The Cayman Islands continues to be at the forefront of adoption of global best practices in the funds industry. The regulation of closed-ended funds reflects the Cayman Islands’ commitment to implementing governance principles laid out by the EU, the OECD and other international organisations.
General
Subject to certain exclusions, the Private Funds Act applies to any private fund - which includes "any company, unit trust or partnership whose principal business is the offering and issuance of investment interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors to receive profits or gains from such entity’s acquisition, holding, management or disposal of investments", where:
the holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments; and
the investments are managed as a whole by or on behalf of the operator of the private fund, directly or indirectly, for reward based on the assets, profits or gains of the company, unit trust or partnership.
"Investment interest" means a share, LLC interest, trust unit or partnership interest that:
(a) carries an entitlement to participate in the profits or gains of the company, unit trust or partnership; and
(b) is not redeemable or repurchaseable at the option of the investor, but does not include debt, or certain transferable debt instruments.
Out of scope entities
The following are out of scope of the PFA:
Certain prescribed non-fund arrangements including, among others, structured finance, securitisation and debt issuance vehicles, joint ventures, proprietary vehicles, employee incentive schemes, holding vehicles, preferred equity financing vehicles, certain listed funds, sovereign wealth and pension funds and single family offices;
Certain Cayman Islands licensed entities;
Regulated Cayman Islands mutual funds; and
Single-investor funds, formed without the purpose of pooling investor funds.
Registration with the Regulator
A private fund must submit its registration application to the Cayman Islands Monetary Authority (CIMA) within 21 days after acceptance of capital commitments from investors and pay an annual registration fee.
The PFA expressly permits private funds to enter into binding subscription agreements with certain high net worth and sophisticated persons (as defined) before submitting a registration application to CIMA. However capital contributions may not be accepted prior to registration.
The application process for private funds will involve filing an application form with CIMA through its online portal, containing key details on the fund and its service providers. This process will be undertaken by Bell Rock, as a licensed and regulated fund services group.
Operational requirements
The PFA codifies a number of investor friendly operational requirements which are consistent with the EU’s guidance on investment funds, and which in practice, will not be new to sophisticated operators in the global funds industry.
Audit
Audited financial statements signed-off by a Cayman Islands auditor must be submitted to CIMA within six months of a private fund’s financial year end. The PFA provides broad scope for private funds to select the accounting standards to be applied in the preparation of their financial statements.
Private funds will also be required to submit an annual return to CIMA.
Valuation
Private funds must adopt appropriate and consistent procedures for proper valuation of assets, with valuations to be carried out at least annually.
Valuations must be carried out by:
an appropriately qualified independent third party,
the manager or operator of the fund, provided the valuation function is independent of the management function or that potential conflicts of interest are properly identified and disclosed to investors, or
a fund administrator.
Where valuations are not carried out by an independent third party, CIMA may require the private fund to have its valuations verified by an auditor or independent third party.
Custody
Unless it is neither practical nor proportionate to do so (having regard to the nature of the fund and its assets), private funds must appoint a custodian to hold custodial fund assets, and undertake title verification of other fund assets.
If a private fund notifies CIMA of its intention not to appoint a custodian, it must appoint one of the following to perform title verification:
(a) an administrator or other independent third party; or b. the manager or operator of the fund, provided this function is independent of the portfolio management function or that potential conflicts of interest are properly identified and disclosed to investors.
(b) Where title verification is not carried out by a custodian, administrator; or (c) another independent third party, CIMA may require the private fund to have its title verification verified by an appropriately qualified independent third party.
Cash Monitoring
Private funds must appoint a person to monitor cash flows, ensure cash has been booked in appropriate cash accounts, and ensure all payments made by investors have been received.
The appointed person may be:
(a) an administrator, a custodian, or another independent third party; or
(b) manager or operator of the fund, provided the cash monitoring function is independent of the portfolio management function or that potential conflicts of interest are properly identified and disclosed to investors.
Where cash monitoring is not performed by an administrator, custodian or another independent third party, CIMA may require the private fund to have its cash monitoring verified by an independent third party.
Identification of Securities
Private funds that regularly trade or hold securities on a consistent basis, must maintain a record of the identification codes of the securities traded or held, and must make this record available to CIMA on request.
Penalties for Failing to Register
Failure to register a private fund in accordance with the PFA constitutes an offence and carries a fine on conviction of CI$100,000. The same penalty applies to a person not registered as a private fund that holds itself out as a registered private fund. CIMA also has the ability to impose administrative penalties.
Structuring your fund with Bell Rock
As a leading fund services group licensed and regulated in the Cayman Islands, we routinely work directly with investment managers and law firms around the world to set up Cayman closed-end funds involved in private equity, venture capital or real estate.
Not only do we legally form the fund entities (GP and ELP), we also:
register with the regulator
provide registered agent and office address
assist with the appointment of suitable service providers to meet the requirements set out in the PFA (fund administrator, auditor, bank account (as required))
act on the board of GP's for Cayman funds and also investment committee's as independent fund directors to bolster and strength the fund governance framework;
Provide regulatory and compliance services to all Cayman funds.
For further information, please feel free to contact us: info@bellrockgroup.com
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