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Rohan Small, audit partner, Ernst & Young

Cayman keeping pace with the regulatory environment

By Rohan Small (pictured) and Jeffrey Short - The Cayman Islands – one of the world’s leading offshore jurisdictions for the establishment of investment funds – has faced many tests to copper-fasten its dominant position. And now, even in the face of its toughest test ever in terms of intensifying laws on regulation and transparency, both from the European Union and the US, the fund jurisdiction looks set to overcome yet another hurdle.

Take the new EU Alternative Investment Fund Managers Directive. The AIFMD will impose a number of additional registration and reporting requirements on alternative investment funds as well as applying limits relating to manager remuneration. From a Cayman perspective, it will mean that a non-EU manager will need legal representation in its member state of reference and comply with the provisions of the directive in full, along with the jurisdiction meeting certain other conditions.

Cayman is confident that it will meet and comply with these provisions. Various parties in Cayman are already preparing for enhanced regulatory co-operation and the increase in transparency and reporting requirements.

On July 21, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. This will have the most sweeping impact on the financial system since the Great Depression. It will require many investment advisors of hedge funds and private equity funds to register with the Securities and Exchange Commission. In addition, there will be new record-keeping requirements and compulsory disclosure of certain financial and operational information.

These changes will not only have a material impact on operational and compliance requirements and processes but also possibly entail an increase in document requests and examinations by the SEC.

At Ernst & Young we are keenly focused and involved in preparing our clients for this new landscape. We are providing guidance by reviewing their infrastructure, reporting and record-keeping, IT systems, assessing, designing and implementing appropriate compliance programmes, and performing gap analyses and mock examinations to ensure compliance.

There is clearly no doubt that the Cayman Islands are facing stronger competition. Cayman has a long history of working together with foreign regulators and is highly rated by the Financial Action Task Force. The Cayman Islands Monetary Authority has also confirmed its commitment to entering into co-operation agreements with EU regulators as a matter of priority. All this augurs well for the industry, which is extremely receptive and, more importantly, well prepared for the anticipated changes.

It is also important to point out that Cayman is currently setting up approximately 100 new funds per month and will soon be back to pre-crisis levels in terms of registered funds.

Changes are afoot and the dynamic nature of the Cayman Islands will allow it to fit well into this new alternative investment era. The investment industry in the Cayman Islands is well on its way to fine-tuning its regulatory regime, operational processes and strategies, be it for the AIFMD or US registration responsibilities, to ensure continued success in this new environment.

Rohan Small is an audit partner and Jeffrey Short a financial services partner at Ernst & Young in the Cayman Islands

Please click here to download a copy of the Hedgeweek special report Cayman Islands Hedge Fund Services 2011

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