What is a Mutual Fund?
The primary legislation in the Cayman Islands relating to open-ended investment funds is the Mutual Funds Law. A “mutual fund” is defined as a common investment vehicle which issues equity interests that allows participation amongst a pool of investors in the profits or gains of such vehicle’s investments. These investment vehicles can be structured as companies, unit trusts or limited partnerships.
How can a mutual fund be structured?
- a company, (governed by directors), with investors, (shareholders), who purchase shares
- a partnership, (governed by a general partner), with investors, (partners), who acquire interests
- a trust, (governed by a trustee), with investors, (beneficiaries), who acquire units.
Different Categories of Mutual Funds
- Exempt Mutual Funds
- Registered Mutual Funds
- Administered Mutual Funds
- Licensed Mutual Funds.
Exempt Mutual Funds
Funds need NOT comply with the Mutual Funds Law if:
- the participating shares are held by not more than 15 investors
- the majority, in number participating shares holders are capable of appointing or removing the directors of a company, the trustee of a unit trust or the general partner of a partnership.
Registered Mutual Funds
Registered funds are the very common form of mutual funds in the Cayman Islands. For a registered mutual fund, the initial minimum subscription per investor must be at least USD100,000 (or equivalent).
A registered mutual fund is not required to be licensed. Instead, it is only required to register its offering memorandum and certain prescribed details relating to the offering of its participating shares with CIMA.
All registered mutual funds must have their audited financial statements prepared or signed off by an approved Cayman Islands auditor and filed with CIMA within six months of their financial year end.
Administered Mutual Funds
A mutual fund will be an administered mutual fund if its principal office in the Cayman Islands is provided by a licensed mutual fund administrator and with no minimum initial investment amount. The registration process for an administered mutual fund is the same as that for a registered mutual fund, except that it must file an additional form which is signed by the Cayman Islands licensed mutual fund administrator with CIMA.
Licensed Mutual Funds (“Retail Funds”)
Licensed mutual funds are the rarest form of mutual funds regulated under the Mutual Funds Law. Unless a mutual fund falls within one of the other categories described above, it must obtain a mutual fund license.
All licensed mutual funds must have a registered office in the Cayman Islands or, in the case of a unit trust, have a locally licensed trustee.
Common Fund Vehicles
The Cayman Islands has company, trust, partnership and related laws that allow a high degree of flexibility for establishing mutual funds. The four vehicles commonly used for operating mutual funds are,
- the Exempted Company,
- the Segregated Portfolio Company,
- the Unit Trust
- the exempted limited partnership.
Exempted companies are established under the Companies Law (as revised) and are the most common form of entity used for the establishment of investment funds. The authorised share capital of an exempted company is generally divided into shares of a fixed par value amount which may be expressed in foreign currencies. The registration fee and the annual return fee are computed on the basis of the company’s authorised share capital.
The requirements for exempted companies to satisfy.
- registered office in the Cayman Islands;
- have at least one shareholder of record;
- details of directors and officers must be furnished to the Registrar of Companies, but these are not publicly available and each year a return must be filed which confirms that the company has conducted its business activities outside the Cayman Islands.
Although CIMA requires there to be at least two directors or a corporate director with at least two directors for a registered, licensed or administered mutual fund, there is no requirement for the directors of an exempted company to meet in the Cayman Islands and there are no restrictions on the nationality or place of residence of the directors or shareholders of such companies.
Segregated Portfolio Company
An exempted company can also be established as a “Segregated Portfolio Company” (“SPC”) with protected cells or portfolios. The SPC makes it possible to provide a means for different groups to protect their assets when carrying on business through a single legal entity.
An SPC may establish any number of Segregated Portfolios (SPs), which are internal accounts to which assets and liabilities may be attributed. Assets and liabilities attributed to a particular Segregated Portfolio are legally separated from the assets and liabilities of another Segregated Portfolio.
SPCs are useful as multi-strategy vehicles and platform vehicles.
Cayman Islands unit trusts are established under and governed by the Trusts Law (as revised) and English equitable principles. Each unit trust will be constituted under a trust deed that provides the terms on which the trustee holds the trust’s assets for unit holders.
However, the trust instrument will usually include a provision to the effect that a unit does not entitle the holder to any particular asset comprised in the trust fund. Therefore, ownership of a unit entitles an investor a right not to a specific investment comprising the trust fund, but simply a right to redeem its share of the pool of assets, represented as a unit, in return for cash based on the underlying value of the trust assets.
