Securing the rules
23 September 2002
Having for many years applied modern and effective regulation to aspects of the financial services industry such as mutual funds, banking and insurance, the Cayman Islands have recently completed this framework by updating the law relating to investment business. The Securities Investment Business Law 2001 (the Securities Law) provides for the licensing and control of persons engaged in securities investment business and introduces criminal liability for creating a false or misleading market and insider dealing.
The Securities Law was passed on 12 March 2002, but will not come into force until an order to that effect has been made by the Governor in Council. At the date of writing, an order has been made bringing into force only the provisions regarding persons carrying on securities investment business who do not require a licence (excluded persons). Such excluded persons are, however, obliged to pay an annual fee and file an annual declaration stating that they are persons to whom the exemptions apply. This obligation arises as of 14 August 2002, and obliges all people carrying on securities investment business, in or out of the Cayman Islands, to examine their status under the Securities Law and whether or not they should be applying for excluded person status, or will be subject to the full force of the Securities Law in due course.
To whom does the law apply?
The Securities Law applies to companies, general, limited and exempted partnerships, and foreign companies incorporated or registered in the Cayman Islands - such entities are regulated wherever they carry on their securities investment business, regardless of whether or not such business is ever carried out in the Cayman Islands. It is incorporation or registration in the Cayman Islands that attracts regulation by the Securities Law. The law also applies to any person or entity based anywhere else in the world - such persons or entities are regulated only to the extent that their securities investment business is carried on within the Cayman Islands.
What is the Securities Law?
The concept of the Securities Law encompasses aspects of investment business from dealing in securities, arranging deals in securities, managing securities to advising others on securities. 'Securities' includes anything from shares, stock, debt instruments, warrants, options, and futures to contracts for differences (with exceptions provided).
The ambit of the law is far-reaching and extensive. It is not beyond the realms of possibility, for example, that existing Cayman Islands incorporated advisers - or advisers with a physical presence in the Cayman Islands - who are not required to be licensed under the existing mutual funds, banking and companies management legislation may now be required to be licensed under the Securities Law. For instance, the concept of managing securities is stated to involve managing securities belonging to another person in circumstances involving the exercise of discretion.
It is understood that the regulations currently being prepared under the Securities Law are based to some extent on the Securities and Futures Association Rules and similar investor protection rules in the UK. The UK protection provisions have come under much scrutiny in recent times, culminating in the composite UK Financial Services and Markets Act 2000. The Caymans thereby have, to some extent, the privilege of learning from the mistakes of others and the resulting opportunity to improve and apply accordingly.
Unless exempt or excluded as set out below, any person carrying on securities investment business must hold a licence granted under the Securities Law. Licence fees have yet to be set by regulation. There is no exemption from them for entities licensed under other legislation in the Cayman Islands. Banks, trust companies, mutual fund managers and other licensed entities will have to apply for a licence under the Securities Law if they engage in securities investment business other than with exempted persons.
Regulations established under the Securities Law may specify such matters as advertising standards, disclosures to clients, standards for dealing with clients and clients' assets, financial and reporting requirements, arrangements for settlement of disputes and any insurance requirements.
To obtain a licence, an applicant must satisfy the Cayman Islands Monetary Authority (CIMA) that it can comply with the Securities Law and the Cayman Money Laundering Regulations and any regulation made thereunder; that it will not be against public interest to approve the application; that the applicant has personnel qualified to carry on the business; and the applicant's senior officers are fit and proper persons. In addition, a licensee must have its accounts audited annually by an approved auditor and filed within six months of the end of a licensees' financial year.
The carrying on of securities investment business without a licence is a criminal offence and is punishable by a fine of up to $125,000 (£81,600) or by a prison term, or both. In the case of a continuing offence, a fine of $12,500 (£8,150) for each day during which the offence continues applies.
The Securities Law specifically excludes certain activities from the ambit of the law. For example, 'dealing in securities' will not be considered securities investment business whereby a person as principal or agent buys, sells, subscribes for or underwrites securities. Such securities create or acknowledge indebtedness in respect of any loan, credit, etc that such person or their principal has made, granted or provided. A company redeeming its own securities is similarly excluded.
Under the heading of 'Arranging Deals in Securities' of the Securities Law, a person making his own arrangements as part of a transaction to which he is a party is excluded from the ambit of the law. Managing securities in connection with the disposal of goods or supply of services is excluded under the 'Managing Securities' heading and media publications are excluded under the 'Advising on Securities' heading, this is provided that the advice given is not to induce persons to buy, sell or subscribe for securities.
There is indeed room for manoeuvre under the Securities Law, but each activity will need to be examined and it is by no means certain that an activity, once excluded, may not later become securities investment business. The obligation is continuing and should be reviewed at later stages without complacency.
Can I be exempted?
To become exempt, the person or entity must file an annual declaration of exemption with CIMA and pay an annual fee, which currently stands at $1,250 (£800). Such persons include companies involved in securities investment business exclusively for one or more members of its group, including direct or indirect subsidiaries of a holding company. Similarly, the Securities Law specifically excludes a person who has a registered office in Cayman for which services are provided by a licensed person and who is involved in a securities investment business exclusively for: a 'sophisticated' (high profile) person; a high net worth person; or a person who is regulated, in respect of securities investment business, by a recognised overseas regulatory authority of the country in which the securities investment is being conducted.
Other exemptions include being part of a joint enterprise where the other person carry on securities investment business and such business is carried on for the purpose of the joint enterprise; or persons who carries on securities investment business by way of them holding a certain position, such as director or partner. The condition is that such persons cannot be separately remunerated for their securities investment business, and do not hold themselves out as handling such business.
Market manipulation and insider trading
The Securities Law also created a new offence of creating a false or misleading market and an offence of insider dealing. The first involves creating a false or misleading appearance of active trading in any listed securities, or a false or misleading appearance with respect to the market for, or the price of, any such securities.
Subject to certain defences available under the law, any individual who has information as an insider is guilty of insider dealing if: he deals with such information in securities listed on the Cayman Islands Stock Exchange that are price-affected securities; he encourages another person to do likewise; or he discloses the information other than in the proper performance and functions of his employment, office or profession, to another person.
The introduction of insider trading as a crime in the Cayman Islands may well satisfy the dual criminality test under the Proceeds of Criminal Conduct Law and regulations made thereunder.
The territorial scope of the insider dealing offence is restricted to people, or others encouraged by them to deal, being within the Cayman Islands at the time of the alleged dealings. Any person who commits an offence under these provisions commits a criminal offence punishable by a fine of up to $125,000 (£81,600) and to a term of imprisonment of up to seven years.
While heralding a new change to investment regulation in the Cayman Islands, the Securities Law - through provisions such as the sophisticated investor exemption - maintains the continuing attraction and inherent flexibility of the Cayman Islands as an offshore jurisdiction.
Aoife O'Sullivan is a partner at Hunter & Hunter
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