Changes to the regulation of Mutual Funds
28 February 2020
Changes to the Mutual Funds Law – section 4(4) ("exempted") Funds
The Mutual Funds Law applies to funds that issue equity interests that are redeemable at the option of the investor ("open-ended" funds). Most open-ended funds are subject to regulation by the Monetary Authority (regulated open-ended funds are referred to here and in the Mutual Funds Law as "Regulated Mutual Funds").
Until now, section 4(4) of the Mutual Funds Law has provided an exemption from regulation for open-ended funds that are limited to a maximum of 15 investors where a majority (in number) of those investors had the power to appoint or replace the fund's directors, general partner or trustee (as applicable) (the "Operator"). Following a recent amendment to the Mutual Funds Law, funds in this category ("4(4) Funds") will become Regulated Mutual Funds. The change will apply to existing 4(4) Funds from 7 August 2020 and to new 4(4) Funds with immediate effect.
Funds that are affected by this change will be required to register with the Monetary Authority. Registration involves providing information to the Monetary Authority and payment of a fee of approximately US$4,270 upon registration and then each year in January. Additional requirements include:
- appointing a local auditor and filing an annual audit with the Monetary Authority;
- filing with the Monetary Authority a copy of an extract of the fund's constitutional documents specifying that a majority of the investors in number are capable of appointing or removing the Operator of the fund;
- the fund's accounts being prepared in accordance with IFRS or generally accepted accounting principles of the U.S/Japan/Switzerland or another non-high risk jurisdiction (based on the Financial Action Task Force lists);
- appointing at least two individuals in management roles; and
- complying with various regulations applicable to Regulated Mutual Funds (including those described below).
Directors of 4(4) Funds will themselves be required to register with the Monetary Authority pursuant to the Directors Registration and Licensing Law if they have not previously registered.
Unlike the majority of Regulated Mutual Funds, 4(4) Funds will not (currently) be required to file an offering memorandum with the Monetary Authority (there will however be requirements relating to the preparation and content of an offering memorandum) or to have a minimum initial investment amount.
Proposed Regulatory Rules
In addition to the foregoing, the Monetary Authority is considering a number of regulatory rules for Regulated Mutual Funds covering segregation of assets, custody, valuations and the contents of offering memorandums.
If passed in their current form, obligations for Regulated Mutual Funds would include:
- new requirements for the contents of offering documents, such as the inclusion of a net asset value ("NAV") calculation policy;
- NAV calculations on at least a quarterly basis conducted by an independent service provider in accordance with the fund's NAV calculation policy;
- appointment of a service provider to ensure safe keeping of the fund's asset portfolio; and
- segregation of the fund's assets (excluding cash) from the assets of any service provider.
The regulations are in the consultation phase and changes are still possible before they are finalised and adopted. Copies of the draft regulatory rules are available here.
If you require any further information please contact your usual Bedell Cristin contact or one of the contacts below.
Location: Cayman Islands
Related Services: Funds & Investment Structures | Regulatory & Compliance