Closed-End funds may not be fully aware of the latest requirements resulting from the new Cayman Islands Private Funds Law 2020 (PF Law or PFL). To date, private funds have been exempt from registration with the Cayman Islands Monetary Authority (CIMA). The PF Law commenced on February 7, 2020, and created a regulatory regime for closed-end funds, such as private equity, venture capital, and private debt funds. Although many of the requirements under the PF Law are similar to the existing requirements for open-ended funds, there are some additional operational features contained in the PF Law which managers also need to address.
It is important to note that all private funds, whether formed before or after the passage of the PF Law, must register with CIMA by August 7, 2020. An expanded scope of the definitions in the PFL may affect investment vehicles that previously were excluded, so careful consideration should be given to these changes. At SS&C, we have seen a number of fund managers who were only focused on registration. While this is indeed a key requirement, we have noticed that some are not paying enough attention to the ongoing compliance requirements, especially around certain investor protection provisions. Consider that Cayman's anti-money laundering (AML) regime has applied to closed-end funds since the end of May 2018. However, once these newly registered private funds come under CIMA’s purview, there will be even more scrutiny with respect to AML issues, and the names of the appointed AML officers will have to be confirmed to CIMA.
In SS&C’s recent webinar we share our findings, learnings and actionable steps from our work with clients, regulators and industry leaders. What is the Private Funds Law? Why all the changes? What is driving it? It is important not to think of this as a strictly Cayman issue, because it is not; the Private Funds Law is being driven by global standards. With respect to the Private Funds Law, the two big drivers for it are AML and tax-related issues. The purpose of the Private Funds Law is to make sure that when you have economic value in a jurisdiction the revenue generated in that jurisdiction is being recognized and can be subjected to tax. Some of the requirements of the Private Funds Law are valuation of assets, safekeeping of assets, cash monitoring and identification of securities. The SS&C webinar addressed some common questions around the new Cayman Islands Private Funds Law including:
Q: With all the extra regulation (registration/reporting - CRS Info Form, AMLCO/AMLRO requirement), is there a concern that fund managers are thinking it's getting too expensive to launch a Cayman fund?
A: While total expense ratios are a general concern, the evolution of regulatory requirements in Cayman is in response to global trends and pressures that affect all similar fund jurisdictions and even reaches beyond them. As an example, over 100 countries have committed to automatic exchange of information under the OECD Common Reporting Standards or CRS, and therefore will be reviewed with respect to the effectiveness of their implementations. While somewhat higher expenses may dissuade emerging managers from launching in certain cases, the dynamic noted is unlikely to result in arbitrage attempts to minimize regulatory compliance expenses.
Q: My fund is winding down/liquidating. Do I have to register with CIMA?
A: A Private Fund that completes its liquidation/wind-up prior to the end of the transition period (August 7, 2020) will not be required to apply for registration pursuant to the PFL. The completion of the liquidation/wind-up process means that the private fund has disposed of all its investments and has made final investor distributions.
Q: Do I have to register a fund with only one investor?
A: No. As long as the constitutive documents of the private fund, or any other provision or arrangement of binding legal effect, expressly states that the fund only has and is only intended to ever have a single investor of record.
Q: What if the fund has only one remaining investment? Do I need to register?
A: Yes. The “spreading of investment risk” threshold has been removed from the definition of a private fund.
Q: Do Cayman AIV vehicles under a non-Cayman main private fund need to be registered?
A: If the Cayman AIV meets the definition of a private fund and does not have a Cayman main fund, then it will need to register. If there is more than one AIV in such a situation, one of the AIVs can register as the main fund and it should be possible for the others to be included in that registration if they meet the legal requirements for AIVs.
SS&C has assisted our client base with AML learning sessions and materials on an ad-hoc basis. We do not actively market a training service but are available to provide insight and assistance as needed. Should the client want specific MLRO/AMLCO or similar Cayman AML training, this would be something DMS provides as a formal service. If AML is done by SS&C, we will provide funds with outsourced AML due diligence services that are in line with the fund’s AML regulatory obligations. For example, a Cayman fund for which SS&C is the administrator will have Cayman AML standards applied to its investors.
Written by Gabriel Vinizki
Director, Business Development