Operating a Cayman Islands Open-Ended Fund

This Briefing Note provides an overview of the Cayman Islands legal considerations in operating an open-ended investment fund in the Cayman Islands. For guidance on the initial establishment process for such a fund, please see our Briefing Note entitled: Establishing a Cayman Islands Open-Ended Fund

This Briefing Note is drafted on the basis that the fund in question is an exempted company as this has traditionally been the most common form of Cayman open-ended investment vehicle. Separate considerations apply for investment funds structured as exempted limited partnerships, as limited liability companies and as unit trusts.

The following is intended to provide a general summary of the position in law as at the date shown on the cover and is not to be taken as specific legal advice applicable to particular issues or circumstances. If such advice is required, please contact one of the Ogier partners listed here.

CAYMAN ISLANDS REGULATORY FRAMEWORK

1 Companies Act

1.1  The Companies Act (Revised) (Companies Act) imposes on Cayman Islands corporate investment funds, whether or not registered under the Mutual Funds Act (Revised) (MF Act), the following obligations:

(a)  Name - the name of the investment fund, including any dual foreign name, must be displayed outside the registered office in the Cayman Islands, and must appear on all notices and other communications, cheques, etc. issued by the fund.

(b)  Minute book - a minute book should be maintained. Although there is no requirement that this be maintained at the registered office, this is normally the case. The minute book should contain minutes of directors’ meetings and shareholders’ meetings, along with any attachments referred to in the minutes and any written resolutions of the directors or shareholders.

(c)  Company registers:

(i)  Register of directors and officers - this register must contain the names and addresses of the directors and officers and any duly appointed alternate directors, but normally also contains their dates of appointment and removal/resignation. A company need not have a secretary; but if one is appointed, the secretary’s particulars must be noted on this register. The register of directors and officers must be maintained at the company's registered office in Cayman and is the only register that must be filed with the Registrar of Companies. The register of directors is open to inspection upon payment of a fee.

(ii)  Register of members - this register must contain the names and addresses of the company’s shareholders, the numbers of shares held by each, the distinguishing numbers (if any) of those shares, the amount paid or agreed to be paid on the shares, whether such shares carry voting rights and if such rights are conditional, together with the date on which each person became and ceased to be a shareholder of the company. This register is usually maintained by the administrator, and may be held outside Cayman.

(iii)  Register of mortgages and charges - this register must contain details of all mortgages and charges specifically affecting property of the company, including a short description of the property mortgaged or charged, the amount of the charge created and the names of the mortgagees or persons entitled to the charge.  It should be noted that under New York law the credit support annex to an ISDA agreement is treated as a security interest; as such, details of this security interest are required to be entered onto the register of mortgages and charges. It should also be noted that prime broker agreements and custody agreements often contain provisions pursuant to which the fund will grant a security interest.  These should be noted in the register of mortgages and charges as well.  The register of mortgages and charges must be maintained at the company's registered office in Cayman.

(d)  Accounts - every company is required to keep proper books of account with respect to its receipts and expenditures, sales and purchases and assets and liabilities. The accounts must give a true and fair view of the company’s affairs and explain its transactions.  The Companies Act does not require such accounts to be audited. The company’s books of account must be retained for a minimum of five years from the date on which they are prepared.

(e)  Filings - the Registrar of Companies must be notified within 30 days of any change of the company’s registered office; and within 30 days of any appointments, removals and resignations of directors and officers.  A copy of any special resolution of the shareholders (a special resolution is necessary to amend the company’s memorandum or articles of association and for certain other purposes) must be filed with the Registrar within 15 days of it being passed.

(f)  Annual requirements - an exempted company must file an annual return, together with the prescribed annual filing fee, with the Registrar of Companies. The annual return confirms that the requirements of the Companies Act in relation to exempted companies have been complied with since the date of incorporation or, as the case may be, the previous annual return. Usually, the registered office provider ensures compliance with this requirement.

