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13 August 2020
Private Funds Law – expanded scope
Administrative fines regime – expanded scope
New CIMA rules for regulated mutual funds and registered private funds
AEOI portal and FATCA and CRS reporting
Court of Appeal re-examines master-feeder redemption procedures
Over the past quarter, the Cayman Islands enacted a number of changes to laws and regulations which affect, or will affect, Cayman funds. This article is intended as a handy reference guide with respect to the recent changes and updates.
Private Funds Law – expanded scope
On 7 July 2020 an amendment to the Private Funds Law 2020 was enacted, the key change being the expansion of the definition of 'private fund'. The deadline to register remained 7 August 2020; therefore, all closed-ended Cayman investment vehicles had to be promptly re-assessed to achieve compliance.
Administrative fines regime
On 26 June 2020 an amendment to the Monetary Authority (Administrative Fines) Regulations (2019 Revision) was passed, significantly expanding the list of regulatory breaches for which the Cayman Islands Monetary Authority (CIMA) may issue administrative fines. The fines range from US$6,098 to US$121,951 (for individuals) and US$1,219,512 (for entities), depending on the nature and category of the breach.(1)
New CIMA rules: disclosure rules for offering documents and marketing materials and rules on segregation of assets and calculation of asset values
CIMA has published the Rule on the Contents of Offering Documents – Regulated Mutual Funds (MF Offering Document Rules) and the Rule on the Contents of Marketing Materials – Registered Private Funds (PF Marketing Materials Rules) (together, the disclosure rules), which set out certain prescribed disclosure requirements that must be included in offering documents relating to regulated mutual funds and registered private funds, as well as the Rule on Segregation of Assets and the Rule on Calculation of Asset Values, in each case for regulated mutual funds and registered private funds.
Automatic exchange of information (AEOI) portal update
The Department for International Tax Cooperation (DITC) provided an update to industry on 26 June 2020 regarding the transition to a new portal for registration (notification) and reporting purposes. The reporting deadline for the 2019 reporting period in relation to both Common Reporting Standard (CRS) and Foreign Account Tax Compliance Act (FATCA) returns has been extended to 16 November 2020.
Ardon Maroon case law update
The Court of Appeal has reiterated the importance of following the redemption procedures set out in a fund's articles of association.
In addition, Q1 saw a number of legal and regulatory changes (for further details please see "Funds update: Q1 2020"). Two notable recent deadlines were as follows:
On 7 July 2020 the government enacted an important amendment to the Private Funds Law 2020 which will increase the number and categories of closed-ended Cayman investment vehicles required to register with CIMA.(2) As the deadline for registration remained 7 August 2020, all closed-ended Cayman investment vehicles had to be promptly be re-assessed in light of the amended definitions to achieve compliance. Open-ended mutual funds and hedge funds are unaffected.
On 26 June 2020 the government passed the Monetary Authority (Administrative Fines) (Amendment) Regulations 2020, amending the Monetary Authority (Administrative Fines) Regulations (2019 Revision) (together, the money authority regulations) issued under the Monetary Authority Law, which allows CIMA to impose administrative fines on individuals and entities licensed and regulated (or required to be licensed and regulated) in the Cayman Islands which breach the Monetary Authority Law or certain other laws, regulations and rules (the administrative fines regime).
The monetary authority regulations, which came into force with immediate effect, significantly expand the list of regulatory breaches for which CIMA may issue administrative fines, which was previously limited to breaches under the AML Regulations.
Categories of breach
The breaches are categorised in the Monetary Authority Law and the monetary authority regulations as minor, serious or very serious, with the administrative fine ranging between US$6,098 and US$1,219,512 depending on the nature and category of the breach and whether it was made by an individual or an entity:
Criteria for imposing fines
The Monetary Authority Law and the monetary authority regulations specify the breaches under the relevant regulatory laws, regulations and rules in respect of which a fine may be imposed. They also include the prescribed list of criteria for determining mitigating or aggravating circumstances, which CIMA must take into consideration when issuing breach notices and imposing discretionary fines.
Process for imposing and disputing fines
Prior to imposing a fine, CIMA must issue a breach notice informing the relevant party of its intention to impose a fine and setting out the nature of the breach and the amount of the proposed fine.
In relation to minor, non-discretionary breaches, the party may provide CIMA with a rectification notice stating that the breach has been rectified within 30 days. In relation to serious or very serious breaches, the party may reply to CIMA within the time specified in the breach notice (which must be no less than 30 days of the breach notice being issued). On receiving a reply or rectification notice, CIMA must reconsider the circumstances of the breach and its decision to impose a fine. If no such reply is received or if on review CIMA is not satisfied that the breach has been rectified (with respect to minor breaches) or that a discretionary fine is still required (with respect to serious or very serious breaches), CIMA must issue a fine notice in accordance with the monetary authority regulations. The administrative fines regime sets out a further review procedure to be carried out by CIMA's management committee in the case of non-discretionary fines for minor breaches and grants leave to appeal against the original decision to the Grand Court in relation to discretionary fines for serious or very serious breaches.
