INVESTMENT BASICS: CAYMAN MUTUAL FUNDS

INVESTMENT BASICS: CAYMAN MUTUAL FUNDS

Definition of Mutual Fund

The definition of a mutual fund is established in the Mutual Funds Act (2012 Revision) (the “MFA”), as follows:

“A company, unit trust or partnership that issues equity interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors in the mutual fund to receive profits or gains from the acquisition, holding, management or disposal of investments but does not include a person licensed under the Banks and Trust Companies Act (2021 Revision) or the Insurance Act, 2010 [Law 32 of 2010], or a person registered under the Building Societies Act (2020 Revision) or the Friendly Societies Act (1998 Revision)”

It is always good to further extend the above definition to include that the company, unit trust or partnership issues equity interest that is redeemable or repurchaseable at the option of the investor in order to complete the definition

Note that funds commonly referred to as hedge funds fall within the definition of a mutual fund and are thus covered by the MFA.

Regulation of Funds

The MFA gives the Cayman Islands Monetary Authority (“CIMA”) responsibility for regulating certain categories of mutual funds operating in and from the Cayman Islands as we will explore in this article.
* The ongoing supervision of mutual funds falls under the remit of CIMA’s Investments Supervision Division.
* Categories of Regulated Mutual Funds
* The categories of funds regulated under the MFA are set out below.

Licensed Mutual Fund

The Licensed Mutual Fund is reserved for those who intend to offer their equity interest to retail investors (general public) outside the Cayman Islands.

The MFA (Section 4(1)) specifies that a mutual fund operating in and from the Cayman Islands must have a licence unless: a licensed mutual fund administrator is providing its principal office; it meets the criteria set out in Section 4(3), which allows for funds to be registered.

The provisions relating to licensed mutual funds benefit large, well known and reputable institutions, which do not propose to appoint Cayman Islands service providers.

Licensed Mutual Funds are the fewer among the regulated mutual funds in the Cayman Islands as they represent less than 1% of all the Mutual fund being a structure popular in onshore jurisdiction. However, Licensed Mutual Funds have been chosen by Japanese promoters and investment managers to service retail investors.

Administered Mutual Fund

The Administered Mutual Funds are slightly more popular than the Licensed Mutual Fund introduced above, representing around 2% of all the regulated mutual funds in the Cayman Islands.

The Administered Mutual Fund is an option for those promoters and investment managers that want to avoid a minimum investment amount for their investors.

To be approved as an administered mutual fund, the fund must have a CIMA-licensed mutual fund administrator providing its principal office. The regulatory responsibility for the administered fund, which has more than 15 investors and which is not a regulated mutual fund, is placed largely in the hands of a licensed mutual fund administrator.

The licensed mutual fund administrator shall notify CIMA if it has reason to believe that a is acting in breach of any provision of the MFA, is insolvent or is otherwise acting in a manner that is prejudicial to its creditors or investors.

Registered Mutual Fund

Registered Mutual Funds are the most popular mutual funds in the Cayman Islands, representing around 70% of CIMA’s regulated and/or licensed mutual funds.

Regulated in section 4(3) of the MFA, a Registered Fund must have either a minimum aggregate equity interest of CI$80,000 (US$100,000 or equivalent in other currencies) purchasable by a prospective investor or the equity interests must be listed on a stock exchange approved by CIMA.

Limited Investor Fund

Defined by section 4(4) of the MFA, Limited Investor Funds were known as the “exempt funds” until 2020 as they didn’t require to be registered with CIMA and are those who their equity interests are held by not more than fifteen investors, a majority of whom must be capable of appointing or removing the operator of the fund (directors) and the prospective investors are not required to have a minimum initial investment.

They are subject to the same regulatory oversight from CIMA as the Registered Mutual Fund, since the update to the MFA in 2020. Since then, they have fell out of popularity and currently represent around 5% of all CIMA’s licensed and/or regulated mutual funds.

Master Fund

Currently, a sub category of the Regulated Funds, a Master Fund must have either a minimum aggregate equity interest of CI$80,000 (US$100,000) purchasable by a prospective investor in the master fund or the equity interests of the master fund must be listed on a stock exchange approved by CIMA.

They represent over 25% of CIMA’s licensed and/or regulated mutual funds and they are commonly used by promoters and/or investment managers when different types of investor are going to be investing in the same underlying assets using similar strategy but they cannot be commingled in one vehicle for different reasons.

