What’s all the Fuss About the Private Funds Amendment Law?

If you invest in a fund in the Cayman Islands, or are planning to do so, you need to know about the new Private Funds Amendment Law. To find out more, keep reading…

With the ease of setting up investment funds in the Cayman Islands, and the subsequent abuse of the tax situation over in that part of the world, restrictions have had to be put in place. Now, the country has introduced legislation to stamp out money laundering through private funds on its soil.

The new private funds amendment law is no exception to the rule as it forces previously unregistered funds to register with the Cayman Islands Monetary Authority (CIMA). This way, they can closely monitor what the funds are doing.

If you’re looking to invest, or have already got investments stored away on the islands, you’ll probably want some further insight. In this post, we’re going to briefly go over the new legislation, and list the types of private funds that fall under its remit. We’ll then go into detail on how this amendment will affect those funds, so don’t go anywhere…

What is the Private Funds Amendment Law 2020?

If you’re an investor in private funds in the Cayman Islands, or you’re thinking of becoming one, read this legislation closely.

On 7 February 2020, the Cayman Islands Government introduced the Private Funds Law 2020 which required all ‘private funds’ to register under the Cayman Islands Monetary Authority (CIMA). 

An amendment to this law was then made on 7 July 2020 to change the definition of ‘private fund’ for clarification, but also to increase the scope of funds it oversees. This new definition of ‘private fund’ includes any company, unit trust or partnership that pools investor funds to allow investors to make profit or gain from the entity’s acquisition, holding, management, or disposal of investment.

However, this only applies to investment funds where:

• The holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments;
• And the investments are managed as a whole by or on behalf of the operator of the private fund directly or indirectly.

Which Entities are Captured Under the New Private Funds Law?

Based on the new definition of a private fund that we laid out above, it’s difficult to know whether the fund you invest in, or are planning to invest in, falls under it. To give you a better idea of whether or not your fund is classified as a private fund under these new laws, here is a list of qualifying factors:

• The fund was created for multiple investors (more than one);
• The fund was established as a company, partnership or unit trust;
• The fund’s primary business is to offer and issue investment with the purpose of pooling investors funds to spread the risk, and produce profits or gains for those investors;
• The fund’s investors do not have day-to-day control over its investment activities;
• The fund’s investments are managed by or on behalf of a fund manager for reward based on its assets, profits or gains.

If you invest in any kind of closed ended fund, it will probably be captured under this new law as the majority of them are.

Exempted Funds

If your fund doesn’t meet any of the above requirements to be considered a private fund and it isn’t closed ended, it’s probably exempt from the new law. However, just to be safe, check this list of exempted ‘non-fund’ arrangements:

• Securitization special purpose vehicles 
• Proprietary vehicles 
• Structured finance vehicles 
• Joint ventures
• Holding vehicles 
• Sovereign wealth funds 
• Employee incentive scheme 
• Single family offices

If the fund you’re reading this post on behalf of falls into any of these categories, you’re free to go, but if you still want to learn more about this new legislation, read on.

What This Means For Private Fund Investors in the Caymans

Now that you’ve got a decent idea of whether the fund you invest in, or plan to invest in, falls under the new private funds legislation, it’s time to tell you what this means for your investment fund.

As we said in the introduction to this post, the Cayman Islands have spent the better part of two years introducing legislation and regulatory changes to keep their financial services sector in line with global standards.

This new Private Funds Amendment Law 2020 was created to register as many funds as possible with CIMA so it can regulate and supervise them to prevent money laundering. These are the three main powers that CIMA will have over your fund if it is required to register with them under the new amendments:

1. Supervision and enforcement
2. Valuation, accounting and auditing of funds
3. Cash monitoring

1. Supervision and Enforcement

Under this new private funds law, CIMA will have the same oversight powers for private investment funds as it currently has with regulated funds.

CIMA will require basic information on whether the fund is a private equity fund, hedge fund, real estate fund or feeder fund. The fund will also need to provide all the categories of investment it expects to put its investors’ money into.

The Caymans regulator will also need the fund to share its type of legal structure, such as a limited partnership or private limited company. If the fund trades in securities, it will need an International Securities Identification Number (ISIN) on record with CIMA. 

Once CIMA has information on the how the fund invests and what its investment objectives are, it might then create a risk-based categorisation and fund monitoring agenda. From there it can use its powers to enforce sanctions and other regulations on the fund.

2. Valuation, Accounting, and Auditing

The new law forces a private fund to have suitable and consistent procedures to allow proper valuation of its assets. This ensures that the valuations are conducted in accordance with Cayman Islands law. 

Fund Annual Return (FAR) submission and auditing is required under these new amendments, but CIMA is currently updating the FAR used for hedge funds. This FAR requirement applies to all funds registered with CIMA.

International Financial Reporting Standards are fine for auditing, but research is being done into other GAAP types to avoid restrictions. Allowing this type of auditing will keep accounts in line with international standards whilst also providing suitable and consistent valuations.

3. Cash Monitoring

These new amendments to the private fund law also include requirements for keeping assets safe and monitoring cash. Any funds registered with and authorised by CIMA need to appoint someone to record and monitor their cash flow.

Funds are allowed to appoint a third party to perform this role, such as a custodian, administrator, or independent third party. However, it’s still up to CIMA whether they allow this third party to act as the fund’s depository or not. 

Appointing an administrator instead of an independent third-party is the best way to comply with CIMA’s cash monitoring and valuation requirements. It also simplifies and reduces the costs associated with the auditing of the fund.

Rounding it Up

So, there you have it. There’s a lot to take in here but, in essence, there will be more regulations imposed on your fund than before it was recognised by CIMA as a private fund.

All these regulations require you to keep track of your fund and report the information to CIMA so they can decide if you’re playing by the rules and punish those who aren’t. These laws will help the Cayman’s government stamp out money laundering, but the supervisions, valuations and cash monitoring will effectively cost all funds recognised as ‘private’ more money.

Should I Keep my Investment in a Private Fund?

In this post, we’ve covered what the new Private Funds Amendment Law is, and which funds it applies to. We’ve also given you an in-depth look at what this means for the funds that fall under its scope.

These regulations essentially make it harder for funds in the Cayman Islands to get away with shady tactics that aren’t allowed under Cayman Law. As long as the fund you invest in, plan to invest in, or own isn’t in breach of the law then this amendment will just be an exercise in being more open about the way your fund operates.

If you know that the fund you invest in is dealing in shady money laundering tactics, or you use it to evade taxes, it might be worth pulling your money out. This will be worth it in case the sanctions affect your money, or the tax evasion gets back to the government of the country you reside in.

Thank you for reading this post, good luck with your investments and stay out of trouble.