The Asset Management Review – CAYMAN ISLANDS
By Jon Fowler and Sara Galletly1
I OVERVIEW OF RECENT ACTIVITY
Asset management vehicles established in the Cayman Islands can be divided into two distinct groups: a regulated open-ended funds, for which there is an abundant supply of publicly available statistical information (although it lags behind the market, as is inevitably the case for information compiled by a regulator); and bother asset management vehicles (including closed-ended funds), for which the available data is more limited.
Investment funds regulated by the Cayman Islands Monetary Authority (CIMA) are required to file audited annual accounts, a fund annual return (an FAR) and a key data elements form (a KDE form) (containing a summary of the basic information about the fund), in each case within six months of the end of each financial year. The FAR provides a snapshot of the activities of such regulated funds, which is published in CIMA’s annual statistical digest. CIMA supplements this information with a quarterly update on, and breakdown of, the number of regulated investment funds.
Interpretation of this extensive information requires some inside knowledge. At first glance, the number of regulated funds appears to have increased markedly to 10,932 at the end of the first quarter of 2013, after a steady decline from its previous peak of 10,291 at the end of the third quarter of 2008.2 However, the 2012 and 2013 figures are affected by the inclusion of 2,131 master funds3 at the end of the first quarter of 2013 that were required to register with CIMA as a result of statutory changes introduced in December 2011 and January 2013. Removing these registered master funds from the picture reveals a reduction of 149 investment funds in the first quarter of 2013 (from 8,950 at the end of 2012),4 reflecting an annual trend resulting from year-end deregistrations, and an aggregate reduction of 457 investment funds from the end of 2011.
The number of hedge funds regulated in the Cayman Islands has remained relatively stable, at around 9,000 funds, for several years. While the level of growth experienced in the years preceding the global financial crisis has ended, the industry has largely held its ground since the crisis. The Cayman Islands saw approximately 1,000 new open-ended funds registered in both 2010 and 2011, and 775 new registered, licensed and administered funds and 1,891 new master funds were registered in 2012. The Cayman Islands are currently on track to see the same figure in 2013, with 229 new feeder funds and 362 new master funds registered in the first quarter of 2013. Another indicator of the industry’s resilience is CIMA’s statistical digest for 2010, which shows growth in the net asset value of reporting funds from US$1,693 billion in 2008 to US$1,798 billion in 2011.5
It is more difficult to obtain an accurate overview of the state of the Cayman Islands’ asset management industry as a whole, which would necessarily include looking at the level of managed account activity and closed-ended fund activity.
The recent past has seen a trend towards managed accounts, but this is difficult for the jurisdiction to track accurately. While single investor vehicles created as part of a managed account structure may involve registration of the relevant vehicle with the Cayman Islands registry, the vehicle will often not be required to register with CIMA because there is only one investor and therefore no pooling of investor funds (a requirement of the statutory definition of a mutual fund). Added to this is the fact that many managed accounts do not require that a separate vehicle be established, as they are operated through contractual arrangements onshore (e.g., in the EU or the US) that need not involve a tax-neutral jurisdiction such as the Cayman Islands.
There is also an exception to the need to register with CIMA for funds known as Section 4(4) funds, which are open-ended investment funds that pool investor funds but that have 15 or fewer investors, a majority of whom are given the power to appoint and remove the fund’s directors, general partner or trustee, as applicable.
Closed-ended funds (i.e., funds that do not permit investors to voluntarily withdraw all or part of their investment prior to winding up) fall outside the regulatory regime in the Cayman Islands, so it is difficult to gauge their numbers. The most useful indicator of the level of closed-ended fund activity (which generally includes funds investing in illiquid asset classes, such as private equity, real estate or infrastructure projects) is the level of registrations of Cayman Islands exempted limited partnerships (ELPs). However, this is only a rough indicator based upon practitioners’ experience that the majority of the ELPs formed are used in closed-ended fund structures. This is borne out by CIMA’s statistical digests, which show that only a small fraction of open-ended funds are formed as ELPs; for example, ELPs accounted for only 6 per cent of the total number of reporting funds in 2010.6 Figures released by the Cayman Islands Registrar of Exempted Limited Partnerships show a drop in the rate of formation of new ELPs after 2008 from an average monthly rate of 182 to 107 per month in 2009, then gradually recovering to 129 per month in 2010, 158 per month in 2011 and 170 per month in 2012, although dropping slightly to 160 per month in the first quarter of 2013.7
ELPs are utilised for a variety of purposes within closed-ended structures. An ELP may well be the primary fund vehicle, but often ELPs will also serve other purposes (e.g., ELPs may be used as a feeder into an onshore fund, an alternative investment vehicle, a parallel fund or a co-investment vehicle). Changes in the rate of formation of ELPs could therefore indicate fluctuations in the rate of new fundraising, but are just as likely to point to variations in the level of transactional activity by established closed-ended funds themselves.
II GENERAL INTRODUCTION TO THE REGULATORY FRAMEWORK
As noted above, investment funds in the Cayman Islands are either open-ended and subject to regulation (unless falling within the Section 4(4) exception), or closed-ended and therefore outside the regulatory regime. The primary statute regulating Cayman Islands investment funds is the Mutual Funds Law (2012 Revision), as amended (the Mutual Funds Law). Subject to the Section 4(4) fund exception, an investment fund qualifies as a mutual fund, and is, therefore, required to be regulated under the Mutual Funds Law if:
it is a Cayman Islands company, partnership or unit trust;
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 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.
The key distinction between such a fund and a closed-ended fund is the ability of investors to voluntarily withdraw some or all of their investment prior to winding up, whether at will or on a specified period of notice. However, the question of whether shares, partnership interests or trust units are voluntarily redeemable or can be repurchaseable prior to winding up can be difficult to answer where long lock-up periods are part of a transaction’s terms, although Cayman Islands practitioners and CIMA generally consider that a lock-up period should be at least five years for an investment fund to be regarded as closed-ended at the outset.
A master fund within a multi-level investment fund structure will be deemed to be a mutual fund for the purposes of the Mutual Funds Law and, accordingly, will be required to be regulated under the Mutual Funds Law, if it:
a is a Cayman Islands company, partnership or unit trust;
b issues equity interests to one or more investors;
c holds investments and conducts trading activities for the principal purpose of implementing the overall investment strategy of the regulated feeder fund; and
d has one or more regulated feeder funds (i.e., a mutual fund regulated under the Mutual Funds Law that conducts more than 51 per cent of its investing in a master fund, whether directly or indirectly via an intermediary entity), whether directly or through an intermediary entity established to invest in the master fund.
Due to the definition of master fund under the Mutual Funds Law, a master entity in a structure having only one investor (so there is, strictly speaking, no pooling element) will now constitute a mutual fund. The exact fund structure will, in each case, determine whether registration of a master entity, or any other entity, is necessary, although there are certain structural approaches that may allow such an entity to fall outside the scope of the master fund registration regime under the Mutual Funds Law.
Few investment funds are fully licensed under the Mutual Funds Law, as this is generally only necessary for retail funds, while the majority of investment funds formed in the Cayman Islands are intended for institutional or high net worth investors, or both. Of the total number of 10,932 regulated investment funds at the end of the first quarter of 2013, only 120 were fully licensed by CIMA under the Mutual Funds Law.8
The two alternatives to obtaining a full licence under Section 4(1)(a) of the Mutual Funds Law are to be regulated as an administered fund under Section 4(1)(b) of the Mutual Funds Law, or as a registered fund under Section 4(3) of the Mutual Funds Law. As at 31 March 2013, the numbers of administered and registered funds (including master funds) were 399 and 10,413 respectively.9
Administered funds have steadily declined in popularity in recent years (from 510 in 2008 to 408 in 2012),10 perhaps because the administrators who originally saw them as a source of higher fees came to realise that the higher fees were counterbalanced by higher risks. Registration as an administered fund is achieved by designating a Cayman Islands licensed mutual fund administrator as the fund’s principal office. The administrator must satisfy itself that the promoters of the fund 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 manner. The administrator is obliged to report to CIMA any suspected infringements of the Mutual Funds Law (or any other law) by the fund, or any suspicion that it may be insolvent or that it may be acting in any manner prejudicial to its creditors or investors. Clearly, this imposes a role of quasi-regulator and compliance monitor on the administrators themselves, which they will find burdensome to carry out effectively.
Registered funds regulated under Section 4(3) of the Mutual Funds Law account for approximately 95 per cent of all regulated investment funds in the Cayman Islands as at 31 March 2013.11 The straightforward requirements for registration and the lack of a pre-approval process are the most obvious drivers of this popularity. The basic requirements for registration under Section 4(3) (for both traditional mutual funds and master funds) are that the minimum investment per investor is at least US$100,000 (or its equivalent), or that the equity interests are listed on a recognised stock exchange. Registration involves filing an application form and registration fee together with the fund’s offering document and consent letters from its Cayman Islands auditor and its administrator. A separate offering document is not required for a regulated master fund. On an ongoing basis, the fund must file an amended offering document within 21 days of any material change that occurs while it is still offering its equity interests. It must also file with CIMA annual audited accounts, a KDE form and an FAR (all submitted electronically by the fund’s auditor) within six months of the end of each financial year.
There are no local service provider requirements for Cayman Islands regulated investment funds, other than the requirement to have an approved local auditor.
III COMMON ASSET MANAGEMENT STRUCTURES
Three types of vehicle are most commonly utilised by Cayman Islands investment funds: exempted companies, ELPs and exempted unit trusts. Exempted in this context simply means that the vehicle is eligible to apply to the government for an undertaking (lasting 20 or 50 years depending on the type of vehicle) that if any taxation is introduced in the Cayman Islands during the period to which the undertaking applies, such taxation will not apply to the vehicle in question. In return, exempted vehicles are not permitted to carry on business within the Cayman Islands.
Exempted companies limited by shares are the most commonly used vehicle for open-ended funds. In 2011, 80 per cent of reporting funds were exempted companies (including segregated portfolio companies).12 The reason for this is likely to be a combination of investors’ comfort with the share as a form of security, and the easily understood reporting of fluctuating investment values when expressed on a net asset value per share basis.
It is now uncommon to see closed-ended funds established in the Cayman Islands as exempted companies. Most jurisdictions with managers of, or investors in, such funds have become comfortable with the limited partnership structure prevalent in the United States, which is replicated to a significant degree in the Cayman Islands ELP structure.
While exempted companies are extremely flexible in the extent to which voting and economic rights can be mixed among different classes of shares, companies, by their very nature, have certain limitations that do not apply to ELPs.
There are fewer statutory rules governing the approvals processes within an ELP, which makes them generally more flexible. For instance, general partners can be, and usually are, delegated a certain degree of unilateral authority to amend the limited partnership agreement of an ELP, while such powers cannot be delegated to the directors of an exempted company in relation to its memorandum and articles of association (which can only be amended by special resolution of its shareholders). However, the key reasons for the use of ELPs for closed-ended funds relate to distributions. First, general partners are only limited by the terms of the limited partnership agreement when considering which sources of funds to utilise, while the directors of a company are restricted by statutory and common law maintenance of capital rules. Even more significant, however, is:
a the ability of partners to directly enforce the limited partnership agreement against one another; and
b the fact that the terms of investment can easily be expressed to survive a partner’s withdrawal (whereas a shareholder in a company ceases to be subject to its articles of association when he or she no longer holds any shares).
Closed-ended funds generally make distributions on a waterfall basis, most commonly by paying distributions first to investors until all capital contributions have been returned and a certain level of return obtained, then to the manager or general partner until it has received a specified percentage of the aggregate amount of all distributions, and then to investors and the manager or general partner in specified percentages. Such distributions are often subject to claw back at the end of the fund’s life if, once all distributions have been made, the manager or general partner has received a higher proportion of the aggregate distributions than intended, or in some cases to fund indemnity payments. Utilising a company in this situation would generally require these obligations to be set out in a separate shareholders’ agreement that is also signed by the company to ensure that the obligations survive a shareholder’s withdrawal, and can be directly enforced by each investor and the company as against each other.
Investment funds structured as unit trusts are primarily formed in the Cayman Islands for distribution in Japan, where the demand is generated by familiarity with the unit trust structure and historical local tax benefits relating to trust units as opposed to company shares or limited partnership interests. The Cayman Islands also has specific regulations13 that such investment funds can elect to comply with when applying for a licence under the Mutual Funds Law, which under current guidelines set by the Japan Securities Dealers Association permit them to be marketed to the public in Japan. Although companies and limited partnerships are also eligible to use this regime, the popularity of unit trusts with Japanese investors means that funds regulated under this regime are usually unit trusts.
IV MAIN SOURCES OF INVESTMENT
The disparity of available information between regulated and unregulated investment funds in the Cayman Islands is evident when analysing the source and value of investments in such funds. CIMA’s published statistics14 provide a useful indication of the scale of the regulated industry, with the net asset value of reporting funds in 2011 being almost US$1.8 trillion, and reported inflows and outflows during 2011 from such funds of US$687 billion and US$548 billion respectively. It is worth bearing in mind that the actual figures for open-ended funds alone will exceed these amounts because CIMA’s figures are based only on the 73 per cent of regulated funds as at December 2011 that had actually filed their fund annual returns for 2011 by December 2012, and they do not capture funds exempted from regulation under Section 4(4) or funds held in managed accounts.
We can speculate that the size of the closed-ended fund industry in the Cayman Islands is of a similar order. However, as previously noted, the exact number of closed- ended fund vehicles is difficult to establish, and the details of equity holders in those vehicles and the size of their investments is not publicly available information. Therefore, it should be noted that this is at best an educated guess.
V KEY TRENDS
The investment fund industry in the Cayman Islands, which had grown dramatically over the course of the preceding decade, was certainly affected by the financial crisis in 2008. The rate of formation of new investment funds dropped off sharply, although never completely. While the rate of new fund registrations with CIMA was approximately 30 per cent lower in 2009 than in 2008, there were still 1,162 new registrations during 2009, at the supposed height of the crisis.15 One reason for this resilience was the requirement for all investment funds registered with CIMA to have an approved Cayman Islands auditor, which helped the Cayman Islands avoid any equivalent of the Bernard Madoff fraud. Another reason was the apparent robustness and flexibility of the legal structures utilised by Cayman Islands investment funds. As a general matter, during the liquidity crisis, Cayman Islands open-ended investment funds were able to utilise the mechanisms built into their constitutional documents to cater for the extreme situations encountered, such as the suspension of net asset value calculations, redemptions and payment of redemption proceeds, or the creation of side pocket (i.e., non-redeemable) share classes for particular illiquid assets. Where difficulties did arise, this was usually because fund managers had made a conscious decision for marketing purposes not to incorporate such mechanisms into their funds. Situations undoubtedly arose where trading losses reduced the net asset value of a fund to such an extent that the fund’s manager could see no reasonable prospect of regaining the fund’s high water mark in the foreseeable future, and accordingly the fund was terminated. The difficult environment caused a number of managers to decide to wind up their funds, and fund termination levels in the Cayman Islands increased markedly during this period.
The stress testing of these emergency mechanisms and attempts by investors to realise their investments by resorting to the courts created a body of new case law in the Cayman Islands relating specifically to the investment fund industry. While these cases occasionally produced some surprising judgments, on the whole they endorsed the mechanisms utilised by Cayman Islands funds. For example, the practice of including class terms in a fund’s offering document has been confirmed, as has the precedence of a corporate fund’s articles of association.16
One group of cases (collectively the Belmont cases)17 has focused on the common practice among managers of conducting a soft wind-down of a fund by ceasing to actively trade, reducing the fund’s assets to cash over a period of time and then redeeming out investors as liquidity becomes available, as opposed to putting the fund into formal liquidation and appointing a liquidator. The Belmont cases each involved a petition by investors for the just and equitable winding up of a corporate fund (i.e., a formal liquidation) on the basis that the fund was no longer operating within the reasonable expectations of its investors and had therefore lost its substratum. These judgments suggest that the Cayman Islands courts will be likely to regard a fund that is in soft wind- down as having lost its substratum, making it just and equitable to make a winding-up order if there had been no express disclosure in the fund’s offering documents that a soft wind-down might be conducted (i.e., so that it is not within the reasonable expectation of investors).
However, the judgment in the ABC case18 involving a fund structured as a Cayman Islands segregated portfolio company (SPC) that an investor sought to have wound up on just and equitable grounds contains indications that the courts may be softening their views on soft wind-downs. In the ABC case, a number of the fund’s segregated portfolios that held illiquid real estate assets were subject to a soft wind-down by the fund’s manager. Taking note of the fund’s offering document and articles of association (which contained the relevant health warnings and suspension provisions), consents given by investors to amendments to the fund’s constitutional documents permitting it to continue with a suspension of redemptions while recommencing net asset value calculations, and the fact that two-thirds of the fund’s net asset value was held in segregated portfolios that were still operating normally, the Court of Appeal ruled that the fund had not ceased to carry on business within the reasonable expectation of its investors, and that experienced Cayman Islands investors must reasonably expect that the illiquidity of a portfolio would lead to an inability to pay redemptions.
The ABC case is significant because the Court of Appeal reached this decision without any express wording in the fund’s offering document permitting soft wind- downs (which is a step back from the hard line taken in the Belmont cases), and this is the first case in which the statutorily segregated nature of the portfolios in an SPC has been tested (and upheld) in the courts.
SPCs are a type of exempted company introduced to the Cayman Islands in 1998.19 An SPC can create one or more segregated portfolios, the assets and liabilities of which are ring-fenced from the assets and liabilities of the SPC’s other segregated portfolios and from the SPC’s general assets and liabilities (if any). The legal segregation of assets and liabilities in each portfolio would appear to be ideally suited for investment funds that wish to offer multiple strategies or exposure to different levels of leverage to investors, but in 2011, only 11 per cent of reporting CIMA-registered funds were SPCs,20 and in the first three months of 2013, SPCs were being formed at an average rate of 14 per month compared with an average of 672 per month for exempted companies as a whole.21 The judgment in the ABC case, when combined with changes effected to the Companies Law in 201122 that removed the threat of personal liability for directors who failed to ensure that SPC contracts were entered into in the name of the correct segregated portfolio, could lead to an increase in the popularity of SPCs as open-ended fund vehicles.
In addition, two recent decisions of the Cayman Islands Grand Court considered side letters in the hedge fund context. While both cases arose out of unusual factual circumstances and should, accordingly, be read carefully in their context, they provide useful practical guidance as to some general principles to bear in mind when entering into side letters with a Cayman Islands investment fund. The first case, Re Medley Opportunity Fund Ltd,23 emphasises the importance of ensuring that the correct parties are recorded as parties to a side letter and involved a side letter entered into by an underlying beneficial owner of interests in the fund who was not the shareholder of record, which was a nominee entity. The nominee shareholder was not able to rely upon the provisions of the side letter entered into with the beneficial owner, as they were separate legal entities and the principle of privity of contract (i.e., the principle that only the parties to a contract may enforce it in court) was upheld. (As a side note, statutory reforms modelled on the corresponding legislation in the UK may soon provide third parties the right to enforce contracts governed by Cayman Islands law in certain circumstances.) The second case, Lansdowne v. Matador Investments Limited (in official liquidation),24 upheld this principle and also underlines the importance of ensuring that the terms of any side letter are consistent with the fund’s memorandum and articles of association and offering documents.
The increased level of fund failures during the financial crisis inevitably led to investors seeking not only control of the winding-up process, but also to apportion blame. In the Weavering case,25 a particularly egregious example of dereliction of their duties by a fund’s directors (both of whom were Swedish residents and neither of which were independent of the manager), the resulting order for damages was unsurprising. Usefully for the Cayman Islands fund industry, the judge took the opportunity to outline exactly what the court expects of independent fund directors with regard to their duties of skill and care. Providers of independent directors in the Cayman Islands have taken the opportunity to review their operational model and infrastructure in the light of the judgment, and to engage with and reassure their clients accordingly. There is clearly an ongoing focus by investors on the board governance aspect of corporate funds. For instance, it is rare in the current climate to see a regulated Cayman Islands corporate fund formed without at least one, if not a majority of, independent directors. Equally, independent directors themselves have become increasingly aware of the need to take a more proactive role in fund governance to fulfil their legal duties as directors and the expectations of investors. In addition, CIMA recently commissioned a hedge fund corporate governance survey,26 obtaining feedback from over 170 hedge fund managers, investors, directors and various service providers on the current Cayman Islands corporate governance standards and practices. The survey results reveal the importance of director independence in the minds of investors, with independence being considered the most important element when assessing the corporate governance practices of a Cayman Islands hedge fund by 79 per cent of the investor respondents.27 Interestingly, and somewhat inconsistently, investors have to date focused far less on questions of proper governance and independence in relation to either the onshore feeder funds involved in the majority of open-ended fund structures (which, for open-ended fund structures established by US managers, are often Delaware partnerships or limited liability companies (LLCs)) or the increasing number of partnerships that act as master funds in such open-ended structures.
The trends discussed above all relate to open-ended investment funds. Closed- ended funds also suffered a decline in the rate of formation during 2009, although as previously noted with a gradual resurgence thereafter. While the liquidity crisis clearly affected closed-ended funds, it did so in a different manner. Such funds were not prey to redemption requests from their own investors desperate to shore up their own liquidity, but they were faced with banks unwilling to provide leverage for acquisitions, and a harsh macro-economic environment in which many managers were too nervous to carry out deals at all. However, closed-ended funds cannot delay indefinitely because of the limited period during which they can call capital from their investors (the usual investment period being around five years). Therefore, as the credit markets began to ease, these funds have gradually begun investing and calling capital again. The dip in closed-ended fund activity resulted in a somewhat elongated period before the funds raised prior to the financial crisis were sufficiently drawn down for managers to begin raising their next fund.
As with the regulatory regime for open-ended funds, with closed-ended funds the government has preferred to update well-serving existing laws and regulations to meet the ever-changing commercial needs of the fund industry, rather than introducing a swathe of new legislation. As previously mentioned, the ELP is the vehicle most commonly used by closed-ended funds, and proposals have been submitted to the government to update the Exempted Limited Partnership Law (2012 Revision) (the ELP Law). The drivers behind the proposals are to bring the ELP Law further into line with the equivalent statute in the US state of Delaware, which the original ELP Law was largely based on, and to clarify the legal position for the fund industry on practical issues that have arisen in recent years. The proposals include allowing partners to contractually reduce the general partner’s fiduciary duties, clarifying the fiduciary duties of members of advisory boards, providing a statutory basis for the granting of floating charges over the assets of an ELP, preventing default provisions (e.g., on a failure to pay capital calls) being unenforceable solely on the basis that they may be considered penal as a matter of common law and allowing foreign (i.e., non-Cayman) partnerships to act as general partners of Cayman ELPs. The proposals are still subject to review, but it seems probable that the ELP Law will be amended to some degree during the coming year.
VI SECTORAL REGULATION
i Insurance
There are no specific rules that apply to insurance asset management in the Cayman Islands. Local insurance companies licensed by CIMA under the Insurance Law, 2010 may have restrictions imposed on them by CIMA regarding the classes of assets in which they are permitted to invest.
ii Pensions
There are no specific rules that apply to pensions asset management in the Cayman Islands. Local pension plans must be registered with the Supervisor of Pensions under the National Pensions Law (2012 Revision), and the administrators of such plans are subject to statutory duties of care, diligence and skill (comprising both objective and subjective tests) in their management of the plan assets.
iii Real property
There are no specific rules that apply to property fund management in the Cayman Islands.
iv Hedge funds
Hedge funds will generally be open-ended vehicles and therefore need to comply with the provisions of Mutual Funds Law, as described in Section II, supra.
v Private equity
There are no specific rules that apply to private equity funds in the Cayman Islands. However, as noted above, certain changes are proposed to the ELP Law that are intended to bring the law more into line with the current commercial demands of private equity funds.
VII TAX LAW
The Cayman Islands imposes no taxation on the income or capital gains of investment funds or their investors, and no transfer taxes on the transfer of interests in investment funds. Exempted companies, limited partnerships and unit trusts can obtain undertakings from the government that if any such taxation is introduced during a 20-year period (companies) or 50-year period (limited partnerships and unit trusts),28 as applicable, from the date of the undertaking (or date of creation of the unit trust), such taxation will not apply to the entity to which the undertaking is given.
VIII OUTLOOK
The Cayman Islands has weathered the macroeconomic storms of the recent past in remarkably good shape. Although the rate of formation of Cayman Islands investment funds declined following 2008, it has steadily regained ground over the past three years. Legislation and regulations have been tweaked when necessary to meet OECD and other requirements (as was the case with the legislation requiring master fund registration), but there has been no attempt to fix something that is not fundamentally broken, and this trend can be expected to continue. Improvements to the Companies Law (2012 Revision) and, as noted in Section V, supra, updates to the Exempted Limited Partnership Law (2012 Revision), are in the pipeline and may be implemented in the coming year.
The Cayman Islands fund industry is focused on the legal and regulatory changes taking place in the US and Europe, and the Cayman Islands has reacted to ensure that Cayman will be compliant and that it will be business as usual as and when those changes come into effect. In response to the US Foreign Account Tax Compliance Act (FATCA), the government issued a press release in March 2013 confirming that the Cayman Islands would opt for a Model 1 intergovernmental agreement (IGA), which will be beneficial for users of Cayman Islands investment funds, as a Model 1 IGA should provide a simplified FATCA compliance procedure via a registration for a global intermediary identification number rather than requiring Cayman Islands investment funds to sign individual agreements with the IRS.
The Alternative Investment Fund Managers Directive (AIFMD) generally came into force on 22 July 2013, although certain EU Member States have applied flexible interpretations as to the impact of AIFMD during a one-year transitional period expiring on 21 July 2014. CIMA announced on 11 July 2013 that memoranda of understanding (MOUs) had been signed by CIMA with 25 member organisations of the European Securities and Markets Authority (ESMA), with the five ESMA members still to sign being Austria, Germany, Italy, Slovenia and Spain. The MOUs will mean that Cayman Islands alternative investment funds with non-European managers are well placed to take advantage of the ongoing availability of EU national private placement regimes, notwithstanding AIFMD coming into effect.
The demand for an inexpensive, tax-neutral and secure method of pooling capital from multiple jurisdictions, and of transmitting that capital to where it can best be employed, is unlikely to disappear in the near future, as higher growth rates in the developing world continue to attract investment capital from the more stagnant economies of the US and Europe, and demographics drive increased demand for alternative investment classes. The secure legal and regulatory framework and level of specialist expertise, combined with a proactive and pro-industry regulator, should enable the Cayman Islands to continue taking advantage of this demand, and to maintain its position as a premier jurisdiction for offshore investment funds.
1 Jon Fowler is a partner and Sara Galletly is an associate at Maples and Calder. 2 Figures taken from the Number of Mutual Funds and Mutual Fund
website: www.cimoney.com.ky.
3 4 5 Ibid. Ibid. CIMA: Investments Statistical Digest – 2011 Bulletin, p. 2.
6 Ibid., p. 4.
7 Figures taken from the General Registry of the Cayman Islands website: www.ciregistry.gov.ky.
8 9 10 Op. cit. 2. Op. cit. 2. Op. cit. 2.
11 Op. cit. 2. 12 Op. cit. 5, p. 9.
13 The Retail Mutual Funds (Japan) Regulations (2007 Revision), as amended pursuant to the Retail Mutual Funds (Japan) (Amendment) Regulations, 2012.
14 Op. cit. 5, p. 2.
15 CIMA: The Navigator, January 2010.
16 Culross Global SPC Limited v. Strategic Turnaround Master Partnership Limited [2010] UKPC 33.
17 Belmont Asset Based Lending Limited [2010] 1 CILR 83; ICP Strategic Credit Income Fund Ltd (Grand Court, Unreported, 10 August 2010); Wyser-Pratte Eurovalue Fund Limited [2010] CILR 194; Re Heriot African Trade Finance Fund Limited [2011] 1 CILR 1.
18 ABC Company (SPC) v. J & Co Ltd (CICA Unreported, May 2012).
19 Pursuant to the Companies (Amendment) (Segregated Portfolio Companies) Law, 1998.
20 Op. cit. 5, p. 9.
21 Op. cit. 7.
22 Pursuant to the Companies (Amendment) Law, 2011.
23 Re Medley Opportunity Fund Ltd (Grand Court, 21 June 2012).
24 Lansdowne v. Matador Investments Limited (in official liquidation) (Grand Court, 23 August 2012).
25 Weavering Macro Fixed Income Fund Limited (In Liquidation) v. (1) Stefan Peterson and (2) Hans Ekstrom (Grand Court, 26 August 2011).
26 Cayman Islands Hedge Fund Corporate Governance Survey commissioned by the Cayman Islands Monetary Authority, at the Publications section of the CIMA website: www.cimoney. com.ky.
27 Ibid., pp. 7 and 10.
28 Companies are entitled to a 20-year undertaking under Section 6 of the Tax Concessions Law (2011 Revision), limited partnerships are entitled to a 50-year undertaking under Section 17 of the Exempted Limited Partnership Law (2012 Revision) and trusts are entitled to an undertaking under Section 81 of the Trusts Law (2011 Revision).
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