Unlike a company, a unit trust has no separate legal personality, rather it is a relationship which relies on the trustee enforcing contractual obligations entered into by the trustee on behalf of the trust. The trustee is responsible for the overall business and affairs of the unit trust and has a duty to act in the best interests of the beneficiaries.
Exempted Limited Partnership
An exempted limited partnership (ELP) is a limited partnership registered under the Exempted Limited Partnership Law (as revised) (ELP Law).
The ELP Law takes these partnership concepts and provides a modern framework that makes an ELP the vehicle of choice for particular types of international business, including for all types of private equity, real estate and other closed-ended funds; as tax transparent master funds in onshore/offshore hedge fund structures; and as single-investor vehicles replicating managed accounts.
Cayman Islands investment funds are established to provide wide range of Fund Structures depending on the needs of Investment Manager and Investors. When deciding on what type of structure to use, tax considerations typically factor into the analysis.
Typical structures include
This is simple structure of investment fund vehicle. Under this structure investors simply purchase participating shares in a single vehicle.
Cayman stand-alone fund operates in parallel to an onshore stand-alone vehicle with an identical investment strategy (but a different investor base) and the two vehicles execute the same trades. Accordingly, the investors would expect to receive a similar investment return.
The typical master-feeder structure involves US tax-exempt investors and non-US investors investing in a Cayman exempted company feeder fund, US taxable investors investing in a Delaware limited partnership feeder fund, and the two feeder funds investing together into a single master fund (typically a Cayman exempted company or a Cayman exempted limited partnership), with the master fund holding the underlying portfolio investments.
Fund of Funds
This is more likely an investment objective rather than structure. A fund of funds has the investment objective of investing its investment capital in other investment funds.
There are no corporation, capital gains, income, profits or withholding taxes. For exempted companies, unit trusts and limited partnerships to register with and apply to the Cayman Islands government for a written undertaking that they will remain tax-free for a minimum period (20 years in the case of exempted companies and 50 years in the case of unit trusts and limited partnerships). The Cayman Islands have no direct taxes of any kind.
KEY SERVICE PROVIDERS
- Registered office provider
- Investment Manager
- Fund Administrator or Registrar and Transfer Agent and NAV calculation agent
- FATCA and CRS services provider (usually the same person as the administrator
- MLRO, AMLCO, DMLRO
- Custodian and Prime Broker
Cayman fund must have a registered office in Cayman and must appoint a service provider holding the necessary licence to provide this service.
There are no restrictions on a Cayman Islands fund using the services of a non-Cayman Islands investment manager or investment advisor and there is generally no requirement for a non-Cayman Islands investment manager or investment advisor to register with CIMA. There is no regulatory oversight of the business of a non-Cayman Islands manager.
Fund Administrator, registrar and transfer agent and NAV calculation agent
There is no requirement to engage a local administrator. Fund will need to disclose who is appointed to act as administrator or registrar and transfer agent and NAV calculation agent to CIMA.
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FATCA and CRS services provider
The Foreign Account Tax Compliance Act (FATCA) provisions of the U.S. Hiring Incentives to Restore Employment Act (HIRE Act) provide that a Reporting Cayman Islands Financial Institution must disclose the name, address and taxpayer identification number of certain United States persons that own, directly or indirectly, an interest in such vehicle pursuant to the terms of an intergovernmental agreement between the United States and the Cayman Islands (US IGA) and implementing legislation and regulations which have been adopted by the Cayman Islands. If a fund fails to comply with these requirements then a 30% withholding tax may be imposed on payments to the fund of United States source income and proceeds from the sale of property that could give rise to United States source interest or dividends.
Almost every open-ended Cayman investment fund will be a Reporting Cayman Islands Financial Institution for this purpose. The Cayman legislation requires Reporting Cayman Islands Financial Institutions to make an annual report to the Cayman Islands Tax Information Exchange Authority (TIA). Any information provided to the Cayman TIA will be shared with the Internal Revenue Service of the United States.
In addition, over 100 countries have signed the OECD Multilateral Competent Authority Agreement and Common Reporting Standard (CRS) for the implementation of the automatic exchange of tax information based on the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters. The CRS is similar in form and substance to the US IGA.
