CONVERGENCE: New Rules Impacting Regulated Funds In The Cayman Islands
A key trend in recent years for financial services law and regulation is convergence. Keen readers of the Private Funds Law, 2020 (the “PFL”) will have noted requirements with respect to valuation, safekeeping of fund assets and cash monitoring that are conceptually similar to investor protection mechanisms found in other jurisdictions.
New investor protection Rules have recently been released by The Cayman Islands Monetary Authority (“CIMA”) regarding hedge funds regulated under the Mutual Funds Law (2020 Revision) (“Regulated Mutual Funds”) and private (closed end) funds that are registered under the PFL (“Registered Private Funds”).
The Rules dealing with segregation of fund assets have been issued for both Regulated Mutual Funds and private funds, which further align the open and closed end regulatory regimes with each other and those in other key jurisdictions.
SEGREGATION OF ASSETS REQUIREMENTS
CIMA has published Rules on the segregation of assets for both Regulated Mutual Funds and Registered Private Funds (the “Segregation Rules“). In both cases, the overriding requirements of the Segregation Rules, is that a fund regulated by CIMA must ensure that none of its service providers use any of the financial assets and liabilities of the fund (including investor funds and investments) to finance their own or any other operations in any way.
CIMA, in a letter dated 30th June 2020, has confirmed that the Segregation Rules are not intended to prohibit rehypothecation or sub-custodial arrangements.
Regulated Mutual Funds and Registered Private Funds (collectively “regulated funds”) share similar Segregation Rules and specify that none of the following shall constitute the financing of the Service Provider’s own operations:
- Remitting to the relevant investors the redemption, withdrawal or distribution proceeds being paid on behalf of the fund;
- Paying fees, charges and expenses that are payable by an investor in connection with the purchase, conversion, holding, transfer or redemption of equity or investment interests of the fund;
- Acquiring or disposing of assets for investment purposes in accordance with the fund’s governing documents and offering document / marketing materials; or
- Paying fees, charges, expenses and taxes that are properly payable by the fund and as disclosed in and in accordance with the fund’s constitutive documents or the offering document / marketing materials or as otherwise disclosed to investors.
In all instances, the operators (board of directors, GP or similar governing body) of a regulated fund must establish, implement and maintain (or oversee the establishment, implementation and maintenance of) strategies, policies, controls and procedures to ensure compliance with the Segregation Rules, consistent with the regulated fund’s offering document / marketing material and appropriate for the size, complexity and nature of the regulated fund’s activities and investors.
Operators of a Regulated Mutual Fund must also ensure that:
- A Service Provider is appointed with respect to ensuring safekeeping of the Regulated Mutual Fund’s Portfolio;
- The asset title verification function is independent from the portfolio management function or that potential conflicts of interest are properly identified, managed, monitored and disclosed to the investors of the Regulated Mutual Fund. This is similar to the safekeeping of fund assets requirements under the PFL.
REGULATED MUTUAL FUNDS – OFFERING DOCUMENT REQUIREMENTS
The new Rule will apply to any document where equity interests in the Regulated Mutual Fund are offered for sale or persons are invited to subscribe for, or purchase, equity interests in the Regulated Mutual Fund, typically an offering document.
The Rule is specific and detailed, in contrast to previous principle-based requirements, but covers disclosures that are largely usual and customary, so any amendments to the Offering Documents in order to meet compliance will generally be minor.
The new Rule does, however, include a requirement of a mandatory statement regarding CIMA in an exact form (the “Mandatory Statement”). This is a new requirement and means that every new Offering Document including updates to an Offering Document will require some minor adjustment to be compliant.
REGISTERED PRIVATE FUNDS – MARKETING MATERIALS REQUIREMENTS
The new Rule will apply to any Registered Private Fund that intends to prepare any documents for investor review prior to the purchase of investment interests in a Registered Private Fund, including but not limited to offering documents, but does not require the preparation of such Marketing Materials (e.g. if there will be no further investments).
Whilst this Rule does not represent significant changes, the requirement to include the Mandatory Statement will also apply to Registered Private Funds and therefore all new or updated Marketing Materials prepared will need to be amended to incorporate the new amendments.
Penalties for non-compliance
In the case of breaches of the Rules, CIMA’s regulatory policies and procedures as contained in its Enforcement Manual will apply, in addition to any other powers provided in the MFL, PFL and the Monetary Authority Law.
To find out how DMS can help your Fund comply with the safekeeping requirements or for any queries in relation to the above, please contact your usual DMS representative or contact us below:
If you have any questions please reach out to your usual DMS representative or contact us below: