Cayman Islands Mutual Funds

• Published date: 03 April 2023
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Government, Public Sector, Financial Services, Fund Management/ REITs, Compliance, Corporate and Company Law, Directors and Officers, Terrorism, Homeland Security & Defence, Money Laundering
• Law Firm: Conyers
• Author: Conyers

Preface

This publication has been prepared for the assistance of those who are considering the formation of a mutual fund in the Cayman Islands. It deals in broad terms with the requirements of Cayman Islands law for the establishment and operation of such entities. It is not intended to be exhaustive but merely to provide brief details and information which we hope will be of use to our clients. We recommend that our clients seek legal advice in the Cayman Islands on their specific proposals before taking steps to implement them.

Before proceeding with the incorporation of a company or the formation of a unit trust or the establishment of a partnership in the Cayman Islands, persons are advised to consult their tax, legal and other professional advisers in their respective jurisdictions.

Conyers

1. INTRODUCTION: MUTUAL FUNDS IN CAYMAN

The Cayman Islands is a well-established base for investment funds with many of its funds quoted on stock exchanges such as the London Stock Exchange and the Hong Kong Stock Exchange. The governing legislation is the Mutual Funds Act (as amended) (the 'Act') and the regulations promulgated thereunder. Whilst both the Act and this memorandum make specific reference to the term 'mutual funds,' as a practical matter, this term encompasses various types of investment funds, including hedge funds.

The Cayman Islands Monetary Authority (the 'Authority') is responsible for the regulation of mutual funds pursuant to the Act.

2. DEFINITION

A mutual fund is defined under the Act as a 'company, unit trust or a partnership that issues equity interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors in the mutual fund to receive profits or gains from the acquisition, holding, management or disposal of investments.'

It should be noted in this context that:

• 'company' also includes foreign companies 'unit trust' includes foreign unit trusts and 'partnership' includes foreign partnerships, general or limited, but excludes general partnerships constituted under Cayman Islands law
• to be considered an 'equity interest', a share unit, partnership interest or any other representation of an interest must be redeemable or repurchasable at the option of the investor and, as such, closed-end funds are excluded from the definition. Closed-ended funds are instead regulated under the Private Funds Act (2021 Revision);
• 'equity interest' excludes debt and therefore a fund which only issues debt instruments would not be regarded as a mutual fund for these purposes;
• there is no statutory definition of 'investments';
• 'promoter' is defined as any person whether within or without the Cayman Islands who causes the preparation or distribution of an offering document in respect of the mutual fund or proposed mutual fund but does not include a professional adviser acting for or on behalf of such a person; and
• 'operator' means, in the case of a unit trust, the trustee of that trust; in the case of a partnership, the general partner in that partnership; or in the case of a company, a director of that company.

A mutual fund must not carry on or attempt to carry on business in or from the Cayman Islands without a licence unless: (a) it is an unregulated mutual fund, or (b) it falls within the exemptions for a licence under the regulated mutual fund provisions of the Act.

'To carry on or attempt to carry on business in or from the Cayman Islands' means that the mutual fund is incorporated or established in the Cayman Islands or, regardless of where it is incorporated or established, a mutual fund ('Foreign Fund') which makes an invitation to the public in the Cayman Islands to subscribe for its equity interests.

An invitation to any the following persons will not constitute an invitation to the public in the Cayman Islands:

1. sophisticated persons;
2. high net worth persons
3. the Cayman Islands Stock Exchange, the Authority, the Cayman Islands Government or any public authority created by the Cayman Islands Government;
4. exempted or ordinary non-resident companies registered under the Companies Act;
5. foreign Companies registered under Part IX of the Companies Act;
6. a limited liability company registered under the Limited Liability Companies Act;
7. any company listed in (d), (e) or (f) above that acts as general partner to a partnership registered under section 9(1) of the Exempted Limited Partnership Act;
8. any director or officer of the entities listed in (d),(e), (f) or (g) above acting in such capacity;
9. a limited liability partnership registered under the Limited Liability Partnership Act; or
10. the trustee of any trust capable of registration under section 74 of the Trusts Act acting in such capacity.