As a result, a Cayman fund will be required to:
(a) register with the US Internal Revenue Service in order to obtain a Global Intermediary Identification Number (GIIN) and, accordingly, give one or more individuals authority to complete such registration. This is typically applied for by the manager on the fund’s behalf following incorporation of the fund;
(b) conduct requisite due diligence on all of its investors in order to identify the tax residency of each investor and to determine whether the interest held by that investor constitutes a “reportable account” under the regulations issued under the US IGA and CRS. Generally, funds address this by (i) seeking appropriate self-certifications and beneficial ownership information from investors at the time of subscription, and (ii) engaging the fund administrator or another specialist provider to assist with the fund’s FATCA and CRS due diligence and reporting obligations;
(c) provide notification to the Cayman TIA of certain prescribed details, and to identify a Principal Point of Contact and Change Notice Person; and
(d) report the requisite information on each of its “reportable accounts” to the TIA prior to the applicable deadlines.
This function usually taken care by fund administrator. Please reach out to ASCENT Global Fund Administrator sales team at email@example.com for this product offerings.
Appointment of MLRO, AMLCO, DMLRO
Cayman investment funds must appoint named individuals to the roles of anti-money compliance officer (AMLCO), money laundering reporting officer (MLRO) and deputy money laundering reporting officer (DMLRO); the AMLCO and MLRO may be the same individual. The AMLCO will be responsible for overseeing the effectiveness of the investment fund’s AML systems, compliance with applicable AML legislation and guidance and the day-to-day operation of the AML policies and procedures. The MLRO/DMLRO must receive all reports of suspicious activity in relation to any aspect of the fund and its activity; the MLRO/DMLRO should determine whether the information contained in any report supports the suspicion reported in order to determine whether, in all the circumstances, he/she in turn should submit a suspicious activity report to the Financial Reporting Authority of the Cayman Islands (FRA).
More generally, the Cayman AML Regime requires that if any person resident in the Cayman Islands knows or suspects or has reasonable grounds for knowing or suspecting that another person is engaged in criminal conduct or is involved with terrorism or terrorist property and the information for that knowledge or suspicion came to their attention in the course of business in the regulated sector, or other trade, profession, business or employment, the person will be required to report such knowledge or suspicion to (i) the FRA or a nominated officer (appointed in accordance with the PCL), if the disclosure relates to criminal conduct or money laundering, or (ii) the FRA or a police constable or a nominated officer, pursuant to the Terrorism Law (Revised), if the disclosure relates to involvement with terrorism or terrorist financing and terrorist property. Such a report shall not be treated as a breach of confidence or of any restriction upon the disclosure of information imposed by any enactment or otherwise.
This function should be independent from fund administrator for good governance.
Registered funds must appoint a CIMA approved Cayman auditor to sign off the fund’s financial statements. The audit work itself is frequently performed by an affiliate of the approved auditor.
The audit may be undertaken outside of Cayman however a Cayman firm needs to sign the audit report. The fund will sign an engagement letter each year to appoint the auditor.
Registered funds are “covered entities” for the purposes of the Directors Registration and Licensing Law (DRLL). Every director or manager of a covered entity must be a corporate director, a professional director or a registered director under the DRLL (which in the case of an LLC shall be deemed to refer to every manager).
Corporate directors are increasingly uncommon, in part because of the higher fees and more onerous obligations for corporate directors under the DRLL.
Professional directors are defined as natural persons appointed as directors for 20 or more covered entities. There are exceptions that mean that in practice few individuals are required to register as a professional director.
Registered directors are natural persons appointed as directors for fewer than 20 covered entities and represent by far the most common category.
Individuals must be registered or licensed before they are appointed as directors of a covered entity. Registration is effected through an online portal and takes approximately 48 hours to be processed.
Funds that are not registered with CIMA are not covered entities for the purposes of the DRLL and individuals do not need to register under the DRLL in order to serve as directors of such funds.
|Registered Director||A registered director is a natural person acting as director on 19 or fewer covered entities. Registered directors do not need to apply for a license.|
A professional director is a natural person acting as director on 20 or more covered entities. Some exemption applies.
A professional director must,
a. apply for a professional director’s license
b. maintain D&O insurance from a reputable insurer
Corporate directors are permitted and must
a. apply for a license as a corporate director
b. companies holding a companies management license or a fund administration license are exempted
Custodian and Prime broker
Custodian is appointed by directors of fund to act as guardian of its assets pursuant to the terms of the relevant custodian agreement. There is no requirement that a custodian be based in the Cayman Islands. If the custodian is based in the Cayman Islands, it may need to be regulated pursuant to the Mutual Funds Law.
