Introducing Private Funds
Posted by: Paul
The new PFL brings closed ended funds within the scope of a regulatory regime in Cayman for the first time and sets outs the requirements for the registration of closed ended funds with CIMA.
Which Funds come under the scope of the Law?
In scope – Most closed ended funds with more than one investor come within the scope of the PFL; the PFL applies to ‘Private Funds’ and a fund is a Private Fund if:
- it has been structured as a Cayman Islands company, unit trust or partnership,
- its principal business is offering and issuing investment interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risk and enabling investors to receive profits or gains from the fund’s acquisition, holding, management or disposal of investments,
- its investment interests are not redeemable at the option of the investor,
- its investors do not have day to day control over the acquisition, holding, management or disposal of the fund’s investments, and
- its investments are managed by or on behalf of its operator, directly or indirectly, for reward based on the assets, profits or gains of the fund.
‘Non fund’ arrangements – the PFL includes a list of ‘non fund’ arrangements which are specifically excluded from the PFL, and which includes:
- securitization special purpose vehicles,
- holding vehicles,
- individual investment management arrangements,
- debt issuing vehicles,
- structured finance vehicles,
- employee incentive schemes (or similar),
- sovereign wealth funds,
- single family offices, and
- arrangements not operated by way of business.
How long do you have?
The commencement date of the Law is 7th February 2020 and Private Funds have until 7th August 2020 to register with CIMA and comply with the Law (the ‘Transition Period’).
Once the Transition Period has passed, PFL provides that a new in scope private fund must (i) submit its registration application to CIMA within 21 days after its acceptance of capital commitments from investors and; (ii) be registered by CIMA before it accepts capital contributions. Registration is expected to be online via the existing CIMA registration portal for mutual funds, REEFS
A registered Private Fund must comply with the following:
- Valuations: private funds must have appropriate and consistent procedures and that the valuation of its assets is carried out at least once a year. Valuations must be carried out by; the manager or operator of the fund (subject to functional independence or conflicts management requirements), or independent valuer or an administrator or. Under the draft ‘Rule on the calculation of Asset Values’, currently under consultation, Private Funds must disclose their valuation policy within their constitutional documents, marketing materials or other form of investor communication.
- Safekeeping of fund assets; private funds require a custodian (i) to hold private fund assets which are capable of physical delivery or capable of registration in a custodial account except where that is neither practical nor proportionate given the nature of the private fund and the type of assets held; and (ii) to verify title to, and maintain records of, fund assets. Where having a custodian is neither practical nor proportionate given the nature of the private fund and the type of assets held, title verification can be carried out by any of the manager or operator of the fund (subject to functional independence or conflicts management requirements), an independent administrator or another independent third party.
- Cash monitoring; the monitoring of cash flows and checking of cash accounts and receipt of investor payments be carried out by any of the manager or operator of the private fund (subject to functional independence or conflicts management requirements), an independent administrator, independent custodian or other independent third party.
- Identification of Securities: private fund that regularly trades securities, or holds them on a consistent basis, to maintain a record of the identification codes of the securities in question.
- Annual Fee: an annual fee must be paid to CIMA by 15 January of each year. The exact fee amount has not yet been confirmed. Transitioning private funds which register by 7 August 2020 should not be subject to this fee until 15 January 2021.
- Annual Return: a private fund will need to submit an annual return to CIMA in respect of each financial year.
- Inform CIMA of Changes: details of any changes to the fund which materially effect the information submitted upon the fund’s initial registration must be submitted to CIMA within 21 days.
- Accounts and Audit: Private Funds will need to prepare annual accounts in accordance with the International Financial Reporting Standards or generally accepted accounting principles and an audited set of accounts must be filed with CIMA within six months of the fund’s year end. The audit will need to be undertaken by a Cayman Islands auditor approved by CIMA.