Further, Foreign Funds will not need to be registered in the Cayman Islands in the event that they are making an offer of equity interests to the public in the Cayman Islands where they do so by or through an entity licensed under the Securities Investment Business Act; and

1. the equity interests are listed on a stock exchange approved by the Authority; or
2. the Foreign Fund is regulated by an overseas regulatory authority approved by the Authority.

3. TYPES OF FUNDS

The Act divides mutual funds into the following main categories: licensed mutual funds, registered mutual funds (including 'master' funds), administered mutual funds, limited investor mutual funds and EU connected funds (see 3.4 below).

3.1 Unregulated Mutual Funds

A fund is not regulated by the Act if either it is not a mutual fund within the statutory definition (see above) or it has no significant link with the Cayman Islands.

A mutual fund is deemed to have a significant link with the Cayman Islands if either:

1. it is incorporated or established in the Cayman Islands or
2. it makes an invitation to the public in the Cayman Islands to subscribe for its equity interests (bearing in mind the limitations on the notion of making an invitation to the public in the Cayman Islands noted above).

3.2 'Private' or 'Limited Investor' Mutual Funds

The term 'private' or 'limited investor' mutual fund is used to refer to a fund in which 'the equity interests are held by not more than fifteen investors, a majority of whom are capable of appointing or removing the operator of the fund'.

An 'investor' for this purpose is defined as 'the legal holder of record or legal holder of a bearer instrument representing an equity interest in the mutual fund' but does not include a 'promoter' or 'operator'.

Historically, such funds could conduct business without registering or obtaining a licence under the Act, without appointing a licensed mutual fund administrator and without filing any papers with the Authority. However, the Mutual Funds (Amendment) Act, 2020 removed this exemption. Accordingly, all such limited investor funds are required to register in the same way as regulated mutual funds.

3.3 Regulated Mutual Funds

1. Generally

A mutual fund which falls within the statutory definition or has a significant link with the Cayman Islands is subject to full regulation under the Act.

The three different ways in which a regulated mutual fund may qualify to conduct business are as follows:

• Licensed Funds: A mutual fund may qualify to conduct business by obtaining a licence from the Authority pursuant to the provisions of the Act and having a registered office in the Cayman Islands (or if a unit trust - the trustee is appropriately licensed). Special conditions to the mutual fund licence may be imposed. (For more information on licences please contact Conyers directly).
• Administered Funds: A mutual fund may qualify to conduct business by employing a licensed mutual fund administrator to provide the fund's principal office in the Cayman Islands and complying with other requirements applicable to all regulated mutual funds (see below). It should be noted that a licensed mutual fund administrator must comply with certain obligations and duties pursuant to Part 3 of the Act.
• Registered Funds: A mutual fund may qualify to conduct business by simply registering as such with the Authority on the basis that
  1. the minimum initial investment per investor in the fund is at least US$100,000 (CI$82,000) or the equivalent;
  2. the shares, units or other interests in the fund are listed on a recognised stock exchange; or
  3. the equity interests are held by not more than fifteen investors, a majority of whom are capable of appointing or removing the operator of the fund

All regulated mutual funds, regardless of sub-category, are subject to the same requirements and regulatory powers which are described at section 3.3.(c) below

2. Master Funds

The master-feeder fund structure is popular for drawing in investment funds from different jurisdictions and consolidating them in one central investment platform. Particularly useful at adapting to country-specific regulations, master-feeders are flexible and efficient vehicles for raising financing for investment internationally.

Master funds have registration requirements and are subject to regulation under the Act.

A master fund is defined as 'a company, partnership or unit trust that (a) is established or incorporated in Cayman; (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...