The Private Funds Law (2020)
The Private Funds Law was recently passed into law by the Cayman Islands legislative assembly. The new law will apply to closed-ended investment funds, which were previously unregulated in the Cayman Islands by virtue of the fact that they do not issue redeemable investment interests. Investment funds that are impacted by the new law will be required to comply from 7 August 2020.
Application of the Private Funds Law
A "Private Fund" is defined as "a company, unit trust or partnership whose principal business is the offering and issuing of its investment interests, the purpose or effectof which is the pooling of investor funds with the aim of spreading investment risks and enabling investors to receive profits or gains from such entity's acquisition, holding management or disposal of investments" where (i) the investors do not have day to day control of the investment programme, and (ii) the portfolio is managed for reward based on the assets, profits or gains.
There will be a number of initial and ongoing compliance obligations for Private Funds. These include:
- registering the Private Fund with the Monetary Authority;
- appointing a local auditor and filing an annual audit with the Monetary Authority;
- calculating asset values at least annually;
- appointing a custodian to hold assets in custody and verify title to the fund's assets;
- appointing an administrator, custodian or another independent third party to perform certain cash monitoring obligations; and
- where relevant, maintaining a record of the identification codes of securities the fund trades and holds.
The requirements relating to valuation, custody and cash monitoring do allow for some additional flexibility as highlighted further below under Compliance Obligations.
A number of structures that might otherwise be deemed to be Private Funds are explicitly excluded from the Private Funds Law as "non-fund arrangements". Those include pension funds, SPVs, joint ventures, proprietary vehicles, holding vehicles, individual investment management arrangements, debt issuing vehicles, structured finance vehicles, preferred equity financing vehicles, sovereign wealth funds, single family offices and funds that are listed on a recognised exchange. We anticipate that the scope and interpretation of these "non-fund arrangements" will be key to a number of closed-ended arrangements falling outside of the Private Funds Law and will be further clarified. Single investor structures will also fall outside the scope of the law.
In addition, the Private Funds Law contains definitions (expanded by Regulations made under the law) for (i) an "alternative investment vehicle" being, essentially, an entity formed by a Private Fund for the purposes of making, holding and disposing of investments related to the business of the Private Fund and whose members are also those of the Private Fund (such as in a typical private equity AIV structure) and (ii) a "restricted scope private fund" which is an exempted limited partnership (again, typically used for private equity-type funds) that is managed or advised by a person licensed or registered by the Monetary Authority or authorised or registered by a recognised overseas regulatory authority and in which each of the investors are non-retail being high net worth or sophisticated persons. We anticipate that these categories of "alternative investment vehicles" and "restricted scope private funds" will have reduced requirements although these have not yet been clarified.
The Monetary Authority is also preparing a number of regulatory rules that will apply to Private Funds. These provide more detail on the obligations relating to marketing materials, valuation, custody and cash monitoring. The draft regulatory rules are discussed in more detail below.
Registration and timing
From 7 August 2020 newly formed Private Funds will be required to apply for registration with the Monetary Authority within 21 days of accepting any capital commitments, and may not accept capital contributions until registration is approved. Existing Private Funds are also required to register if they are in receipt of capital contributions.
Registration will involve payment of a fee of approximately US$4,270 upon registration and then each year in January. The initial registration fee will be waived for funds that register prior to 7 August 2020. A copy of the fund's prescribed particulars must be filed upon registration and re-filed whenever changes are made, although (currently) there is no requirement to submit an offering document to the Monetary Authority. The Monetary Authority has circulated a draft rule on the contents of Private Funds' marketing materials, which is available here.
Private Funds are required to have asset valuation procedures described in the offering document or marketing materials. Valuations are to be conducted by an independent third party or by the investment manager or the fund's management if (i) the valuation function is independent from the portfolio management or (ii) the potential conflicts of interest have been identified and disclosed to investors. The Monetary Authority has circulated a draft rule on the valuation of Private Fund assets, which is available here.
The Monetary Authority may exempt a Private Fund from the asset valuation requirements (absolutely or subject to conditions) as it deems appropriate.
Custody and cash monitoring
Private Funds are generally required to appoint a custodian to (i) hold the fund's assets in segregated accounts and (ii) verify that the Private Fund holds title to fund assets and keep a record of the fund assets ("Title Verification"). A Private Fund does not have to appoint a custodian if it has notified the Monetary Authority and it is neither practical nor proportionate for it to do so given the nature of the Private Fund/type of assets it holds – in which case it will still have to appoint a person to perform Title Verification.
Private Funds must also appoint a person to perform cash monitoring duties including (i) monitoring cash flows, (ii) ensuring cash of the Private Fund has been booked in cash accounts opened in the name/for the account of the Private Fund and (iii) ensuring that all payments made by investors into the Private Fund have been received.
The custodian (including Title Verification) and cash monitoring functions are generally to be conducted by an independent third party. The Title Verification and cash monitoring functions can be performed by the investment manager or the fund's management if; (i) the Title Verification/cash monitoring function is independent from the portfolio management or (ii) the potential conflicts of interest have been identified and disclosed to investors.
Custodial assets must be held in segregated accounts in the name, or for the account, of the fund and cash must be booked in cash accounts opened in the name, or for the account, of the fund. The Monetary Authority has circulated a draft rule on the segregation of Private Fund assets, which is available here.
Identification of securities
A Private Fund that regularly trades/holds securities must maintain a record of the relevant identification codes (such as the International Securities Identification Number (ISIN)) and make this available to the Monetary Authority on request.
The regulatory rules on valuations, segregation and marketing materials are in the consultation phase and changes are still possible. They are likely to be finalised and adopted in some form prior to 7 August 2020.
Operators of Private Funds should begin taking steps now to be ready by 7 August. If you require any further information please contact your usual Bedell Cristin contact or one of the contacts below.
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