Government has released two bills that will bring changes to the oversight of mutual funds and private funds, especially those that are not registered with the Cayman Islands Monetary Authority.
The Mutual Funds Bill would introduce a registration requirement for mutual funds with 15 or fewer investors and require the operators of those funds to file annual financial returns with CIMA, while private, or closed-ended, funds would also have to register with the financial regulator under the Private Funds Bill. These funds would also be subject to regulation.
The Private Funds Bill requires private funds to have appropriate and consistent internal procedures for the proper valuation of their assets. Similar to existing requirements for mutual funds under the Mutual Funds Law, the bill would require private funds to be audited annually by a CIMA-approved auditor in accordance with international audit standards and have proper custodial and cash-monitoring processes.
Private funds that regularly trade securities or hold them on a consistent basis would be required to maintain a record of the identification codes of the securities and make those records available to the regulator on request.
Under the bill, CIMA will have the power to enforce special measures against a private fund if the authority believes the fund has breached, or is at risk of breaching, its obligations under the law. CIMA’s proposed enforcement powers over private funds are broadly similar to those for mutual funds.
Proposed changes to the Mutual Funds Law will make it an offence to knowingly include false or misleading information in an offering document, which on conviction would attract a fine of $100,000. The amendments would also repeal two sections which provide for indemnities and clarify common law restrictions on alienation.
“The changes would provide additional surety and transparency for investors and managers of Cayman Islands investment funds, while better aligning with best market practices, enhanced anti-money laundering and other key regulatory standards,” the government said in a press release.
Both bills seek to adopt “sensible and commercially responsive regulation that has been the mainstay of the Cayman Islands open-ended funds regime and seek to maintain the Cayman Islands’ position as the preeminent jurisdiction for investment funds,” the statement said.
The proposed legislation was drafted in consultation with a working group of Cayman-based funds professionals as well as sCIMA, the Ministry of Financial Services noted.
Some of the proposed legislative changes are in response to EU concerns over Cayman’s regime for collective investment vehicles in relation to economic substance. The Cayman Islands government committed to addressing these concerns before the end of 2019 to ensure that Cayman is not included on an EU blacklist of countries that are considered non-cooperative in tax matters.
To provide guidance on what is expected by the EU, the EU Code of Conduct Group released a framework for collective investment vehicles in May 2019.
This framework does not touch on economic substance and funds remain outside of the economic substance tests introduced in 2019. Instead it outlines certain criteria that the EU will evaluate to determine that Cayman’s domestic framework for funds is “sufficiently robust”.
The criteria are structured around four themes: the authorisation and registration of funds; supervision and rules’ valuation; accounting and auditing; and depositary rules.
However, government is stressing that the goal of the legal changes is to update the investment funds framework in such a way that Cayman can continue to effectively compete at the highest level and still allow for innovation and market development, with strengthened investor protection as aselling point.
The bills are expected to be debated at the next sitting of the Legislative Assembly on 30 Jan.