Investment Basics: Securities Investment Businesses
As introduced in our previous article, Investment Basics: Securities, the Securities Investment Business Act (SIBA) is the key legislation governing securities activities in the Cayman Islands. SIBA sets the rules for conducting securities business, outlining what counts as regulated activity, who must comply, and who is exempt.
In this article, we’ll break down how SIBA applies to specific types of business activities, who is covered, and who falls under exemptions. We’ll also discuss what it means to be a non-registrable person under SIBA. This should give you a clearer understanding of when a license or registration is required—and when it’s not—for conducting securities investment business in or from the Cayman Islands.
Regulated Activities Under SIBA
The Securities Investment Business Act (SIBA) categorizes certain activities as “Securities Investment Business.” To understand SIBA’s scope, it’s helpful to know how it defines Dealing, Arranging, Managing, and Advising—terms that may sound familiar, but have specific meanings in this context.
Dealing refers to the process of buying, selling, subscribing for, or underwriting securities, either on behalf of clients or on one’s own account. If you picture a typical broker, who acts as an agent buying and selling stocks for clients, you’re thinking of a common example of dealing under SIBA.
On the other hand, prime brokers are firms that may act as principals, underwriting new issues and trading directly on behalf of clients. So, whether acting as an agent or principal, anyone involved in these transactions within the Cayman Islands needs to consider whether their business qualifies as “dealing” under the Act.
Arranging activities, meanwhile, are most often associated with market makers. A market maker’s role is to bring together buyers and sellers, creating liquidity by ensuring securities can be traded efficiently. While arranging may not involve direct buying or selling, facilitating transactions by organizing introductions and structuring deals also falls within SIBA’s scope. If a business is regularly setting up securities transactions for others, even without taking part in the trade itself, it may be classified as “arranging.”
Moving into Managing, this term applies when a person or firm actively manages securities on behalf of another, often making decisions without consulting the client on each transaction. Familiar figures here are investment managers or portfolio managers—the professionals who handle the ins and outs of investment portfolios.
They might decide when to buy, hold, or sell securities in order to meet client objectives. Under SIBA, anyone involved in this discretionary management of assets is considered to be engaging in “managing” activities and may need to register accordingly.
Lastly, Advising, covers the role of providing guidance or recommendations on securities investments. If you’ve worked with an investment adviser who recommended specific stocks, bonds, or funds, you’ve likely encountered this type of activity.
Advising under SIBA involves evaluating the benefits and risks of securities and offering advice to potential investors. Whether it’s a casual conversation about the merits of a new stock or a comprehensive investment strategy, anyone regularly giving advice on securities may need to be mindful of this designation.
Each of these categories highlights a different way of engaging in the securities market, and SIBA’s classifications ensure that these varied activities remain transparent and regulated within the Cayman Islands. Whether facilitating, trading, managing, or advising, businesses involved in these areas should be aware of SIBA’s requirements and consider whether licensing or registration might apply to their operations.
If your business uses titles or descriptions suggesting that it engages in securities investment, or if you make representations of carrying on such activities, you may need to be registered or licensed.
Exempt Activities Under SIBA
While SIBA regulates many securities-related activities, it also makes exceptions for certain types of business. These exemptions recognize that not all securities activities carry the same regulatory risks. Here’s a rundown of the main exempt activities and what they mean in simple terms.
One exemption applies to dealing in indebtedness securities related to loans or credit arrangements. This means that if a business is trading in debt securities tied to loans, like bonds or promissory notes, it generally doesn’t fall under SIBA’s purview. The goal here is to separate traditional loan-related securities from broader investment securities that SIBA regulates.
Another exemption is the issuer exemption, which covers companies, partnerships, or trusts that are issuing, redeeming, or repurchasing their own securities. In other words, if an entity is simply handling its own shares—whether issuing new ones, buying back old ones, or redeeming them—it doesn’t need to register under SIBA. This is intended to allow businesses to manage their own equity without the extra layer of regulation.
Similarly, treasury shares—which are shares a company holds in its own treasury and may sell or reissue later—are exempt from SIBA. This exemption allows companies to manage their internal shareholding without being classified as a securities business.
Derivatives for risk management also fall outside SIBA’s scope, as long as they’re used solely to manage risk in non-securities investment businesses. For instance, if two companies enter a derivative contract to manage currency risk on a trade, it wouldn’t be considered a regulated activity, since it’s tied to non-securities business.
