2018 was an extremely busy year for Walkers, one of the Cayman Islands’ leading international law firms. The firm saw a tremendous amount of activity in private equity and related downstream corporate work, while with respect to hedge funds the Cayman team was busy doing restructuring work.
“We had instructions in relation to changes to fee terms, to re-energise products and make them more attractive to current investors and new investors. Overall, we were very busy across the group,” says Caroline Heal, Partner, Walkers’ global Investment Funds group.
The last 12 months has certainly seen Cayman continue to implement global best practices to meet the expectations of international regulators as it seeks to uphold its reputation as the world’s leading offshore jurisdiction. CIMA has enhanced its anti-money laundering (AML) regime which takes a risk-based approach and clarified that unregulated closed-ended funds, such as private equity and real estate funds, must comply with the AML regime.
“The main regulatory development in 2018 was a series of refreshments to the Cayman AML regime. It’s mostly been a series of helpful clarifications on points and questions that we were asked to advise on frequently.
“The changes have brought new obligations for funds that we’ve had to help people navigate through. Walkers, as well as fiduciary services businesses and fund administrators have all acted quickly to support their clients and offer solutions, which underlines the quality of Cayman’s service provider community,” says Ed Pearson, Senior Counsel within Walkers’ global Investment Funds group.
One key enhancement of the AML regime is the requirement for Cayman funds, regulated or unregulated, to appoint natural persons to act as anti-money laundering compliance officer (AMLCO), money laundering reporting officer (MLRO) and deputy money laundering reporting officer (DMLRO).
Heal feels that these changes made to Cayman’s AML regime has reinforced Cayman’s position as a jurisdiction fully in line with global standards on AML. “I think it continues to strengthen the reputation of the Cayman Islands in this area. It hasn’t been particularly difficult to make the changes that are in these new pieces of AML law and guidance. The quality of the regulatory regime and service providers is second to none,” says Heal.
With digital asset strategies becoming increasingly popular with fund managers and Initial Coin Offerings (ICOs) being used by fintech entrepreneurs, issuing tokens to fund their business development activities, the need for a robust risk-based regulatory regime is timely. Digital assets, led principally by a proliferation of cryptocurrency strategies, are still in many respects an inchoate asset class.
“There is a distinction between funds that are investing in cryptocurrency or digital assets versus ICOs being launched by entrepreneurs.
“We’ve worked on a lot of cryptocurrency fund launches; most have been open-ended vehicles, although I have seen a number of closed-ended vehicles, which tend to have broader fintech strategies than purely cryptocurrency,” explains Heal.
Pearson notes a divergence of opinion among those launching crypto funds, with respect to regulation. On the one hand, he says, some managers are finding ways to postpone or avoid some of the regulatory burdens that are applicable to large funds. “Keeping their funds within an exemption from registration has been important to some of them to control their costs in their early stages,” he says. “On the other hand, some managers have said they want to be as regulated as they can be from the outset, due to investor pressure.”
One of the challenges with ICOs is that many are marketed broadly and therefore have a multi-jurisdictional component to them. The SEC has issued guidance on this subject, particularly in light of some ICOs falling foul of US securities laws because the tokens they have issued are, in the SEC’s view, securities.
As Coin Telegraph reported on 27th November, 2018, both the SEC and fellow regulator the Commodity Futures Trading Commission (CFTC) have adopted the perspective that while Bitcoin is not considered a security, various ICO tokens are subject to individual scrutiny.
“I think we’ve been clear that Bitcoin isn’t a security, but many of the ICOs that you see and talk about – they are securities,” Jay Clayton, chairman of the SEC, told CNBC.
It is something to keep an eye on over the next 12 months as Cayman seeks to balance attracting digital asset investors and applying sufficient regulatory oversight, without introducing unnecessary risks to its highly valued investment funds industry.
One other area that Walkers has been tracking relates to the nature of board compositions to Cayman funds. The majority of Walkers’ hedge fund clients have a majority representation of independent directors. This has largely developed in response to the increasing demands of institutional investors.
“There has been a trend for independence at the Master Fund level with the use of a governance board and oversight by independent directors. In the private equity space, more investors are pushing for seats on advisory boards and LPAs are asking advisory boards to do more. It’s the continuance of a trend that has been in place for a while,” observes Pearson.
Heal notes a related trend: “We see managers looking for directors with specific backgrounds so they get the right balance on the board.”
“We now see people with a wide variety of backgrounds, including more traditional public company boards, valuation committees and other experience that isn’t necessarily rooted in the investment funds industry. Walkers regularly assists clients in finding the right balance for them,” concludes Heal.