On 29 May 2020 and 15 July 2020, CIMA published a series of rules in relation to regulated mutual funds and registered private funds.(3)
Of particular note to the funds industry will be the following rules.
Disclosure rules for offering documents and marketing materials
The MF Offering Document Rules apply to funds regulated under the Mutual Funds Law (Revised) (regulated mutual funds). Any document (eg, an offering document or private placement memorandum) pursuant to which equity interests in a regulated mutual fund are offered for sale must comply with the MF Offering Document Rules. In practice, the MF Offering Document Rules should not require significant additional disclosure to be included in the fund offering documents from the usual market practice, but there are two mandatory disclosure statements concerning CIMA which must be included in a specified form. All new offering documents must include these statements and every offering document update should take into account the new MF Offering Document Rules, including the addition of these statements.
The PF Marketing Rules do not impose a requirement on private funds registered under the Private Funds Law (registered private funds) to prepare any form of marketing materials where none are contemplated. However, where a registered private fund intends to prepare any documents to be distributed to investors prior to the purchase of investment interests in the registered private fund, including any offering document or private placement memorandum, such marketing materials must comply with the PF Marketing Materials Rules. Again, the PF Marketing Materials Rules do not require significant additional disclosures from existing typical marketing materials but will require the inclusion of CIMA's mandatory statements and all new or updated marketing materials for any registered private funds should be reviewed to ensure compliance.
In each case, only regulated mutual funds or registered private funds with new or ongoing offerings need comply with the new disclosure rules.
Rules on the segregation of assets
CIMA has also published the Rule on the Segregation of Assets for both regulated mutual funds and registered private funds (segregation rules). Operators of regulated mutual funds and registered private funds must establish, implement and maintain (or oversee the establishment, implementation and maintenance of) strategies, policies, controls and procedures to ensure compliance with the segregation rules consistent with the fund's offering document or marketing materials, as the case may be, and appropriate for the size, complexity and nature of the fund's activities and investors.
Rules on the calculation of asset values
Under the Rule on the Calculation of Assets Value for both regulated mutual funds and registered private funds (NAV Rules), the regulated mutual fund or registered private fund, as the case may be, must establish, implement, and maintain a NAV calculation policy (as defined in the NAV Rules) that ensures a fund's net asset value is fair, complete, neutral, free from material error and verifiable. Such NAV calculation policy must be:
On 26 June 2020 the DITC provided an update to industry regarding the transition to the new DITC portal for registration (notification) and reporting purposes, which will eventually encompass all relevant legislative frameworks, including economic substance reporting.(4) The AEOI portal remains offline pending the transition.
The DITC confirmed that a new launch date for the DITC portal would be provided in due course and all functionality (notifications and reporting) will be available at that time. All user accounts from the AEOI portal will be migrated to the new DITC portal. Authorising persons and principal points of contact of Cayman financial institutions should expect to receive an email from the DITC in due course, which will contain steps on how to log on to the DITC portal.
Further details on this process are also expected to be posted on the DITC website. The DITC update also confirmed that the reporting deadline for the 2019 reporting period in relation to both CRS and FATCA returns has been extended to 16 November 2020.
In Ardon Maroon Asia Master Fund (in Official Liquidation) (CICA, 20 May 2020), the Court of Appeal reiterated the importance of following the natural and ordinary meaning of a fund's articles in order to ensure that redemptions are effective. The court reaffirmed the Grand Court's 2018 decision whereby it rejected the argument of the feeder fund's liquidators that on receipt and acceptance by the feeder fund of a redemption request by one of its investors, an automatic redemption of the feeder fund's holding in the master fund had occurred on a back-to-back basis. In reaching its decision, the Court of Appeal considered the weight to be given to commercial considerations and, in particular, the extent to which extrinsic evidence of commerciality and business efficacy could be used to imply terms into the statutory contract created by a company's articles of association. The Court of Appeal concluded that the comprehensive redemption procedures set out in the articles left no room to imply additional provisions based on the natural and ordinary meaning of the articles. The court's confirmation of the earlier decision is welcome. However, it does highlight the importance of ensuring that the redemption procedures set out in a master fund's articles are strictly adhered to as a matter of practice.(5)
For further information on this topic please contact Justin Savage, Joanne Huckle or Praajakta Pargaonkar at Ogier's Grand Cayman office by telephone (+1 345 949 9876) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). Alternatively, please contact Kate Hodson at Ogier's Hong Kong office by telephone (+852 3656 6000) or email (email@example.com). The Ogier website can be accessed at www.ogier.com.
(2) Further information is available here.
(3) CIMA's rules may be accessed on its website here.
(4) The DITC update, including a series of FAQs, can be accessed here.
(5) A more detailed discussion of the decision is available here.
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