Cayman Islands Private Funds Law, 2020
On February 7, 2020, the Cayman Islands government enacted the Private Funds Law, 2020 (PF Law 2020), legislation that provides for the registration of private funds and for incidental and connected purposes with the Cayman Islands Monetary Authority (CIMA).
The PF Law 2020, as its name suggests, applies to all Cayman Islands private funds, which is defined as “a company, unit trust or partnership whose principal business is the offering and issuing of its investment interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors to receive profits or gains from such entity’s acquisition, holding, management or disposal of investments, where (a) the holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments; and (b) the investments are managed as a whole by or on behalf of the operator of the private fund, directly or indirectly, for reward based on the assets, profits or gains of the company, unit trust or partnership.” Typically, these are closed-ended funds. Mutual funds such as open-ended funds or regulated EU Connected Funds are not covered by the PF Law 2020. Non-fund arrangements, such as pension funds, securitization special purpose vehicles, joint ventures, holding vehicles, debt issues and debt issuing vehicles, etc., are not considered private funds and also will be exempted from the PF Law 2020.
First and foremost, the PF Law 2020 provides the requirement to register private funds with CIMA. A private fund must submit an application for registration to CIMA within 21 days after its acceptance of capital commitments from investors for the purposes of investments. A private fund shall not accept any capital contributions from investors in respect of investments until it is registered by CIMA.
The PF Law 2020 does provide a six-month transitional period in which private funds may register between February 7 and August 7, 2020. This applies to all private funds that had commenced their operations before February 7, 2020, and all private funds that commence their operations between February 7, 2020, and August 7, 2020. Private funds that launched on or after August 7, 2020, must comply with the registration requirements mentioned above.
It is important to note that, according to the PF Law 2020, a private fund may engage in oral or written communications and enter into any agreements with high persons who may have an interest in subscribing for or purchasing investment interests prior to the filing of its registration application with CIMA. An annual registration fee also is due to the general revenue of the Cayman Islands on or before January 15 of each year.
The PF Law 2020 also provides the following operating conditions for private funds:
- Annual audit of private funds
- Annual return
- Retention of records
- Safekeeping of fund assets
- Cash monitoring
- Identification of securities
Annual audit of private funds – A private fund shall have its financial statements—prepared in accordance with IFRS or GAAP of the U.S., Japan, Switzerland or a nonhigh-risk jurisdiction—audited annually by an approved auditor, within six months of the financial year, and submit them to CIMA.
Valuations – A private fund shall have appropriate and consistent procedures for the purpose of proper valuations of its assets. Valuations shall be carried out at a frequency that is appropriate to the assets held by the private fund and at least annually. Valuations shall be performed by an independent qualified third party, the manager or operator of the private fund—provided the valuation function is independent from the portfolio management function—or an administrator.
Safekeeping of fund assets – A private fund shall appoint a custodian to (a) hold in custody the custodial fund assets and (b) verify the private fund holds title to any other fund assets and maintain a record of those other fund assets, unless the private fund has notified CIMA that it is neither practical nor proportionate to do so, having regard to the nature of the private fund and the type of assets it holds. Where the title verification is not performed by a custodian, CIMA may require the private fund to have its title verification performed by an appropriate, professionally qualified independent third party.
Cash monitoring – A private fund shall appoint an administrator or custodian, or the manager or operator of the private fund (provided that the cash monitoring function is independent from the portfolio management function or potential conflicts of interest are properly identified and disclosed to the investors of the private fund), to perform the cash monitoring duties. These duties include (a) monitoring the cash flows of the private fund; (b) ensuring that all cash of the private fund has been booked in cash accounts opened in the name of the private fund; and (c) ensuring that all payments made by investors to the private fund in respect of investment interest have been received.
Identification of securities – A private fund that regularly holds or trades securities shall maintain a record of the identification codes of the securities it holds or trades and shall make this record available to CIMA upon request.
For more information or to discuss specific requirements of the PF Law 2020, please reach out to a BKD Trusted Advisor™ or use the Contact Us form below.
If you have funds regulated by the Cayman Islands Monetary Authority, you face unique audit and tax compliance and reporting challenges. BKD’s national asset management advisors can help you navigate these audit, operational and regulatory issues via our BKD Cayman Ltd. subsidiary. We can provide a quality audit solution for your domestic and Cayman-domiciled funds. Further, our tax professionals can assist with annual reporting requirements and structuring your fund complex to achieve your desired outcomes.