If a Cayman Islands Regulated Mutual Fund or a Limited Investor Fund invest more than more than 51% of its investing through a Cayman Islands company, unit trust or partnership, the latter will fall under the MFA’s definition of Master Fund and should register with CIMA.

EU Connected Funds

EU Connected funds are defined in the MFA those mutual funds as defined above that are:

1. managed by a person whose registered office is in a Member State and whose regular business is managing one or more Alternative Investment Funds (“AIF”) as notified to the Authority as being identified to the relevant competent authority of a Member State in accordance with the relevant Law implementing the Alternative Investment Fund Managers Directive (“AIFMD”) in the Member State; or
2. marketed to investors or potential investors in a Member State, as notified to the Authority as being identified to the relevant competent authority of a Member State in accordance with the relevant Law implementing the AIFMD in the Member State;

The MFA allows both mutual funds to apply to be regulated by CIMA as EU Connected Funds and therefore enable them to benefit from the EU passport regime.

Standards of Regulation

CIMA regulates mutual funds in accordance with:
• The acts and regulations applicable to all regulated entities and those specifically governing this sector, namely, the Mutual Funds Act; Mutual Funds (Annual Returns) Regulations, 2006; Retail Mutual Funds (Japan) Regulations (2007 Revision);
• The relevant rules, guidance, policies and procedures issued by the CIMA; and
• Relevant international standards set by the International Organization of Securities Commissions (IOSCO) and the Offshore Group of Collective Investment Scheme Supervisors (OGCISS).

Common Fund Vehicles

The Cayman Islands has company, trust, partnership and related acts that allow a high degree of flexibility for establishing mutual funds. The four vehicles commonly used for operating mutual funds are the exempted company, the segregated portfolio company, the unit trust and the exempted limited partnership.

Exempted Company – The exempted company may redeem or purchase its own shares and may therefore operate as an open-ended corporate fund. Closed-ended corporate funds can also be established using the exempted company and it is a relatively straightforward procedure to convert from one to the other.

Segregated Portfolio Company – An exempted company can also be established as a “Segregated Portfolio Company” (“SPC”) with protected cells or portfolios. The SPC makes it possible to provide a means for different groups to protect their assets when carrying on business through a single legal entity.

Unit Trust – The unit trust is usually established under a trust deed with the investors’ interest held as trust units.

Exempted Limited Partnership – The exempted and limited partnership provides a second unincorporated vehicle and it can be formed as easily as the exempted company or the unit trust. Please contact the Registrar of Companies or your professional advisors for more information on structuring a fund in the Cayman Islands.

Service providers

Investment manager: The investment manager of a Cayman Island mutual fund is not required to be registered or incorporated in any particular jurisdiction.

Auditor: All regulated mutual funds must appoint a CIMA approved auditor that shall submit the annual audited financial statements of the mutual fund.

Administrator: The MFA doesn’t require to all regulated mutual funds to have an administrator but practically, regulated mutual funds would normally appoint an independent administrator to handle the accounting, net asset value calculations, investor AML/KYC and reporting.

Registered Office: as exempted companies, LLCs, exempted limited partnerships and exempted unit trusts mutual funds regulated in the Cayman Islands must have a duly licensed registered office in the Cayman Islands.

AML Officers: CIMA requires all mutual funds to appoint Anti-Money Laundering Compliance Officers (“AMLCOs”), Money Laundering Reporting Officers (“MLROs”) and their Deputies (“DMLRO”) (together the “AML Officers”) and they must ensure that their AML Officers are aware of their respective duties and responsibilities as set out in the Anti-Money Laundering Regulations (2020 Revision) (as amended) (“AMLRs”)
and will act in accordance with them.

Director registration

All directors and managers of LLCs, who act as directors of regulated mutual funds (or manager where the regulated mutual fund is an LLC), whether natural persons or corporate directors and whether resident in the  Cayman Islands or elsewhere, must be registered or licensed by CIMA under the Director Registration and Licensing Act (DRL Act)

An application fee is payable to CIMA together with annual fees, which must be paid by 15 January of each year. There are heavy penalties for non-compliance with the DRL Act, including significant fines and imprisonment.

We have explored the mutual funds regulated by MFA in this Article but for specific guidance on the features and regulations on any of the mutual discussed above and how your business may be impacted by these regulations, please contact your usual Vale Law attorney or any of:

Shelley Do Vale: shelley.vale@valelaw.ky
Santiago Mtnez-Carvajal: sc@valelaw.ky