Global regulation surrounding the alternative investment industry continues to evolve. Private fund jurisdictions have expanded requirements by adopting legislation that requires private funds, which have previously been exempt from registration, to be subject to additional compliance and registration requirements similar to those currently in place for open-ended structures. There are, however, differences specific to private funds.
One such change is the Private Funds Law, 2020 (PFL), enacted by the Cayman Islands in February 2020, requiring that private equity, real asset and most other private closed-ended funds register with the Cayman Islands Monetary Authority (CIMA).
Overview of Compliance Changes
The PFL compliance requirements are as follows:
- Existing private funds must register with CIMA on or before August 7, 2020.
- New funds must register with CIMA within 21 days of the fund’s acceptance of capital commitments from investors.
- Private funds must pay an annual fee of CI$3,500 (US$4,268) plus CI$250 (US$304) for each alternative investment vehicle used by the Private Fund to make, hold or dispose of investments.
- Private funds must notify CIMA of certain prescribed material changes within 21 days of the change.
- Fund financial statements must be audited annually and filed with CIMA within six months of the fund’s fiscal year-end.
Overview of Operational Changes
The law also includes operational changes in a number of areas, such as annual audit requirements, annual return for the fund, record retention, valuations, cash monitoring and safekeeping of assets. These include:
- A private fund must have its accounts audited by an approved auditor, and signed off on and filed with CIMA by a local auditor within six months of the fund’s financial year-end. Financial accounts may be prepared and filed in combination or consolidated with an alternative investment vehicle in accordance with US GAAP, IFRS or other GAAP of a non-high-risk jurisdiction.
- Private funds must appoint a custodian to hold the fund assets (cash and securities) unless they notify CIMA that it is neither practical nor proportionate to do so due to the nature of the fund and the type of assets it holds. In such cases, CIMA must be notified and an independent party or group may act as custodian.
- Also included in the law, are cash monitoring requirements. Private funds are required to appoint a party to monitor and ensure all incoming/outgoing cash flows have been accounted for. In cases where a party is not appointed, CIMA may require a fund’s cash monitoring be verified by an independent third party.
- The valuation process is another operational change. Private funds must have consistent asset valuation procedures carried out at a frequency that is appropriate for the assets held and meets fund reporting obligations to investors. The manager valuing fund assets must ensure that the valuation function is independent of the portfolio management function or that any potential conflicts of interest are identified, managed, monitored and disclosed to investors.
- A fund that regularly trades in securities or holds them consistently must maintain a record of the identification (ISIN) codes for all securities it holds or trades, and that record must be made available to CIMA upon request.
Finally, the new legislation adds data points to Fund Annual Returns (FAR). Every Cayman fund registered with CIMA is required to file a FAR, which historically has contained data on the service providers of a fund and certain prescribed financial data. Any FAR filed after March 17, 2020 must report additional data points including investor metrics and fund financial data. All CIMA registered funds will be required to file an FAR with their December 31, 2020 audited year-end financial statements.
These increasing Cayman obligations in 2020 for a private funds manager and private funds follow changes to Cayman investor Anti Money Laundering (AML) requirements for Private Funds in recent years. SS&C can help funds navigate these changes. As private fund firms face new challenges and timelines, our solutions and expertise can help you evolve and thrive. For more information, contact us.
Written by Bhagesh Malde
Head of SS&C GlobeOp