Nov 2024
The Cayman Islands is a pre-eminent offshore funds jurisdiction. In fact, with around 29,500 registered funds in 2023, Cayman accounts for 68% of funds set up outside of the United States.
This success is set against the backdrop of a regulatory environment that has changed significantly over the last few years as the jurisdiction has updated its funds regime to remain compliant with international standards of the European Union and the Financial Action Task Force.
The Private Funds Act (2021 Revision) (the “PFA”) governs the regulation of Cayman closed-ended funds, including private equity, real estate, venture capital, infrastructure and private credit funds – otherwise known as “private funds”. The PFA is supplemented by Regulations, and other regulatory measures such as Rules, which are directives issued by the Cayman Islands Monetary Authority (“CIMA”) and Statements of Guidance, which offer less onerous, but nonetheless useful recommendations by CIMA on the operation of a private fund. Cayman private funds are also subject to a comprehensive AML/CFT regime. Collectively, these measures represent a significant evolution from 2020, when Cayman closed-ended funds came to be regulated for the first time.
There have been a number of regulatory developments since the introduction of the PFA. As well as requiring a private fund to register under the PFA, Rules and/or Statements of Guidance have been introduced to cover areas such as:
- Valuation of assets, which must take place at least annually
- Safekeeping of assets, to ensure a private fund has verifiable title to all fund assets
- Cash monitoring, which requires that any cash received from investors is properly recorded
- Segregations of assets, to ensure financial assets and liabilities of a private fund are segregated from any assets of the operator and/or the investment manager
- Identification of securities, requiring the fund to maintain a record of identification codes if a fund trades securities
Most recently, a Rule and Statement of Guidance has been issued by CIMA on Corporate Governance and Internal Controls, which requires that, amongst other things, the “operator” or “governing body” of the private fund must establish, implement and maintain a corporate governance framework that provides for sound and prudent management oversight of the fund’s business and protects the legitimate interests of relevant stakeholders. That framework should be, amongst other things, commensurate with the size, complexity, structure, nature of business and risk profile of its operations. Depending on the form the fund takes, these obligations directly apply to the general partner of a limited partnership, the trustee of a unit trust or the board of a company.
The extent of these corporate governance obligations may come as a surprise to operators who did not appreciate these obligations apply at the fund level rather than to the investment manager. Whilst many investment managers will likely have certain aspects in place due to their own regulatory obligations, these need to be carefully considered and applied to the fund, with any gaps being addressed.
CIMA has indicated that it expects private funds to demonstrate a high level of regulatory compliance with these measures to ensure a robust regulatory framework and promote a sound financial system. While there are significant benefits from operating a private fund in one of the world’s leading offshore funds jurisdictions, fund operators should take steps to ensure that they comply with their regulatory obligations when operating a Cayman private fund so as to avoid administrative fines or enforcement action by CIMA.
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Tailored professional advice should be sought in respect of individual circumstances. Please reach out to your usual Conyers contact or one of the individuals listed below to find out more about your regulatory obligations in relation to operating a Cayman private fund.
This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information.