Posted on 19 August 2020
Are You on the Right Side of Cayman’s New Private Funds Law?
Long a favoured fund domicile due to its favourable tax environment, as well as relative ease and lower cost of set-up – the Cayman Islands have in recent years taken several major steps to bring regulatory requirements in line with other international financial centres. The most recent of these is the Private Funds Law, which was announced in February this year and came into effect after a transitional period that ended on 7 August 2020. It requires a wide scope of Cayman-domiciled funds to be registered with the Cayman Islands Monetary Authority (CIMA) and to comply with a host of new operational requirements.
“With the deadline for registration having just passed, our advice for clients is to get started on the rest of the process as soon as possible – ideally yesterday,” explains Elizabeth Robinson, Director – Business Management, APAC & Commercial Office at Alter Domus, a fully integrated alternative service provider dedicated to serving clients operating in international environments.
“One important aspect we try to impress upon clients is that registration was just the first step in compliance with the Private Funds Law. There are a number of ongoing stipulations as well, such as the requirement for sign-off on annual financials by a local Cayman auditor,” Robinson continues.
As the requirements represent a significant change for the local financial industry, Robinson expresses concern that local audit firms may struggle to find the capacity to handle a sudden increase in the number of audit requests – especially with around 30,000 funds expected to fall under the scope of the new law. The audit process requires a fair amount of planning, and a glut of new requests in a relatively short reporting window may prove challenging for auditors in Cayman, especially in the first year or two after the law comes into effect.
According to CIMA’s latest stats, 11,193 private funds had registered as of 6 August, on the eve of the deadline. Although the expectation is that there are still more that need to register, Robinson adds, “CIMA appear to have coped very well with the sudden surge in registration applications with over 4,000 successful registrations being processed in the final week before the deadline. CIMA had just announced their soft reopening post Covid-19 – which went some way to help to avoid delays in processing time.”
“With the ability to provide vertically integrated service across fund structures, Alter Domus is in a strong position to help clients avoid these types of potential pitfalls,” comments Juliana DeBlois, Head of Cayman at Alter Domus. “Many of the requirements of the Private Funds Law are linked to services that Alter Domus already provides – this gives us unique insight into the process, and an advantage over funds that may be considering handling these new requirements in-house.”
Robinson adds, “Although it is permitted for clients to take on the majority of the ongoing requirements themselves, it may not be an optimal approach given the various safeguards needed to remain in compliance. For example, you can’t have the same team conducting both valuations and performance reporting; the spirit of the law seems to encourage third party involvement in the process.”
In an update announced on 7 July 2020, CIMA sought to clarify the definition of what constitutes a private fund – bringing single asset funds into scope in particular. They also covered requirements for conflicts of interest arising in relation to asset valuations, safekeeping of fund assets and cash monitoring – and also removed the Cayman Cabinet’s power to exempt persons or businesses from the application of the law – all strategic enhancements to promote alignment with global best practices.
Importantly, additional guidance on fines came with the release of the Monetary Authority (Administrative Fines) (Amendment) Regulation on 26 June. Fines are scaled according to a three-tiered system where breaches under the Private Funds Law can attract penalties in the “very serious” category costing up to US$1.22m for corporates (US$122k for individuals). Non-compliance will also block the issuance of Certificates of Good Standing, for example – with clear implications for opening bank accounts or getting deals done.
Robinson summarises, “Although compliance with the new Private Funds Law comes at a cost, the potential financial and reputational costs of non-compliance are far greater. If you’re reading this and wondering if your fund needs to do anything, don’t take the chance, take action now.”
Director, Commercial Office
Head of Loan Trade Settlement, North America