2 Mutual Funds Act

Registration

2.1  The MF Act is the principal Cayman Islands legislation applicable to investment funds, and determines whether a Cayman Islands investment fund is required to be registered, administered or licensed with the Cayman Islands Monetary Authority (CIMA).  

2.2  In general terms, the MF Act applies to open-ended funds whose interests are redeemable at the option of the investor and that do not qualify for exemption. In the remainder of this note, such funds are referred to for convenience as registrable funds. For more detailed guidance on registration, the registration categories and any available exemption under the MF Act, please see our Briefing Note: Establishing a Cayman Islands Open-Ended Fund.

Requirement to maintain and file current offering document

2.3 Under the MF Act, a regulated mutual fund (other than a mutual fund registered under section 4(4) of the MF Act or a regulated master fund) must not carry on or attempt to carry on business in or from the Cayman Islands unless, among other requirements, there is filed with CIMA a current offering document which:

(a)  describes the equity interests which are being offered in all material respects; and

(b)  contains such other information as is necessary to enable a prospective investor in the mutual fund to make an informed decision as to whether or not to subscribe for or purchase the equity interests.

2.4  If there is a continuing offering of shares, the filing requirement noted above has not been complied with if any promoter or operator of the regulated mutual fund:

(a)  is aware of any change that materially affects any information in the offering document filed with CIMA or in the prescribed details filed with CIMA; and

(b)  has not, within 21 days of becoming so aware, filed with CIMA an amended offering document or amended prescribed details, as the case may be, incorporating that change.

General requirements

2.5  The MF Act imposes on regulated mutual funds the following continuing obligations:

(a)  to file with CIMA a copy of material amendments to its current offering document or prescribed details within 21 days (see paragraph 2.4 above);

(b)  to have its accounts audited annually by an auditor approved by CIMA (unless CIMA grants an exemption whether absolute or conditional) and to file those accounts with CIMA within six months of the end of the mutual fund’s financial year;

(c)  to pay the prescribed annual filing fee on or before 15 January in each year; and

(d)  to have appointed to its board of directors at least two directors at any one time. Generally these should be individuals. CIMA will permit a corporation to act as a director either alone or in conjunction with an individual director, though this has become unusual following the introduction of the director licensing requirements (see section 5 below).

Supervisory powers, enforcement and penalties

2.6  If CIMA is satisfied that a regulated mutual fund:

(a)  is or is likely to be unable to meet its obligations as they fall due;

(b)  is carrying on or attempting to carry on business or is winding up its business voluntarily in a manner that is prejudicial to its investors or creditors;

(c)  has not been directed and managed in a fit and proper manner; or

(d)  has a person holding a position as a director, manager or officer who is not a fit and proper person to hold that position,

then CIMA may:

(i)  cancel the mutual fund’s registration;

(ii)  require the substitution of any promoter or operator of the fund;

(iii)  appoint a person to advise the fund on the proper conduct of its affairs; or 

(iv)  appoint a person to assume control of the affairs of the fund.

2.7 If CIMA has reasonable grounds for believing a person is carrying on or attempting to carry on business as a mutual fund in or from the Cayman Islands in contravention of the MF Act, it may instruct that person to provide to it such information or explanation as it may reasonably require, in order to enable it to fulfill its duties under the MF Act.  In addition, if it appears to CIMA that a mutual fund is carrying on or attempting to carry on business in or from the Cayman Islands in breach of the MF Act, CIMA may seek injunctive and other reliefs from the Grand Court to preserve the assets of the fund’s investors.

2.8 An operator of a regulated mutual fund who operates in breach of the requirements of the MF Act is guilty of an offence and liable on conviction to a fine of US$120,000.

2.9 A person, other than a regulated mutual fund, who represents in any way that he is carrying on or attempting to carry on business in or from the Cayman Islands as a mutual fund, is guilty of an offence and liable on conviction to a fine of US$120,000 under the MF Act and an administration fine of up to US$1,200,00 under Cayman's administrative fines regime.

