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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