6 November 2006
It has long been known that the Cayman Islands was to amend the legislation governing its investment funds industry. But the precise details of the likely legislative changes have only recently been unveiled.
The Cayman Islands Mutual Funds Law (2003 Revision) is to be amended by the Mutual Funds (Amendment) Law 2006. The latter has been passed by Cayman's Legislative Assembly and is currently awaiting publication in The Cayman Islands Gazette, the official publication of the Cayman government. It is not yet clear when the amendment law will come into effect; earliest estimates speak of this month, but in any event it is almost certain that 2007 will commence with the new legislation already in place. However, it is probably fair to say that the scope of the amendments was perhaps not as great as some had anticipated.
As was widely expected, the most important change from a sponsor's or promoter's perspective is that the prescribed minimum initial subscription for registered funds has been doubled, from $50,000 (£26,000) to $100,000 (£53,000), and becomes the effective new benchmark of what constitutes a non-retail investment. Rather than attempting to define a non-retail investor, the new law continues to provide clarity and certainty by merely increasing the minimum initial subscription on the assumption that those subscribing for investments at that level do not require the protection of heavy regulatory oversight.
A further change provides that foreign funds subject to regulations deemed comparable to that of the Cayman Islands, and which are marketed through a regulated service provider in Cayman, where the securities offered are listed on a stock exchange approved by the Cayman Islands Monetary Authority (Cima), may carry on business in or from Cayman without having to be licensed by Cima. Quite clearly this amendment is aimed at attracting further business to service providers located and licensed in Cayman which are able to offer foreign-domiciled funds among their products.
Cima has now been given the discretion to waive annual audit requirements. However, it has announced publicly that it will only make use of its discretion in particular circumstances, such as where an auditor has resigned and a fund finds it difficult to appoint a new auditor. The new powers are not aimed at saving fund operators the cost of an audit, even where investors do not require an audit.
Certain obligations of administrators licensed in Cayman, which previously only applied to circumstances where they provided a principal office (obligations such as ensuring that a promoter is of sound reputation and that the administration will be undertaken by persons with sufficient expertise to administer a mutual fund and of sound reputation) have now been extended to all mutual funds for which a Cayman-licensed administrator provides fund administration services. These obligations will therefore now apply to registered funds as well, and adjustments may be needed in the compliance procedures of some administrators.
The good news from a fund operator's perspective is that the new law contains 'grandfathering' provisions, such that a registered fund that currently has a minimum initial subscription of less than $100,000 will still be permitted to continue to operate on that basis.
Power to the authority
The powers of Cima have generally been increased by the new law, which has granted general responsibility to the authority for supervision of persons and institutions governed by the new law, setting out powers to carry out investigations and to gather information, with appropriate penalties for those providing false information. Now Cima is able to cancel a compliance certificate or the registration of a fund in certain instances, for example where the fund is carrying on business in a manner that is prejudicial to investors. One further power Cima has been granted is to attend winding-up proceedings where a petition for the winding up of a licensee was presented by a person other than Cima.
While the amendment law does contain some fairly significant changes and certainly does increase the powers of Cima, imposing additional duties on auditors and administrators, overall the changes are probably not as comprehensive as many had anticipated.
In addition to the amendment, the Mutual Funds (Annual Returns) Regulations will also be passed imminently. These regulations will bring into effect Cima's electronic reporting initiative, to take effect in early 2007. For regulated funds, fund managers will submit, in a prescribed manner, their annual reporting requirements using a secure, streamlined and paperless system. Cima will then have accurate electronic data, extracted mostly from audited accounts, for use in reporting aggregate information on the funds industry. Cima has, however, underlined that information will only be made available on an aggregate basis and there is no question of disclosure of information in relation to any particular fund.
At the same time, there is change at Cima, as head of the securities and investment division Gary Linford steps down and makes way for his successor Yolanda McCoy. The funds industry in Cayman has grown dramatically under Linford's stewardship, and perhaps the limited scope of the Mutual Funds (Amendment) Law will stand as a legacy and testament to his successful reign as the head of one of Cima's most important divisions.
Remo Dalimonthee is an associate at Solomon Harris