When it comes to goods and services disposal, businesses dealing in securities related to their own products or services are exempt as long as they aren’t marketing themselves as a securities dealer. For example, a company selling ownership shares in a real estate property is exempt as long as it doesn’t advertise as a securities dealer.
The ancillary services exemption applies when a firm’s securities activities are a minor part of another business and aren’t separately charged. For example, a legal firm that occasionally provides securities advice as part of broader legal services is generally exempt, as long as the advice is not a distinct, billable service.
Under employee schemes, businesses dealing in securities related to employee share plans or pensions are exempt. This means that if a company issues shares to employees or manages a pension scheme involving securities, it doesn’t need to register under SIBA for those activities.
Proprietary trading, or trading one’s own assets as a principal, is also exempt. This allows a business to manage and trade its own investment portfolio without being classified as a securities business.
Lastly, self-financing—arranging financing to help someone purchase securities—is exempt from SIBA. This covers cases where a company provides financing, like a loan, to help someone buy shares without being considered a securities dealer.
Each of these exemptions ensures that SIBA focuses on high-impact securities activities while allowing businesses to carry out day-to-day operations that may involve securities without extra regulatory burdens.
Who Needs to Comply with SIBA?
SIBA applies to any company, partnership, or individual conducting securities investment business in or from the Cayman Islands, including those registered offshore. Importantly, SIBA can affect businesses without a physical presence on the islands, so if you’re operating internationally, SIBA may still apply.
Non-Registrable Persons
Some people and organizations are considered Non-Registrable Persons under SIBA and don’t need to register or get licensed. These include:
- Joint Ventures: Where securities business is carried out for the joint venture’s purposes.
- Key Public Entities: Like the Cayman Islands Stock Exchange, the Cayman Islands Monetary Authority (CIMA), and government bodies.
- Certain Roles: People acting as directors, partners, or trustees, provided they don’t hold themselves out as engaging in securities business outside these roles.
- Single-Family Offices conducting securities investment business for family members only.
Understanding Registration Requirements
If you’re conducting securities investment business under SIBA, you may need to register with the Cayman Islands Monetary Authority (CIMA). This process applies to Registered Persons—businesses involved in specialized securities activities or those serving specific types of clients. Let’s break down what it means to be a Registered Person and how registration works.
Who Qualifies as a Registered Person?
A Registered Person is typically a business that engages in securities investment activities but operates within specific, defined scopes. Registration is required for companies that don’t need the full licensing process, either because of the nature of their clients or because they’re part of a larger structure. Here are the key categories that qualify:
- Intra-Group Companies: If your company operates exclusively for other companies within the same corporate group, you may qualify as a Registered Person. This is common for businesses providing securities investment services within a family of companies under shared ownership.
- Sophisticated and High-Net-Worth Clients: If your business serves clients with extensive financial resources, like sophisticated or high-net-worth individuals, it can often register instead of seeking a full license. Sophisticated clients typically include regulated entities or experienced investors making significant investments (over $100,000 per transaction). High-net-worth individuals are generally defined as those with a net worth of $1 million or more, or businesses with assets totalling over $5 million.
- Internationally Regulated Entities: Companies that are already regulated by a recognized authority in another jurisdiction may also qualify for registration. This allows businesses with established regulatory oversight abroad to operate in the Cayman Islands without needing a new license, provided they meet the standards set by their home regulator.
Why Register Instead of License?
For Registered Persons, the registration process is simpler and less intensive than obtaining a full license. By registering, these entities signal compliance with Cayman regulations while maintaining flexibility in their operations. It’s a streamlined process designed for businesses whose activities, clients, or affiliations don’t require the depth of oversight applied to publicly accessible securities services.
How to Register
Before beginning any securities investment business, Registered Persons need to submit a registration application with CIMA. This application includes information on the company’s structure, its client base, and its investment activities, providing CIMA with the necessary oversight. Once registered, these businesses can operate within the limits set by SIBA while enjoying a lighter compliance burden compared to fully licensed entities.
Licensed Persons: More to Come
For companies involved in broader securities activities that serve the public or a wide client base, a full license is generally required. Licensing involves a more extensive process and allows for activities beyond the scope of Registered Persons. We’ll explore licensing requirements and conditions in detail in a future article, focusing on what it takes to become a Licensed Person under SIBA.
For now, if you’re considering registration and wondering how SIBA might apply to your business, consult with a legal advisor. They can help clarify the registration requirements and ensure your compliance with Cayman Islands regulations.
Shelley Do Vale: shelley.vale@valelaw.ky
Santiago Mtnez-Carvajal: sc@valelaw.ky