agreement. A custodian will hold Cayman Islands. Depending on whether or not an in custody all of the securities and cash of the fund. entity is a relevant legal entity and whether or not It may also collect dividends and other payments it performs a relevant activity, certain information due in respect of the fund’s assets. There is no needs to be reported to the applicable tax requirement that a custodian be based in the authority. Cayman Islands. If the custodian is based in the Cayman Islands, it may need to be regulated KEY SERVICE PROVIDERS pursuant to the MFL if it has control of all or substantially all the assets of the mutual fund. In Cayman funds, regulated under the MFL or PFL, will case of a private fund, a custodian is required to be generally appoint the following functionaries, some appointed in accordance with the PFL, unless it is of them compulsorily: neither practical nor proportionate to do so (having • an investment manager; regard to the nature of the fund and the type of • an administrator; assets it holds). • a custodian; • an auditor; and Auditor • directors. Both mutual funds and private funds are obliged to appoint an auditor. Every investment fund must file Investment manager accounts audited by an approved auditor, based in The primary service provider appointed by a fund is the Cayman Islands, within six months of its its investment manager or investment adviser. Its financial year end. Additionally, a mutual fund or precise role will vary depending on the terms of the private fund is obliged to file a fund annual return contract pursuant to which the investment manager with CIMA together with its audited accounts. or investment adviser is appointed and can range from managing the fund’s assets to simply acting in In practice, the requirement for a local sign-off in an advisory capacity and leaving all investment Cayman Islands causes little difficulty because all of decisions ultimately to the fund’s operators (such as the main accounting firms have offices in Cayman. the directors). The bulk of the preparatory work will invariably be done by the audit firm in the place in which the There is no requirement that an investment fund’s records are physically located (usually the manager is appointed or that the appointed office of the investment manager or administrator) investment manager is based in the Cayman Islands. and subsequently the Cayman audit firm will sign- In case of a Cayman Islands based investment off on the audited financial statements.

Directors The MFL obliges mutual funds to appoint at least two directors. Generally, these should be natural persons, although CIMA will permit a legal person to act as a director under certain circumstances. Similar requirements however do not apply to private funds under the PFL.

The directors are responsible for the day-to-day oversight of the fund and must act in accordance with the Statement of Guidance on key principles of good governance.

Generally speaking, directors of investment funds are not personally liable for the debts, liabilities or obligations of the company except for those debts, liabilities or obligations which arise out of the negligence, fraud or breach of fiduciary duty on the part of a director or an action not within its authority and not ratified by the company.

In addition, under the Directors Registration and Licensing Law 2014, directors of (a) mutual funds regulated under the MFL and (b) companies registered as registered persons under the Cayman Islands Securities Investment Business Law must register with, or obtain a license from, CIMA. This requirement does not apply to private funds regulated under the PFL.

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