EFFECTIVENESS: Cayman Islands’ evolving standards to impact fund management operations
In late June 2020, the regulations empowering the Cayman Islands Monetary Authority (“CIMA”) to impose administrative fines of up to approximately USD1.25 million were amended. The amendments included various fines specific to non-compliance with provisions in the Mutual Funds Law under which hedge funds are registered with CIMA as well as closed end funds registered under the Private Funds Law (“PFL”).
General non-compliance with the PFL is a statutory offence, but one with a relatively small fine of USD25,000, but is considered a “very serious” breach under the administrative fines’ regulations, subject to the maximum fine noted above.
Key areas for PFL compliance are valuation, safekeeping of fund assets and cash monitoring.
In addition to fines which enforce compliance with regulatory requirements, rules are being more frequently issued for funds registered with CIMA that make the requirements more prescriptive, rather than a principles-based approach that we have seen in the past.
This is part of a global process affecting key fund domiciles as they are evaluated by the FATF, OECD and EU for the effectiveness of their regulatory regimes, with respect to combating financial crime, safeguarding investor interests and minimizing systemic risk.
In addition to Rules on Segregation of Assets, CIMA has issued rules on the calculation of Net Asset Values for hedge funds and closed end funds.
These rules require that, among other things:
- A NAV calculation policy be established;
- The NAV Calculation Policy (“NCP”) ensures that a Fund’s NAV is fair, reliable, complete, neutral and free from material error and is verifiable;
- The NAV is calculated in accordance with IFRS, US GAAP or another acceptable standard;
- The NCP must be disclosed to investors and contain practical and workable pricing and valuation policies, practices, and procedures;
- The NCP mandates the valuing of assets regularly (at least quarterly for hedge funds and annually for closed end funds);
- The NCP states the accounting principles or reporting standards that will be followed;
- The NCP identifies the price sources for each investment type and a practical escalation of resolution procedure for the management of exceptions;
- For funds registered under the PFL, the NCP defines the role and responsibilities of the person identified under Section 16 in the valuation process. This is the person valuing each asset held by the fund;
- Deviations from the NAV Calculation Policy must be disclosed in the Fund’s Marketing Materials. Where they are likely to have an effect on the reported NAV, they must be disclosed to the fund’s investors and agreed by the governing body of the fund (GP, directors etc.) in advance of the determination or production of the NAV;
- For hedge funds, investors must be notified in the fund’s marketing materials if the NAV calculation is not performed by a person independent of the investment manager and governing body, including a justification of why another service provider could not perform this service;
- For private / closed end funds, investors must be notified of any material involvement by the fund’s investment manager / advisor in the pricing of the fund’s portfolio, or otherwise in the calculation, determination or production of the NAV and any conflicts of interest caused by such involvement;
- The governing body has ultimate responsibility for oversight of the entire net asset valuation process, and must approve, and review at least annually, the NCP and any Pricing Models.
It is therefore critical that managers remain up-to-date with the evolving regulatory requirements given the global pressures to ensure that all fund regulatory regimes protect investor interests when they are pursuing favorable risk/return profiles in the alternative investment space. The rules and regulations mentioned herein are now effective for CIMA registered funds. For managers of closed end funds, who have not previously dealt with these issues in the Cayman context, this is even more important.
“Please note that the deadline for registration under the Private Funds Law remains 7th August 2020.”
Please contact your usual DMS contact for further information or contact us below: