Cayman Islands: Cayman Finance welcomes new Opt-In AIFMD regime
Today (Fri 10) two draft bills (the “Bills”) were published by the Cayman Island’s Government which make certain amendments to the Mutual Funds Law (“MFL”) and Securities Investment Business Law (“SIBL”).
The Bills are designed to put in place two separate opt-in regimes (together, the “AIFMD Regimes”) for prudential regulation of both EU connected funds and EU connected managers which are consistent with the Alternative Investment Fund Managers Directive (“AIFMD”). The AIFMD Regimes will give Cayman Islands based funds and managers the option of electing for an additional layer of regulation (which is consistent with the relevant requirements of AIFMD) to apply where certain types of marketing in the EU, or managing of EU funds, or depositary activity is contemplated.
The broad framework for the AIFMD Regimes is included in the Bills, which it is anticipated will pass into law during August 2015. The specifics of the AIFMD Regimes will be set out in detailed regulations which are currently being finalised and will, we anticipate, be issued by shortly after the changes made by the Bills come into force.
The AIFMD Regimes, combined with the long-standing reciprocity of access for EU funds and managers to investors in the Cayman Islands, will put Cayman in an excellent position to secure an extension of the AIFMD passport to the Cayman Islands. This will be of particular interest to those seeking to market Cayman funds in the EU whether using existing national private placement regimes (“NPPRs”) or, once extension to Cayman is approved, the AIFMD passport mechanism.
The fact that the AIFMD Regimes are optional means that it is business as usual for the rest of the funds and managers using the Cayman Islands.
ESMA Recommendation to the European Commission
On 22 July 2015, the European Securities Markets Authority (“ESMA”) is due to provide its initial recommendation to the European Commission (“EC”) as to which jurisdictions should be considered for a “third country passport” under AIFMD.
ESMA has decided to take a “country by country” approach to such recommendations to the EC. Whether to grant any actual extension of the passport to any country will be determined separately by the EC who have 3 months from 22 July, 2015 to reach a decision on the countries recommended on 22 July.
Given that ESMA is working its way through reviewing a significant number of non-EU jurisdictions, we would anticipate that there will be other recommendations to the EC from ESMA following relatively shortly after 22 July 2015.
New Opt-in AIFMD Regimes
The Bill amending the MFL introduces the concept of an opt in designation as a “regulated EU Connected Fund”, being any type of investment fund (whether open-ended or closed-ended) which (i) is either managed from or marketed in a Member State of the European Economic Area (“EEA”) as contemplated under AIFMD and (ii) elects to fall within CIMA’s new regulated EU Connected Fund regime.
The Bill amending SIBL introduces the concept of an opt in designation as an “EU Connected Manager”, being a person who: (i) falls within the existing scope of SIBL; (ii) conducts management, marketing or depositary activities as contemplated under AIFMD; and (iii) elects to fall within CIMA’s new EU Connected Manager regime.
Under the AIFMD Regimes (i) both open ended and closed ended EU Connected Funds will be able to elect to be regulated by CIMA, but under a new regime tailored to EU Connected Funds, and (ii) EU Connected Managers will be able to elect, despite being “excluded persons” under SIBL, to become fully licensed under SIBL and in addition to be governed by new regulatory standards which are consistent with AIFMD.
Both of the Bills make clear that the existing supervisory duties and powers of CIMA under the MFL and SIBL will extend to EU Connected Funds and EU Connected Managers which opt in to the AIFMD Regimes.
The Cayman Islands are home to over 11,000 investment funds, with the vast majority of the top 100 managers outside of the EEA using Cayman Islands vehicles in their fund structures. Permitting extension of the passport to the Cayman Islands would be of significant benefit to EU investors, providing them with access to world-class investment options across a diverse range of different investment products and strategies. Given this dynamic, Cayman Finance believes that there is a compelling case for ESMA and the EC to properly and promptly consider extension of the AIFMD passport to the Cayman Islands.
Timing of the Opt-in AIFMD Regimes
It is anticipated that the Bills will be passed into law in August 2015 and that the detailed regulations will be approved shortly thereafter
The AIFMD Regimes will place Cayman ideally for consideration for AIFMD passport extension by ESMA and the EC. We are confident that Cayman’s AIFMD Regimes, plus on-going reciprocity, will enable Cayman to secure extension of the AIFMD passport to the Cayman Islands by the EC later this year.
Cayman Finance CEO Jude Scott commented that “The Cayman Islands Government, the Cayman Islands Monetary Authority and the Cayman Islands financial services industry all recognize Cayman’s important role in the global investment funds market, and these new AIFMD Regimes are the latest example of the jurisdiction continuing to evolve its legislation and regulation in a balanced and robust manner to meet the needs of investors and managers around the world.”
Related story
Cayman Islands establishing AIFMD consistent regimes
By Tim Clipstone, Jon Fowler, Philip Ireland, Barry McGrath, Anthony Webster, Paul Govier, Tom Katsaros From Maples
The Cayman Islands Government (“CIG”) published two bills (“Bills”) on 10 July 2015 which will establish two new “opt in” regulatory regimes for the Cayman Islands which are consistent with the Alternative Investment Fund Managers Directive (“AIFMD”).
