The Private Funds Act, 2020, requires the registration of closed-ended funds with the Cayman Islands Monetary Authority (CIMA). Mutual funds (e.g., hedge funds) are not caught by this law, and continue to be regulated by the Mutual Funds Act, 2021 Revision, as amended.
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A private fund means a company, unit trust or partnership that offers, or issues, or has issued its non-redeemable investment interests. The purpose or effect of a private fund is to pool the funds to enable investors to receive profits or gains from the 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.
Single investor private funds will be outside the scope of the law as there would be no pooling of investor funds in this case. The law applies to private equity funds, venture capital funds, and other types of closed-ended funds set up as Cayman Islands limited partnerships, companies (including segregated portfolio companies), and limited liability companies.
Registration process. The law states that a private fund is required to:
(1) apply for registration to the CIMA within 21 days after accepting capital commitments from investors;
(2) file prescribed details in respect to the private fund with the CIMA;
(3) pay a prescribed annual registration fee to the CIMA in respect of the private fund;
(4) comply with any conditions of its registration imposed by the CIMA; and
(5) comply with the provisions of the law.
Timing of registration. A new private fund caught by the law must submit its registration application to the CIMA within 21 days of accepting capital commitments from investors, and be registered by the CIMA before taking capital contributions from investors.
Requirements to register changes. A private fund is required to notify the CIMA of any change that materially affects prior information submitted to the regulator, as well as any change of its registered or principal office. The private fund has 21 days to do so after making the change, or becoming aware of it.
Registration fee. The registration fee payable to the CIMA in respect of registration of private funds is USD4,268.
Regulatory requirements
Private funds must have in place certain mechanisms and safeguards relating to audit, valuation of assets, safekeeping of fund assets, cash monitoring, and identification of securities.
Annual audit. Each private fund is required to have its accounts audited annually by a firm of auditors that is on the CIMA approved list of auditors, and file the audited accounts within six months of the end of each financial year, along with an annual financial return in the CIMA’s prescribed form.
Valuation of assets. The law requires a private fund to have appropriate and consistent procedures for proper valuations of its assets, ensuring that valuations are conducted according to the law’s requirements. Valuations of the assets of a private fund are required to be carried out at least on an annual basis.
Safekeeping of fund assets. A custodian must hold the private fund’s assets capable of physical delivery or capable of registration in a custodial account, except where it is neither practical nor proportionate given the nature of the private fund and the type of assets held. The custodian must also verify the title and maintain records of fund assets.
The CIMA may, in certain circumstances, require the private fund to have its title verification verified by an appropriate and professionally qualified independent third party.
Cash monitoring. A private fund must appoint an administrator, custodian or other independent third party, be it manager or operator of the private fund, to:
(1) monitor its cash flows;
(2) ensure that all cash has been booked in cash accounts opened in its name, or for its account; and
(3) ensure that all payments made by investors in respect of investment interests have been received.
Identification of securities. Where the private fund regularly trades securities, or holds them consistently, it must maintain a record of the identification codes of the securities that it trades and holds, and make this available to the regulator upon request.
Penalty for non-compliance
The penalty for failing to register with the CIMA is a liability on conviction to a fine of 100,000 Cayman Islands dollars (KYD), or USD122,000. There are also penalties applicable to the operator of a private fund.
Gary Smith is a partner at Loeb Smith Attorneys in the Cayman Islands
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