ASCENT as non-banking Global Fund Administrator work with all major custodian and prime brokers globally. Please reach out to our dedicated sales team at firstname.lastname@example.org
Fund required subscription/redemption and operating expenses bank account to accept the subscription monies, payment of redemptions and payment of operating expenses.
ASCENT as non-banking Global Fund Administrator work with all major banks globally for fund’s bank account. Please reach out to our dedicated sales team at email@example.com
The Cayman Islands Stock Exchange
All Cayman Islands mutual funds may list their equity interests on the Cayman Islands Stock Exchange (CSX).
The CSX has been admitted to membership of the European Securitisation Forum (an independent initiative of The Bond Market Association) and has entered into a working relationship with Euroclear which allows CSX participants access to the Fundsettle system for enhanced transparency and communication with investors. The CSX is also an affiliate of the International Organization of Securities Commissions (IOSCO).
ASCENT being the Global Fund Administrator has significant experience in the listing of investment funds on CSX. Please reach out to our dedicated sales team at firstname.lastname@example.org
Once the Fund has been formed, the principal documents it to carry on business as an investment fund are as follows:
- Offering document i.e. offering memorandum, private placement memorandum or confidential explanatory memorandum: This includes investment objectives, strategies and risks of the fund, the terms of an investment in the fund (including in relation to liquidity and fees), share classes , side pockets, redemption gate, subscription and redemption procedures and any other disclosures .
- Subscription Agreement: This is the contract between the investment fund and the investor.
- Memorandum and Articles of Association: This is constitutional documents conjunction with the terms of the offering document and certain common law principles, govern the contractual relationship between the investment fund and its shareholders.
- Investment Management Agreement: This is the contract between the Fund and the investment manager. It establishes the terms upon which the investment manager will provide investment services to the investment fund
- Administration Agreement: This is the contract between the Fund and the Administrator. It establishes the terms upon which the administrator will provide administration services to the Fund;
- Prime brokerage/Custodian Agreement: This is the contract between the Fund and the prime broker/custodian. It establishes the terms upon which the prime broker will provide prime brokerage services to Fund.
- Directors’ Resolutions: Initial directors’ resolutions which approve the terms of the offering of the investment fund’s shares, entry by the Fund into the appropriate service agreements and, if appropriate, the application to register the investment fund with CIMA. As with all board resolutions, the directors must declare any interests in the business to be considered by the meeting or written resolutions where applicable.
Documents required for CIMA registrable funds
- Offering Document: Every registrable fund must have an offering document
- CIMA forms: The Mutual Fund Law requires registrable mutual funds to disclose certain core information to CIMA. Such disclosure must be made to CIMA on specific forms (MF1, MF2, MF2A, MF3 or MF4 (to be used as applicable)
- Auditors’ consent letter: This is a letter from the auditors to CIMA confirming that they consent to act as auditors to the fund and are aware of their duties under the Mutual Fund Law. The Mutual Fund’s auditors must be approved by CIMA.
- Administrator’s consent letter: This is a letter from the administrator to CIMA confirming their consent to act as administrator of the fund and agreeing to make documents relating to the fund available to CIMA when required. The administrator need not be based in the Cayman Islands.
- Affidavit of a director in relation to certain online filings.
Other General Requirements
The registrar of companies must be notified of certain material changes to the fund’s constitutional documents. Failure to do so will incur penalties to the Fund.
- Amendments to the memorandum and articles of association or name change within 15 days
- Changes to the directors and officers of the fund within 30 days
- CIMA must be notified of material changes to the fund’s constitutional documents including any change of registered or principal office. This includes changes to the fund’s offering memorandum by filing the revised document within 21 days.
|No Cayman Islands residency restrictions on:||Cayman Islands residency restrictions on:|
|Fund Management||Registered office|
|Official books and records|
|Appointment of directors|
|Transfer agent services|
|Bank and custodian /Prime broker accounts|
How can ASCENT help you?
We are independent Global Fund Administrator. Our dedicated team of subject matter experts with more than over decade of Hedge Fund industry experience provide hand holding and assistance in setting up fund in Cayman Islands. Our dedicated team will make sure they provide full assistance and guidance to Investment Manager pre-launch and post-launch of the fund.
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