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Shoring up the rules – strengthening oversight in the Cayman Islands

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By A Paris – As the global focus on regulation continues to ramp up, the financial industry in the Cayman Islands is shoring up its legislation to remain at the forefront of change and strengthen its position as a fund domicile.

By A Paris – As the global focus on regulation continues to ramp up, the financial industry in the Cayman Islands is shoring up its legislation to remain at the forefront of change and strengthen its position as a fund domicile.

In its most recent move, the Ministry of Financial Services announced the introduction of the Private Funds Bill in an effort to enhance oversight of investment funds, both open- and closed-ended. This brings about significant changes for funds which were previously unregulated.

“The changes would provide additional surety and transparency for investors and managers of Cayman Islands investment funds, while better aligning with best market practices, enhanced anti-money laundering and other key regulatory standards,” the ministry says in a briefing note.

Published in January 2020 and enacted in February, this Bill sees a number of previously unregulated funds, such as private equity, private credit, real estate and infrastructure funds, being required to register with the Cayman Islands Monetary Authority (CIMA). This is a significant change to the current status quo. Ahead of this Bill being tabled, funds investing in unlisted or private assets set up in the Cayman Islands were not subject to any CIMA registration or regulatory requirements.

“Following the introduction of the Bill, such vehicles will be required to register with CIMA and will be subject to the supervisory measures of CIMA. Additionally, such funds will need to comply with various governance and filings requirements set out in the Bill. Once registered, a private fund will be required to pay an annual registration fee, comply with annual return and local audit requirements, inform CIMA of material changes to the information submitted as part of its registration application and retain appropriate accessible records,” law firm Cadwalader Wickersham & Taft LLP says in a statement.

According to Cayman Finance, the island’s promotion agency: “These legislative changes are in response to an evolution in global regulations, primarily driven by the Organisation for Economic Co-operation and Development, the European Union and the Caribbean Financial Action Task Force. The Cayman Islands consistently responds to global changes like these with a thoughtful and balanced approach enabling prompt adherence to evolving key global regulatory and anti-money laundering standards and best practices.”

The Bill also includes requirements around operational regulation as well as supervision and enforcement. Private funds will be required to carry out annual valuations and also to appoint a custodian for the safekeeping of the fund assets. Further, the Bill demands monitoring of cash flows, record keeping of securities and auditing of accounts by a CIMA recognised auditor.

Bill Prew (pictured), chief executive at Indos Financial, a independent depositary and fund oversight services provider, comments: “The valuation, asset safekeeping, verification and cash flow monitoring requirements may appear straightforward but, as always, the devil will be in the detail and may dictate the solutions available to managers.

For example, few fund administrators actually perform the valuation or verify ownership and title of private assets. Depositaries, on the other hand, are more suited to performing the functions given their existing remit under AIFMD and can also do so for managers that have not outsourced their fund administration function.”

International pressure

The Cayman Islands is under considerable international pressure to ensure operators in the jurisdiction comply with these regulations. To this effect, several industry commentators advise managers to implement these changes effectively rather than simply ticking the compliance box.

“As the Ministry of Financial Services undertakes this modernisation of funds regulation to best adhere to international standards, it’s imperative that those active in this industry take the steps necessary to prepare for these changes.

“The legislation is expected to include transition period and/or staggered implementation. This period will allow those affected time to review their accounts and make the necessary changes to become compliant with CIMA’s oversight. With the enhanced supervision and enforcement allocated to CIMA in these amendments, adequately preparing private funds for these new regulations will be paramount,” notes the fund administrator Mainstream Group in a statement.

Maples Group add: “The Cayman Islands’ government and private sector have approached these developments in a robust and responsive way that ensures the jurisdiction’s legislative and regulatory environment, tax-neutral status, flexible structuring options and local service providers can cater to a diverse profile of sponsors and investors who are operating in an increasingly complex, competitive and multi-jurisdictional context.”

Tim Rossiter, Chair of the Cayman Islands Fund Administrators Association (CIFAA) comments: “The focus on regulation presents an opportunity for fund administrators to further enhance their value to clients. As we provide the infrastructure of a Fund operating structure, we are the easiest route for managers to meet their regulatory requirements. 

“As Fund corporate structures become increasingly more complex, in parallel with the increased demands for transparency by regulators and institutional investors, managers of close-ended structures (PE/VC/RE/PC) have realised the value of a fund administrator, leading them to adopt the operating models that are now common in hedge funds, i.e. independent administrator, independent fiduciaries and independent auditors.”

Balancing private and public interest

The Private Funds Bill is the latest in a chain of regulatory and legislative changes in the Cayman Islands, all of which have significant impacts on the funds industry – these included strengthening anti-money laundering and terrorism financing laws, introducing a law around data protection and further updating the island’s economic substance requirements.

The law firm Walkers notes: “In October 2019, the Cayman Islands government announced its intention to modernise funds regulation in the Cayman Islands, by introducing a registration regime for closed-ended funds. 

“This initiative arose from an ongoing dialogue the European Union has been conducting with many jurisdictions to ensure they meet EU requirements in respect of good governance. The EU recognises the Cayman Islands as a leading jurisdiction for investment funds and it is therefore unsurprising that they have focused on the Cayman Islands’ investment fund regulatory framework. Bermuda, the British Virgin Islands and the Bahamas are also expected to be required to implement similar regulatory frameworks.”

The changes can also contribute to improving the Cayman Islands reputation among the general public. Rossiter of the CIFAA explains how public perception is one of the challenges the jurisdiction faces: “The Cayman Islands Government has adopted a number of legislative changes to enhance tax transparency and cooperation with the EU. While industry experts recognise how well regulated and transparent the Cayman Islands is (for example we were an early adopter of transparency initiatives such as CRS and FATCA), this perception needs to be extended to the public to help them understand the benefit we provide to “onshore” jurisdictions. We must continually work to address this.”

While working to strengthen the jurisdiction’s status, the changes have been introduced with care for both private and public interest, the balance of which decides the fate of the jurisdiction. As a financial hub, the Cayman Islands is known for fostering a close working cooperation between the private and public sectors, to the benefit of both. 

At a meeting with over 400 industry practitioners, Tara Rivers, Minister of Financial Services said: “It is through our constructive and cooperative working relationship, which has significantly strengthened over the past two and a half years, and your commitment to doing what is in the best interests of the jurisdiction as a whole (which in turn, will have a direct positive impact on your respective companies and firms), that we can meet the challenges facing Cayman’s financial services industry; and succeed in ensuring that the Cayman Islands remains as one of the best and highly sought after places to do business in the world.” 

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