Cayman Islands: Alternative Investment Funds 2019

Last Updated: 10 September 2019
Article by Grant Dixon and Andrew Keast

1 Regulatory Framework

1.1 What legislation governs the establishment and operation of Alternative Investment Funds?

The Mutual Funds Law (2019 Revision) (the "MF Law") provides for the regulation of open-ended investment funds and mutual fund administrators.  Responsibility for regulation under the MF Law rests with the Cayman Islands Monetary Authority ("CIMA").

In addition, the Retail Mutual Funds (Japan) Regulations (2018 Revision) (the "Japan Regulations") provide a regulatory regime for retail mutual funds that are marketed to the public in Japan.

Although not Cayman Islands law, the broad scope and extra-territorial effect of the EU Directive on Alternative Investment Fund Managers ("AIFMD") will capture most types of Cayman Alternative Investment Funds, regardless of whether they are open-ended or closed-ended and regardless of their legal structure and investment strategy, with very few exceptions, to the extent that they are being marketed or managed in Europe (as such terms are defined for the purposes of the AIFMD).  With effect from 1 January 2019, amendments to the MF Law and the Securities Investment Business Law (2019 Revision) ("SIBL") and associated regulations were brought into force to introduce AIFMD consistent regimes for Cayman Islands funds and their managers, which will enable Cayman Islands AIFs and AIFMs to "opt-in" to take full advantage of the AIFMD if and when the AIFMD passport is extended to the Cayman Islands.  The amendments also contemplate a CIMA notification regime for CIMA licensed managers and any fund managed by a manager registered in an EU Member State or being marketed to investors in an EU Member State; however, the Cayman Islands Cabinet must issue a further order before this notification regime becomes applicable for funds.

1.2 Are managers or advisers to Alternative Investment Funds required to be licensed, authorised or regulated by a regulatory body?

A manager or adviser which is established in or, in the case of a foreign company, registered in the Cayman Islands and which conducts "securities investment business", whether or not that securities investment business is carried on in the Cayman Islands, will fall within the scope of SIBL.  Note that material changes are expected to be made to SIBL in 2019, but they are not confirmed at the time of writing, accordingly, the following is a description of the current licensing and registration and does not purport to cover any such changes. 

"Securities investment business" is defined as being engaged in the course of business in any one or more of the activities set out in Schedule 2 to SIBL.  Those activities include managing securities belonging to another person on a discretionary basis and advising in relation to securities, but only if the advice is given to someone in their capacity as investor or potential investor or in their capacity as agent for an investor or a potential investor and the advice is on the merits of that person (whether acting as principal or agent) buying, selling, subscribing for or underwriting a particular security or exercising any right conferred by a security to buy, sell, subscribe for or underwrite a security.  "Securities" are defined to include most forms of shares and stock, debt instruments, options, futures, contracts for differences, and derivatives.

Schedule 3 to SIBL specifically excludes certain activities from the definition of securities investment business, although those exclusions are unlikely to apply to a person conducting discretionary investment management or investment advisory activities.

Any person within the scope of SIBL conducting securities investment business must be licensed by CIMA, unless that person is exempt from holding a licence.  A licence may be restricted (meaning that securities investment business may only be transacted with particular clients) or unrestricted.  A licence may also be issued subject to conditions or may be unconditional.

A person carrying on securities investment business may be exempt from the requirement to obtain a licence but will still be subject to certain provisions of SIBL.  In the case of the exemptions referred to below, which are the exemptions likely to apply to fund managers or advisers, an "Excluded Person" is required to register with CIMA by filing a declaration and paying a fee of CI$5,000 (approximately US$6,097.56), prior to carrying on securities investment business and annually thereafter, confirming that they are entitled to rely on the relevant exemption.

An "Excluded Person" includes: (a) a company carrying on securities investment business exclusively for one or more companies within the same group; (b) a person, whose registered office in the Cayman Islands is provided by a licensee under the law, carrying on securities investment business exclusively for one or more of the following classes of person: (i) a sophisticated person (a person regulated by CIMA or a recognised overseas regulatory authority or whose securities are listed on a recognised securities exchange or who by virtue of knowledge and experience in financial and business matters is reasonably to be regarded as capable of evaluating the merits of a proposed transaction and participates in a transaction with a value or in amounts of at least US$100,000 in each single transaction); or (ii) a high-net-worth person (an individual whose net worth is at least US$1,000,000 or any person that has any assets of not less than US$5,000,000); or (iii) a company, partnership or trust of which the shareholders, limited partners or unitholders are all sophisticated persons or high-net-worth persons; or (c) a person who is regulated by a recognised overseas regulatory authority in the country or territory (other than the Cayman Islands) in which the securities investment business is being conducted.

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Previously published in the International Comparative Legal Guide

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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