Five things you need to know about the Cayman Islands Private Funds Law

While the long-term economic impact of the COVID-19 pandemic remains unknown, the appeal of alternative investments has seen growth. Investors may be navigating the current market with trepidation, but they are looking to alternative investments to diversify and expand their portfolios. Global regulations surrounding the financial services industry continue to evolve as the market adapts, including the addition and amendments of legislations and compliance guidelines.

One of these is the addition of The Cayman Islands Private Funds Law 2020 (PFL). Enacted on February 7, 2020, the PFL is one of a series of steps taken by the Cayman Islands Government to meet global expectations across the financial services industry. The PFL establishes a basis to monitor private funds, requiring that all private equity and private closed-ended funds register with the Cayman Islands Monetary Authority (“CIMA”). A further amendment was passed on July 7, 2020, providing more clarity with respect to the definition of a private fund.

• What defines a private fund?

An entity is defined as a private fund if:

1. a) It is a company, unit trust or partnership that offers, issues, or has issued investment interests, the purpose or effect of which is the pooling of investor funds with the aim of enabling investors to receive profits or gains from such entity’s acquisition, holding, management or disposal of investments.
2. b) Its investment interests carry an entitlement to participate in the profits or gains of the vehicle and are not redeemable or re-purchasable at the option of the investor.
3. c) The holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments.
4. d) The investments are managed by, or on behalf on, the operator of the private fund, directly or indirectly.
5. e) It does not constitute a 'non-fund arrangement', as listed in the schedule of the PFL.

• What is the timeline for registration for private funds with CIMA?

Under the PFL, new private funds are required to register with CIMA within 21 days after the acceptance of capital commitments from investors for the purposes of investments. Any private funds will also be required to be registered by CIMA before they can accept capital contributions from investors in respect of investments. For any pre-existing private funds, registration with CIMA was required by August 7, 2020.

• What are the annual requirements of a private fund?

There are a number of annual requirements for private funds under the new PFL. Audited financial statements are to be signed by a CIMA-approved local audit firm and must be submitted to CIMA annually, within 180 days of the financial year end. The submission must also include a Fund Annual Return (FAR) and applicable FAR fee.

The audited financial statements and the FAR need to be filed with CIMA within six months of the end of the financial year. The accounts must be prepared in accordance with the International Financial Reporting Standards, or the more generally accepted accounting principles of non-high-risk jurisdictions such as the United States, Japan and Switzerland. The audit must also be carried out in accordance with International Standards on Auditing, or the more generally accepted auditing standards of the aforementioned countries.

• What other requirements may private funds be subjected to?

Valuation of assets: The PFL requires appropriate and consistent valuation procedures, which should be carried out each year. Such valuations can be performed by a manager or operator of the private fund, an independent valuer or an administrator.

Safekeeping of fund assets: The PFL requires a custodian to hold private fund assets capable of physical delivery, or capable of registration in a custodial account, except when it’s not practical nor proportionate given the nature of the private fund and the type of assets held. The custodian must also verify their title and maintain records of the fund assets. If having this custodian is impractical or not proportionate, the title verification can be carried out by a manager or operator of the fund, an independent administrator or another independent third party, given the nature of the private fund and the type of assets it holds.

Cash monitoring: The PFL requires that the monitoring of cash flows, the checking of cash accounts and the receipt of investor payments should be carried out by a manager or operator of the private fund, an independent administrator, independent custodian or other independent third party.

Identification of securities: The PFL also requires that a Private Fund that regularly trades securities, or holds them on a consistent basis, must maintain a record of the identification codes of those securities in question.

• Are there any other important fund updates I should know about?

Additionally, on February 7, 2020, the Cayman Islands Government enacted the Mutual Funds (Amendment) Law 2020, removing the exemption from CIMA registration and regulation formerly available to open-ended mutual funds with fifteen or fewer investors, the majority of whom have the power to appoint or remove the operator of the fund. Funds were required to comply with Mutual Funds (Amendment) Law, 2020 by August 7, 2020.

Going forward, such funds will have to make sure they register with CIMA, pay an annual fee and file an annual return to CIMA, have their accounts audited by a CIMA-approved auditor and filed within six months of each financial year end and have at least two natural persons as operators, one of whom must be registered under the Director’s Registration and Licensing Law.

As private funds face new deadlines and challenges in the wake of the PFL and the Mutual Funds (Amendment) Law 2020, our expertise and experience at KPMG in the Cayman Islands can help navigate fund managers through the unknown, while ensuring adaptation and growth continues in this new landscape.

For further information on the Cayman Islands PFL or Mutual Funds (Amendment) Law 2020, please contact:

Richard Scott-Hopkins,
Partner, Asset Management, 
KPMG in the Cayman Islands

E richardscotthopkins@kpmg.ky