Urgent: Check if definition changes mean your Private Fund needs to register with CIMA by 7 August 2020 deadline
14 July 2020
As a matter of urgency, Private Funds ("Private Funds") in the Cayman Islands ("Cayman") need to review changes to the definition of Private Fund made in the Private Funds (Amendment) Law, 2020 ("the Amendment") which came into force on 7 July 2020. The Amendment makes changes to section 2 of the Private Funds Law, 2020 ("the Law").
Cayman Private Funds which considered they fell outside the original definition and therefore outside the scope of the new regime will need to consider whether the changes mean they need to register with the Cayman Islands Monetary Authority ("CIMA") by the 7 August 2020 deadline.
Private Funds Law, 2020
The Law came into force in February 2020. Details of the new regulatory regime may be found in our earlier briefing.
Why has the Law been amended?
The Cayman Ministry of Finance was made aware of possible ambiguities in their original definition of Private Fund. An Industry Advisory of 8 July 2020 ("the IA") explains the clarifications.
How has the definition of Private Fund changed?
The definition of a Private Fund in section 2 of the Law has changed. There is no longer a requirement:
- that the company, unit trust or partnership's "principal business is the offering or issuing of its investment interests";
- that funds are pooled with "the aim of spreading the investment risk"; or
- that management is "for reward based on the assets, profits or gains of the company, unit trust or partnership…".
What is the significance of the change?
The IA explains the changes were made to clarify that the regime applies to funds:
- where Private Fund business is not the "principal" business of the company, unit trust or partnership. The IA makes it clear that conducting private fund business is enough to be included in the regime even where the vehicle's current principal business is, for example, issuing interests, making investments or managing assets;
- which do not continue to offer or issue investment interests. The IA clarifies that the regime applies to all private funds, including those existing funds that have in the past issued investment interests but no longer do so;
- which do not spread investment risk (i.e. they hold only one asset). The IA explains these Private Funds are included but points out that some may be exempted by virtue of the Schedule of Non-Fund Arrangements;
- where there is indirect reward. The IA explains this change clarifies that this section does include where there is indirect reward, for example in a multi-fund investment structure where manager fees are generally charged only at one level. The IA points out that the Schedule of Non-Fund Arrangements sets out the exclusion of officer, manager or employee incentive, participation or compensation schemes.
Are there any other changes?
There are changes to:
Sections 16, 17 and 18
These sections of the Law relate to the operating functions of valuation, safekeeping of funds and cash management. The sections provide that those functions may be carried out by "the manager or operator of the Private Fund, or a person who has a control relationship with the manager of the Private Fund". In those circumstances the sections require that potential conflicts of interest should be "…properly identified and disclosed to the investors of the Private Fund".
The Amendment requires that those conflicts must now be "properly identified, managed, monitored and disclosed to the investors of the Private Fund". This creates a continuing compliance obligation rather than a one-off identification.
The Amendment repeals section 31 of the Law which allowed the Cayman Cabinet to make regulations "exempting any person or class of persons or business or class of business from any provision of this Law". Regulations to that effect could still be introduced, but they would have to go through the usual legislative process.
The introduction of the Law in February 2020 has meant that Private Funds should have checked already whether they are within the scope of this new regime, whether they need to register and what measures they need to put in place before they can register. Those funds which concluded they were outside the new regime need to re-assess their position in the light of the changes. Given that the deadline for registration is 7 August 2020 that assessment needs to be carried out urgently.
If you require any further information or advice on whether your Cayman Private Fund needs to be registered, please contact your usual Bedell Cristin contact or one of the contacts listed.