Five European countries still to enable marketing of Cayman funds

Hedge fUnds

The Cayman Islands has now signed memoranda of understanding with 25 European countries, which will enable the continued marketing of Cayman Islands hedge funds in the European Union.

But five members of the European Securities and Markets Authority, including Germany, Austria, Italy, Slovenia and Spain, have not signed an agreement yet.

Under the Alternative Investment Funds Management Directive, which will be implemented across the European Union from 22 July, 2013, alternative investment funds from non-EU jurisdictions, like Cayman hedge funds, cannot be marketed within EU countries unless certain conditions are met.

One of these conditions is that cooperation agreements exist between securities regulators in the fund domicile country and the EU member state where the fund is marketed.

Until 2015, Cayman funds have in principle the alternative of soliciting investments through private placements in each individual European country.

However, many countries, and particularly Germany, have restricted the access in such a way that the private placement route is virtually closed.

When Germany transposed the directive into national law, it demanded that to be marketed in Germany, fund and fund manager have to be based in the same country. The vast majority of managers of Cayman-registered funds are based outside the Cayman Islands.

Benjamin Collette, a partner at Deloitte Luxembourg, expects France, Italy and Spain to take the same position as Germany. Speaking at a Cayman Islands Society of Professional Accountants training event in June, he said only the UK, Austria, Belgium and Luxembourg still provide some flexibility with regard to private placements.

Cindy Scotland, managing director of the Cayman Islands Monetary Authority, who signed the MoUs with counterparts from 25 financial authorities that are members of the European Securities and Markets Authority, said, “Given the importance of Europe as a market for Cayman hedge funds, we have contacted the five European countries which have not yet signed with a view to securing signed MoUs.”

The memoranda of understanding set standards for cooperation on the supervision of investment funds and aim to protect investors and work toward global coordination of information sharing. The MoUs will also provide for regular reporting to the relevant EU regulator, as well as cross-border on-site visits.

Cayman already meets the remaining two conditions under the directive for the marketing of non-EU funds in Europe – that the domicile of the fund manager is not on the Financial Action Task Force list of non-cooperative jurisdictions and agreements are in place for the exchange of information for tax purposes between the EU and non-EU jurisdictions.

The EU Alternative Investment Funds Management Directive directive, which has to be implemented by EU member states by next week, will come into force in July 2014. It regulates fund managers, but it also impacts alternative investment management activities in the EU, funds domiciled in the EU and non-EU funds that are marketed to European investors.