New registration fees for master funds will bring $7 million to the public purse, according to Premier McKeeva Bush.
Mr. Bush, speaking as he presented a bill to amend the Mutual Funds Law to include the registration of master funds, said the US$2,500 registration fee for each master fund would apply to between 3,000 and 4,000 newly registered funds each year.
The premier first announced plans to introduce registration of master funds in his budget speech in June. At the time, he said the fee was likely to be US$1,500 per registration, but the bill before the Legislative Assembly on Monday stated the fee would be $2,500.
Under the master/feeder fund structure, investors acquire interests directly in a feeder fund, which then invests into a master fund. Assets are typically acquired, held and traded at the master fund level.
“Currently, there are thousands of investment funds that are not regulated by the [Cayman Islands Monetary] Authority, as a result of an exemption in Section 4(4) of the Mutual Funds Law or as a result of the definition of a mutual fund which excludes closed ended private equity funds and funds that issue debt rather than equity interests. Master funds represent a significant portion of the exempted funds category but their exact number is unknown,” Mr. Bush said.
He acknowledged the new regulatory system would require additional resources for the Monetary Authority – at a cost of $750,000 a year.
“However, with anticipated revenue from the proposal estimated to be in excess of $7 million, such operating expenses would be nominal in comparison,” he said.
Mr. Bush said he had sought feedback from members of the financial services industry, and while some had strongly opposed the new measures, others supported them.
Among those who opposed the new regulation was the Cayman Islands Law Society. Leader of the Opposition Alden McLaughlin tabled three letters from the Law Society president Charles Jennings, in which the Society’s opposition to registering master funds was outlined.
In one of those letters, written after Mr. Bush announced the plan to register master funds in the June budget speech, Mr. Jennings said the legal profession had not been consulted and did not support the measure, which he said would be “severely detrimental” to Cayman’s competitive edge and could damage the Islands’ reputation.
In the letter, Mr. Jennings said the negative perception of Cayman could increase when it became more widely known that the “expressed purpose for the increase is simply to supplement private electricity consumption”.
In his budget address, Premier Bush said income from the master fund registration fee would be used to alleviate the burden for Cayman residents caused by growing electricity bills.
Mr. Jennings said if one of the drivers for introducing the new regulations was Organisation for Economic Co-operation and Development peer reviews, in which a jurisdiction’s policy in a particular area is examined by fellow members on an equal basis, then Cayman should consider adopting an alternative system used in the British Virgin Islands.
The Law Society also pointed out it was “most unlikely that master fund registration will generate the revenue government has budgeted for this year” because it would take the Cayman Islands Monetary Authority far longer than a couple of months to “register three or four years’ worth of funds” in that time and that there were not enough lawyers in Cayman to process that number of new registration within that time frame.
“To meet immediate revenue needs at the stroke of a pen, we advise instead simply raising registration fees paid by existing registered funds and charging a small fee for each filing made by registered funds and subsequent revisiting of regulatory aspects when it becomes clear what is needed to meet future … requirements,” the letter read.
Mr. McLaughlin also presented a letter written in June 2011 from members of the Financial Services Council, a body that advises Premier Bush on financial services industry issues.
That letter stated registration of master funds has not been considered necessary because the feeder funds from which it acquires its assets are already registered.
It went on: “It is our view that the main object of concern in the OECD report is not the fact that these funds are unregistered, rather it is the consequential perceived limitations on the availability of investor information in respect to these unregistered funds.”
Mr. McLaughlin, citing the letter, said: “The bottom line is that the OECD wants to be able to access investor information so that it can be exchanged for tax purposes. The requirement for master funds to be registered as mutual funds does not itself achieve this objective. The OECD report itself contains the answer, having identified that the number of unregulated funds is a potential problem, they go on to recommend a solution. The recommended solution is to ‘introduce effective sanctions against companies and partnerships where they fail to comply with requirements to maintain ownership and identity information as requested’.
“What the OECD failed to consider, however, was the existing extensive penalties for failure to maintain client information under money laundering legislation. The OECD has chosen to ignore or has not taken into consider obligations in extent of these provisions. The existing legislation in Cayman has been extensively reviewed by the FATF [Financial Action Task Force] and IMF [International Monetary Fund] and it is difficult to see where further revisions are required.”
Responding to the concerns raised by Mr. McLaughlin, Premier Bush said there had been “mixed views” from members of the Financial Services Council about the introduction of the new registration system, but not “full opposition”. He said lawyers on the council opposed it, while accountant members supported it.
He went on to urge lawyers to “ease the burden on their clients by not excessively charging them”.
Mr. Bush said the introduction of master fund registration was not being done “just out of a desire to see revenue”, but because it was required by the OECD.
In a second reading of the bill, eight Members of the Legislative Assembly voted for it, two members, including Mr. McLaughlin, abstained, and the remainder were absent.