It is anticipated that the Bills will be approved by the Cayman Islands’ Legislative Assembly during August 2015.
These new AIFMD consistent regulatory regimes (together, the “New AIFMD Regimes”) will be of particular interest to managers and funds looking to access European investors, whether using existing national private placement regimes (“NPPRs”) or looking to keep open the option of using an AIFMD passport at some point in the future.
For all other Cayman Islands based funds, and their managers, the fact that the New AIFMD Regimes are wholly optional means that the current Cayman Islands regulatory framework won’t be affected and it will be business as usual.
ESMA Recommendation
Clients will be aware that the European Securities Markets Authority (“ESMA”) is due to provide its recommendation to the European Commission (“EC”) as to which non-EEA[1] jurisdictions should be eligible for a “third country passport” under AIFMD on 22 July 2015 (the “Initial Recommendation”).
ESMA has decided to take a “country-by-country” approach to the extension of the passport and is likely to single out certain jurisdictions in the Initial Recommendation. Noting that ESMA currently has 44 jurisdictions (including the Cayman Islands and the USA) to consider it is unlikely that all can be covered by the Initial Recommendation and jurdisditions will instead be considered on a phased basis. We anticipate that additional advice and recommendations will be issued by ESMA to the EC shortly after the Initial Recommendation until the work on all 44 jurisdictions is complete.
Given the upcoming Initial Recommendation, clients will have been reassured to see that the CIG issued an Industry Advisory on 15 May 2015[2] confirming that CIG and the Cayman Islands Monetary Authority (“CIMA”) had been working on, and were close to finalising, the New AIFMD Regimes. CIMA issued a related Statement on the same day.[3]
The publishing of the Bills is the next step in the process to implement the New AIFMD Regimes in the Cayman Islands.
European Commission Decision
The decision on extension of the passport to any third country rests with the EC rather than ESMA and the EC has discretion whether to accept ESMA’s advice. The EC has three months from receipt of the Initial Recommendation to specify a date when rules relating to the third country passport should become effective for the jurisdiction(s) recommended by ESMA.
That timetable, which is set down by the AIFMD, would see an EC decision on the first non-EEA countries to have the AIFMD passport extended to them by October 2015 at the earliest.
New AIFMD Regimes
The Bill amending the Mutual Funds Law introduces the concept of an opt in designation as a “regulated EU Connected Fund” (the “EU Connected Fund Regime”). The EU Connected Fund Regime is available to any type of investment fund (whether open-ended or closed-ended) which: (i) is either managed from or marketed in a Member State of the EEA as contemplated under AIFMD and (ii) elects to fall within CIMA’s new EU Connected Fund Regime.
The Bill amending the Securities Investment Business Law introduces the concept of an opt in designation as an “EU Connected Manager” (the “EU Connected Manager Regime”). The EU Connected Manager Regime is available to a person who: (i) falls within the existing scope of the Securities Investment Business Law; (ii) conducts management, marketing or depositary activities as contemplated under AIFMD; and (iii) elects to fall within CIMA’s new EU Connected Manager Regime.
Under the New AIFMD Regimes, it is anticipated that regulated EU Connected Funds and EU Connected Managers will be able to opt in to new regulatory standards which are consistent with AIFMD. The Bills make clear that the existing supervisory duties and powers of CIMA under the Mutual Funds Law and Securities Investment Business Law will extend to regulated EU Connected Funds and EU Connected Managers which opt in to the New AIFMD Regimes.
The Bills anticipate that the detail of the New AIFMD Regimes will be provided in regulations issued pursuant to each of the Bills (together, the “Regulations”), which are expected to follow shortly.
How will NPPRs be Affected?
Clients will be aware that there is still uncertainty as to how the third country passport regime under AIFMD will work if and when extended to any one or more countries by the EC, and in particular it is unclear what the potential impact of any decision to extend the passport to third countries will have on the decision as to retention of the NPPRs.
The question as to what any such an extension will do to NPPRs, and whether any withdrawal of NPPRs will be on a blanket, or country by country, basis will hopefully be clarified by ESMA and/or the EC well in advance of the 2018 date set out in the AIFMD.
Cayman Well Placed for Extension
There has been long-standing reciprocity of access for EEA funds and managers to investors in the Cayman Islands.
The New AIFMD Regimes combined with this established reciprocity should place the Cayman Islands in a favourable position for consideration by ESMA and the EC and will, we anticipate, secure extension of the AIFMD passport to the Cayman Islands in relatively short order.
Is there action to be taken immediately?
Although there is no action to be taken now, clients with Cayman Islands funds and / or managers with an EEA nexus should look out for further Maples and Calder updates once the Regulations are issued, which we currently anticipate will be during August 2015.
For further information, please speak with your usual Maples and Calder contact or one of the individuals listed above.
