Investment Fund Regulation and Categories of Funds
There are no prohibitive licensing and regulatory provisions or stringent measures calling for local custodians, managers or directors. Rather, the legislation recognises that most of those engaged in the industry are already strictly regulated or controlled within or outside the Cayman Islands. Thus, reliance to a large extent on self regulation within the industry is seen as reasonable.
There are also no restrictions placed on investment objectives, risks, rates of return, leveraging or other commercial matters given the institutional and sophisticated nature of the investors in Cayman hedge funds or mutual funds.
The law requires that the offering memorandum describes comprehensively the equity interests and contains sufficient information (on objectives, risks, service providers, conflicts of interest etc.) to enable the investor to make an informed decision.
A regulated investment fund must qualify under the law before starting business. To do so it may either obtain its own licence, appoint a licensed mutual fund administrator in the Cayman Islands to provide its principal office, or be automatically registered if it is for a sophisticated investor, i.e. the minimum investment per investor is US$100.000. Funds established before 14th November 2006 are permitted to retain the previous minimum investment requirement of US$50,000.
Categories of Funds Regulated Under the Law
There are therefore three categories of funds regulated under the law:
Licensed Mutual Funds
The provisions relating to licensed mutual funds benefit large, well known and reputable institutions.
The fund submits to the Cayman Islands Monetary Authority:
- a completed registration form (MF3);
- current offering memorandum;
- Certificate of Incorporation, or evidence of registration or establishment of a partnership or unit trust;
- personal questionnaire;
- references and police clearance certificates for all directors of the trustee or general partner.
The Cayman Islands Monetary Authority reviews the documents and considers the promoter’s acceptability to receive a licence for the fund.
The Cayman Islands Monetary Authority has no power to grant the licence until the fund passes the statutory test, satisfying the Authority that:
- each promoter is of sound reputation;
- the administration of the mutual fund will be undertaken by persons who have sufficient expertise to administer the mutual fund and are of sound reputation; and
- the business of the mutual fund and the offer of equity interest will be carried out in a proper way.
If the fund is acceptable, and, on the payment of an application fee the licence will be issued.
Administered Mutual Funds
The regulatory responsibility for the administered mutual fund which has more than 15 investors and which is not a licensed or registered mutual fund is placed largely in the hands of the licensed administrator who must apply the statutory test as described under Licensed Mutual Funds.
- The administrator in responsible for and must pay the initial and annual government fees.
- The fund’s offering memorandum and completed registration form (MF2) must be submitted to the Cayman Islands Monetary Authority, as well as any subsequent material changes.
- Also required is form MF2A whereby the mutual fund designated its principal office in Cayman to be at the office of the licensed mutual fund administrator.
- The mutual fund administrator is required by law to report to the Cayman Islands Monetary Authority if there is reason to believe that the fund, or the promoter of any fund for which they provide the principal office, has problems as specified under “Powers of the Monetary Authority”.
The concept of private sector regulation is taken beyond the initial registration stage with respect to the administered regulated mutual fund.
Registered Mutual Funds
Registered mutual funds are suitable for funds with a minimum subscription of US$100,000. They are also for funds listed on a stock exchange (including over the-counter markets) specified by the Cayman Islands Monetary Authority. Under this category, the fund is simply registered with the Cayman Islands Monetary Authority by the submission of a completed registration form (MF1), which would include specific details from the fund’s current offering memorandum, along with the initial and annual registration fee.