A tryst with a trust
17 October 1995
The lid is about to be lifted on the Cayman Islands' mutual funds industry. Auditors Coopers & Lybrand has been instructed to co-ordinate a survey to find the true size of the Caymans' fund business. It is thought the Islands are the home to at least 2,000 funds and mutual funds, and mutual fund administrators have been regulated since the enactment of the Mutual Funds Law in 1993.
There are some 1,000 active regulated mutual funds in the Cayman Islands with about 15 new funds qualifying each month. The value of assets under management are not yet known, but initial guesstimates put the figure anywhere between US$75-$100 billion.
There are 81 licensed mutual fund administrators, of which 55 have unrestricted licences and 26 have restricted licences.
Figures suggest the Caymans are second only to Luxembourg as an offshore fund domicile.
Most Cayman Islands mutual funds are marketed to sophisticated and/or institutional investors. However, where desired, funds can and do qualify for sale on a wider basis through specific authorisation, registration or a stock exchange listing. Cayman Islands funds are currently listed in Dublin, Hong Kong, London and Luxembourg.
Regulation mirrors the regime applicable to banks and trust companies. The aim of the law is to protect investors and the Cayman Islands against undesirable promoters and managers of mutual funds by ensuring only those with experience and standing are permitted to establish and manage mutual funds. The law does not establish an indemnity fund for investors or control investments or other commercial matters. Closed-ended funds and those with 15 or fewer investors are not regulated. Responsibility for regulation of funds rests with the Inspector of Financial Service.
The following types of mutual funds are most commonly used:
Mutual funds may be open-ended, ie subscriptions and redemptions - usually at net asset value - are permitted on a regular basis. Equally, closed-end funds are possible, where there is an initial subscription period for investors and thereafter the fund is closed-end until liquidation. Hybrids may also be used - the fund may start as closed-end but convert to open-ended in the future.
The most common vehicle for open or closed-end funds is the traditional company with limited liability, issuing shares normally of a stated par value. There is maximum flexibility for the payment of dividends and distributions out of profits and also share premium (contributed surplus). Investor shares may be non-voting.
The unit trust follows the same format as in other jurisdictions such as the UK, the Channel Islands and Hong Kong. A unit trust may be advantageous to investors in certain jurisdictions, for example Japan, because the units will be treated more advantageously than shares for regulatory purposes.
The limited partnership regime provides in substance for a US-style limited partnership. This vehicle has proved both popular and successful, particularly for US investors, due to tax transparency, and for Japanese investors for securities regulatory reasons.
Limited life/duration company
This US-style limited liability company gives the advantages of partnership treatment in its transparency for US tax purposes, combined with the advantages of traditional corporate administration.
Single Class Fund
This vehicle will have one class of investor and one investment portfolio. Very often a sponsor will establish a family of funds, each of which is a stand-alone vehicle with a single class of equity and a single portfolio. However, the funds will be marketed to investors as a family and switching between funds within the family may be subject to lower or no expense charges.
This fund will have a single portfolio of investments but issue different series of equity to investors. Some investors will want dividends, others will want income to be rolled-up and reinvested because the expense charges will differ between the series.
This vehicle will have multiple investment portfolios and will issue a single class of equity attributable to each portfolio of investments. Although multi-class funds are attractive because they can reduce the administrative burdens and expense, there are risks inherent in the structure because of the difficulty of isolating each class in the event of insolvency of the fund.
The master, aimed at institutional investors with a minimum subscription of US$10 million might be formed in a regulated or unregulated jurisdiction and be sponsored by institution A. Institution B may like the master as an investment product for its own customers who individually cannot meet the minimum investment level but collectively can. Institution B will therefore put together a fund for its customers whose sole purpose is to invest in the master. The more complex master/feeder structure is now being used in the offshore environment and is becoming increasingly successful. The master/feeder structure enables both US domestic investors and offshore investors to participate in the same investment programmes.
The single class unit trust or multi-class fund unit trust is particularly attractive to Japanese corporate and institutional investors and is used to permit Japanese corporate or institutional investors to invest in foreign instruments which would not otherwise be permitted under Japanese regulations. It is also used to restructure their investment portfolios without being required to recognise previously unrecognised losses.
There are three types of regulated fund:
The fully licensed mutual fund (which falls outside private sector-regulated or mutual fund described below) which must submit a full application form, including a prospectus, details of the directors, trustees, general partner and of auditors and other service providers and payment of the relevant fee.
The "private sector regulated" mutual fund which must maintain its principal office in the Cayman Islands at the office of a licensed mutual fund administrator. In this case, the filing requirements are considerably less onerous than for the fully licensed fund because the obligation of due diligence is imposed on the licensed mutual fund administrator.
The mutual fund where either the minimum sum per investor is about US$4,800 or where the equity interests are on a recognised stock exchange. In this case, only a short application need be filed.
Each regulated fund must produce a prospectus or a summary which must be filed.
There is no requirement that a custodian be appointed or, if appointed, that it be independent of the investment adviser or manager. Nevertheless, it is usual to appoint a custodian who is often independent.
Auditors must be appointed and annual audited financial statements filed with the department.
The inspector has broad regulatory powers.
The initial and annual government fee for any regulated fund is US$610. If a corporate fund is used, the likely registration and annual fee under the Companies Law will be US$500, greater if the authorised capital is over US$50,000. There is an extra registration fee of US$244 for a limited duration company.
If an exempted unit trust is used, the registration fee under Trusts Law is US$490 and the annual fee is US$122. For an exempted limited partnership, the registration fee under Exempted Limited Partnership Law is US$1,040 and the annual fee is US$580.
The Caymans tend to attract institutional and high net worth individual investors. User-friendly legislation is generally cited as one of the reasons for the huge number of funds, and the law focuses on permitting only those with appropriate experience and standing to establish, manage and administer mutual funds.