Japanese Retail Investment FundsJapanese Retail Investment Funds
Meeting the Highest Expectations:
The Retail Mutual Funds (Japan) Regulations
Article by Remo Dalimonthee
The Cayman Islands hedge fund industry serves a diverse client base including some of the most demanding clients anywhere: The Japanese. The big Japanese banks have long been clients of the Cayman Islands, in several areas, however, in the funds industry particular concerns arose in Japan as to whether certain Cayman Islands funds harmonised with Japanese laws and regulations. After careful research, and some visits to Japan by Cayman Islands Monetary Authority personnel, a solution was found. The Cayman Islands would simply enact legislation specifically tailored to be a safe harbour for those promoters and sponsors who wanted to ensure their fund could sail through the dangerous sea of regulations which awaited in Japan. This legislation, The Retail Mutual Funds (Japan) Regulations, was adopted in November 2003, and has so far served Japanese hedge fund captains as a trustworthy safe haven. If a Japanese fund is good enough for The Retail Mutual Funds (Japan) Regulations, it will generally be good enough for Japan.
How does one tune a normal fund, to ensure it is good enough for The Retail Mutual Funds (Japan) Regulations? Well for a start, normal funds need not apply. In order to comply with the Retail Mutual Funds (Japan) Regulations the fund in question has to be a licensed fund under section 4(1)(a) of the Cayman Islands Mutual Funds Law. Already, then it is clear that only a certain clientele and promoter is going to bother with the extra expense and review process which such funds entail. The Cayman Islands regulators at CIMA, however, will not just examine if a fund meets the requirements for a licensed section 4(1)(a) fund under the Mutual Funds Law, in addition the the constitutional document (bearing in mind that this may often be a trust since the Japanese are still in love with the Unit Trust, rather than the corporate vehicle), must clear the additional hurdles of the Retail Mutual Funds (Japan) Regulations. Which hurdles are these? In a nutshell these hurdles include:
- The fund’s constitutional document must disclose all rights and restrictions that come with the securities that are being offered, be they units in a unit trust or shares in a corporate fund.
- The conditions and terms for valuations of the fund’s assets and liabilities need to be disclosed.
- The methodology of net asset value computation for each security, at subscription or redemption, has to be disclosed.
- The terms and conditions pursuant to which the securities are issued or transferred have to be disclosed.
- The conditions for a suspension of Redemption and repurchase procedures must be disclosed.
Naturally enough the legislation provides that the offering document has to disclose additional information and any offering memorandum or prospectus will undergo very close scrutiny indeed by CIMA’s assigned analyst. Things they will look out for, over and above the usual name of the auditor, administrator, custodian or investment adviser, include:
- Procedures and conditions of the issue, redemption, and repurchase of securities.
- Dividend policy, is it intended to that the fund will pay out distributions or will it use everything for capital growth?
- A thorough description of the investment objective and investment strategy will be required.
- The way the operator of the fund is remunerated has to be detailed in in a proper way, including amount, methodology and when the remuneration is paid.
- Any potential for conflict of interest must disclosed.
- Details of the timing of financial reports, as well as which accounting standards are used, must be disclosed.
- Since CIMA went out its way to build this safe haven for Japanese investors specifically, particular exclusion of liability wording in relation to the fund on the part of CIMA will have to be included. As if anyone would sue CIMA after they are nice enough to build this special harbour for Japanese clients!
In addition there are a number of other requirements that the legislation requires. A custodian must be regulated in the Cayman Islands pursuant to section 5(2) of the legislation, or be from a recognised Schedule 3 territory of the infamous “Schedule 3” list of the Money Laundering Regulations. This list incidentally bears some surprises, Bahrain is approved, Moscow is not, to name but one example.
Where a fund is to be liquidated or suspended CIMA has to be notified as soon as the decision to liquidate or suspend is taken or it is practicable to make the notification.
In addition the administrator of the fund is duty-bound to whistle blow if the operators do not comply with the offering document or the legislation is breached in a material way.
All very sensible provisions, quite clearly, but they bear a striking similiarity to what one sees generally in an offering document these days anyway. Why not, indeed. Could it be, that we are all Japanese now?
Contact Remo Dalimonthee