Alternative Investment

Alternative Investment Funds 2022: Cayman Islands – Fund Management/ REITs


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1 Regulatory Framework

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

The Mutual Funds Act (As Revised) (the “MF Act”)
provides for the regulation of open-ended investment funds and
mutual fund administrators. Responsibility for regulation under the
MF Act rests with the Cayman Islands Monetary Authority
(“CIMA”).

The Private Funds Act (As Revised) (the “PF Act”)
provides for the regulation of closed-ended investment funds.
Responsibility for regulation under the PF Act rests with CIMA.

In addition, the Retail Mutual Funds (Japan) Regulations (As
Revised) (the “Japan Regulations”) provide a regulatory
regime for retail mutual funds that are marketed to the public in
Japan

CIMA has also published rules and guidance regarding certain
operational requirements for CIMA registered mutual funds and
private funds, including in respect of the valuation of assets,
safekeeping of fund assets, cash monitoring and identification of
securities.

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). Legislation for
AIFMD consistent regimes for Cayman Islands funds and their
managers was introduced in 2019, which 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 legislation also contemplates 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.

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

Generally, there is no local restriction on or regulation of a
manager or adviser from another jurisdiction managing an
Alternative Investment Fund established as a Cayman Islands
vehicle. However, a manager or adviser which is itself established
or, in the case of a foreign company, registered in the Cayman
Islands and which conducts “securities investment
business” (“SIB”), whether or not that securities
investment business is carried on in the Cayman Islands, will fall
within the scope of the Securities Investment Business Act (As
Revised) (“SIBA”).

SIB is defined as being engaged in the course of business in any
one or more of the activities set out in Schedule 2 to SIBA. 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 SIBA specifically excludes certain activities from
the definition of SIB, although those exclusions are unlikely to
apply to a person conducting discretionary investment management or
investment advisory activities.

Any person within the scope of SIBA conducting SIB must be
licensed by CIMA, unless that person is registered as a
“Registered Person” under SIBA. A licence may be
restricted (meaning that SIB 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 SIB may be exempt from the requirement to
obtain a licence but will still be required to be registered as a
“Registered Person” under SIBA. In the case of Registered
Persons, which is likely to apply to fund managers or advisers,
they are 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 SIB and annually thereafter, confirming that they are
entitled to rely on the relevant exemption.

A “Registered Person” includes:

  1. a company carrying on SIB exclusively for one or more companies
    within the same group;

  2. a person carrying on SIB exclusively for one or more of the
    following classes of person:

    1. a sophisticated person (i.e., 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);

    2. a high-net-worth person (i.e. an individual whose net worth is
      at least US$1 million or any person that has any assets of not less
      than US$5 million); or

    3. a company, partnership or trust of which the shareholders,
      limited partners or unitholders are all sophisticated persons or
      high-net-worth persons, provided always that such person has a
      registered office or a place of business in the Cayman Islands
      provided by a licensed corporate services provider (such as, for
      example, Maples Corporate Services Limited); and


  3. a person who is regulated by a recognised overseas regulatory
    authority in the country or territory (other than the Cayman
    Islands) in which the SIB regulated activity is being
    conducted.

1.3 Are Alternative Investment Funds themselves required
to be licensed, authorised or regulated by a regulatory
body?

An investment fund qualifies as a “mutual fund” and is
required to be regulated under the MF Act if:

  1. it is a company, partnership or unit trust carrying on business
    in or from the Cayman Islands;

  2. it issues “equity interests” to investors (i.e.
    shares, partnership interests or trust units that carry an
    entitlement to participate in profits or gains and which may be
    redeemed or repurchased at the option of those investors prior to
    winding up); and

  3. its purpose or effect is the pooling of investor funds with the
    aim of spreading investment risks and enabling investors to receive
    profits or gains from investments.

There are four categories of mutual funds:

  1. a licensed fund under section 4(1)(a) of the MF Act;

  2. an administered fund under section 4(1)(b) of the MF Act;

  3. a registered fund under section 4(3) of the MF Act; and

  4. a limited investor fund under section 4(4) of the MF Act.

  1. A mutual fund licence will be granted if CIMA considers that
    the promoter is of sound reputation, there exist persons of
    sufficient expertise to administer the fund, who are of sound
    reputation, and that the business of the fund and any offer of
    equity interests will be carried out in a proper way. Detailed
    information is required concerning the directors, trustee or
    general partner (“GP”) of the mutual fund (as the case
    may be) and the service providers. However, few investment funds
    are fully licensed under the MF Act, as this is generally only
    necessary for retail funds.

  2. Registration as an administered fund requires the designation
    of a Cayman Islands licensed mutual fund administrator as the
    fund’s principal office. The administrator must satisfy itself
    that the fund’s promoters are of sound reputation, that the
    fund’s administration will be undertaken by persons with
    sufficient expertise who are also of sound reputation and that the
    fund’s business and its offering of equity interests will be
    carried out in a proper way. The administrator is obliged to report
    to CIMA if it has reason to believe that a mutual fund for which it
    provides the principal office (or any promoter, director, trustee
    or GP thereof) is acting in breach of the MF Act or may be
    insolvent or is otherwise acting in a manner prejudicial to its
    creditors or investors. This imposes a quasi-regulatory role and an
    obligation to monitor compliance on the administrators themselves,
    and generally higher fees charged by administrators in relation to
    this category of investment fund.

  3. Mutual funds registered under section 4(3) of the MF Act are
    divided into three sub-categories:

    1. where the minimum investment per investor is at least
      US$100,000;

    2. where the equity interests are listed on a recognised stock
      exchange; or

    3. where the mutual fund is a “master fund” (as defined
      in the MF Act) and either:

      1. the minimum investment per investor is at least US$100,000;
        or

      2. the equity interests are listed on a recognised stock
        exchange.


  4. Limited investor funds registered under section 4(4) of the MF
    Act have 15 or fewer investors, a majority in number of whom have
    the power to appoint and remove the fund’s directors, GP or
    trustee, as applicable.

A master fund is a Cayman Islands entity that issues equity
interests to at least one feeder fund (either directly or through
an intermediate entity established to invest in the master fund)
that is itself regulated by CIMA under the MF Act that holds
investments and conducts trading activities for the principal
purpose of implementing the overall investment strategy of the
regulated feeder.

An investment fund qualifies as a “private fund” and
is required to be regulated under the PF Act if it is a company,
unit trust or partnership that offers or issues or has issued
investment interests (being interests that are not redeemable or
repurchasable at the option of the investor), 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,
where:

  1. the holders of investment interests do not have day-to-day
    control over the acquisition, holding, management or disposal of
    the investments; and

  2. the investments are managed as a whole by or on behalf of the
    operator of the private fund, directly or indirectly, but does not
    include:

    1. a person licensed under the Banks and Trust Companies Act (As
      Revised) or the Insurance Act (As Revised);

    2. a person registered under the Building Societies Act (As
      Revised ) or the Friendly Societies Act (As Revised); or

    3. any non-fund arrangements.

1.4 Does the regulatory regime distinguish between
open-ended and closed-ended Alternative Investment Funds (or
otherwise differentiate between different types of funds or
strategies (e.g. private equity vs hedge)) and, if so,
how?

Yes, open-ended funds are governed by the MF Act and closedended
funds are governed by the PF Act. The key distinction between
open-ended and closed-ended funds is the ability of investors to
voluntarily redeem or repurchase some or all of their investment
prior to winding up.

To read the full article
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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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