Bringing the Mutual Funds Law up to speed
The growth of the Cayman Islands as the world's leading offshore hedge fund jurisdiction owes much to the passage of the Mutual Funds Law in 1993.
Over the intervening years there have been few changes to a piece of legislation whose success has prompted financial centres around the world to copy its provisions in the hope of emulating Cayman's success.
The jurisdiction has gone from strength to strength by promoting and supporting top quality service providers, including leading global financial institutions such as UBS (which recently celebrated reaching $ 100 billion in alternative assets under administration), CITCO, the world's largest hedge fund administrator, Goldman Sachs, HSBC and Deutsche Bank.
Cayman also hosts the Big Four accountancy firms and some 88 administrators, including new arrivals Citibank, Morgan Stanley and Soros. The Cayman Islands Monetary Authority (CIMA), which says 80 per cent of all offshore hedge funds are domiciled in the jurisdiction, has just announced the registration of its 10,000th fund.
To meet the exponential growth in funds, CIMA is introducing new information systems to enable digital as well as physical filings. This automated system, plus plans to boost human resources, will maintain its effectiveness as a regulator by easing the filing process and allowing more expeditious service. To finance the changes, an increase of CI$ 500 (USD625) in regulatory fees has been endorsed by the industry after a consultation process initiated by government.
Cayman has long pioneered cutting-edge regulatory and legislative transitions that have enabled the jurisdiction to flourish, including the flexible, effective Mutual Funds Law. A re- examination of the legislation by a working group of government officials and representatives of the private sector - including Ogier, along with other law firms and administrators - has recommended various amendments that industry members anticipate will be enacted in 2006.
Some recommendations are relatively minor, including a change of nomenclature for Cayman funds. The names given to different types of fund would change to 'Professional Fund', 'Managed Fund' and 'Public Fund', becoming more similar to the terms used internationally, but would not affect the regulatory regime governing the funds.
The working group has also proposed increasing the minimum threshold for an initial investment from $50,000 to $ 100,000, bringing Cayman into line with the rules in many other jurisdictions (for example, the minimum for funds listing on the Irish Stock Exchange) and satisfying a recommendation of the International Monetary Fund.
In fact, this will simply align the rules with existing market practice. According to Gary Linford, head of CIMA's Investment and Securities Division, 80 per cent of funds registered with the authority have a minimum subscription of $ 1m or more, while only five per cent or fewer have a minimum of less than $ 100,000. These existing funds will be 'grandfathered' and will not be affected by the change.
The most significant recommendation will offer Cayman hedge fund administrators new opportunities for growth. Currently, the Mutual Funds Law requires funds domiciled abroad to be registered with CIMA in order for them to be administered in Cayman, imposing dual regulation on the BVI or Bermudian funds serviced by some Cayman administrators.
In the same way that Bermudian and Irish administrators service some Cayman-domiciled funds, abolishing this requirement would provide a framework for Cayman administrators to administer US onshore funds as well as funds domiciled in other offshore centres.
Peter Cockhill is a partner and joint head of the investment fund team with Ogier in Cayman
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