3 Anti-money laundering legislation

3.1 The Proceeds of Crime Act (Revised) (PCA), the Proliferation Financing (Prohibition) Act, 2017 and the Anti-Money Laundering Regulations (AML Regulations) and Guidance Notes issued by CIMA together comprise the anti-money laundering regime of the Cayman Islands (AML Regime).  The Misuse of Drugs Act (Revised) and the Terrorism Act (Revised) may also be of relevance. Generally, whether regulated or not, Cayman investment funds fall within scope of the Cayman Island's AML Regime as they will be considered to be engaged in "relevant financial business" as defined under the PCA.

3.2 The AML Regime requires that a Cayman investment fund should not form a business relationship, or carry out a one-off transaction, with or for another person unless it maintains as appropriate, having regard to the money laundering and terrorist financing risks and size of the business of such Cayman fund, the following procedures (AML Procedures):

(a) investor identification and verification procedures in accordance with the Regulations;

(b) adoption of a risk-based approach to monitor investors and financial activities of the Cayman fund including adequate systems to identify risk in relation to persons, countries and activities of the Cayman fund, including screening against all applicable sanctions lists;

(c) record-keeping procedures in accordance with the AML Regulations;

(d) risk-management procedures concerning the conditions under which an investor may invest in a Cayman fund prior to verification;

(e) observance of the list of countries, published by any competent authority, which are non-compliant, or do not sufficiently comply with the recommendations of the Financial Action Task Force;

(f) suspicious activity reporting procedures in accordance with the AML Regulations and the PCA;

(g) procedures to monitor and ensure compliance with anti-money laundering and countering terrorist financing legislative and regulatory requirements;

(h) procedures in place to test the anti-money laundering and countering terrorist financing and proliferation financing systems in place; and

(i) such other procedures of internal control, including an appropriate effective risk-based independent audit function and communication as may be appropriate for the ongoing monitoring of business relationships or one-off transactions for the purpose of forestalling and preventing money laundering, terrorist financing and proliferation financing.

3.3 In addition, Cayman investment funds must appoint named individuals to the roles of anti-money compliance officer (AMLCO), money laundering reporting officer (MLRO) and deputy money laundering reporting officer (DMLRO); the AMLCO and MLRO may be the same individual. The AMLCO will be responsible for overseeing the effectiveness of the investment fund's AML systems, compliance with applicable AML legislation and guidance and the day-to-day operation of the AML policies and procedures. The MLRO/DMLRO must receive all reports of suspicious activity in relation to any aspect of the fund and its activity; the MLRO/DMLRO should determine whether the information contained in any report supports the suspicion reported in order to determine whether, in all the circumstances, he/she in turn should submit a suspicious activity report to the Financial Reporting Authority of the Cayman Islands (FRA).

3.4 Ogier is able to provide individuals to serve as AMLCO, MLRO and DMLRO if required.

3.5  More generally, the Cayman AML Regime requires that if any person resident in the Cayman Islands knows or suspects or has reasonable grounds for knowing or suspecting that another person is engaged in criminal conduct or is involved with terrorism or terrorist property and the information for that knowledge or suspicion came to their attention in the course of business in the regulated sector, or other trade, profession, business or employment, the person will be required to report such knowledge or suspicion to (i) the FRA or a nominated officer (appointed in accordance with the PCA), if the disclosure relates to criminal conduct or money laundering, or (ii) the FRA or a police constable or a nominated officer, pursuant to the Terrorism Act (Revised), if the disclosure relates to involvement with terrorism or terrorist financing and terrorist property. Such a report shall not be treated as a breach of confidence or of any restriction upon the disclosure of information imposed by any enactment or otherwise.

4 FATCA and CRS

4.1 The Foreign Account Tax Compliance Act (FATCA) provisions of the U.S. Hiring Incentives to Restore Employment Act (HIRE Act) provide that a Reporting Cayman Islands Financial Institution must disclose the name, address and taxpayer identification number of certain United States persons that own, directly or indirectly, an interest in such vehicle pursuant to the terms of an intergovernmental agreement between the United States and the Cayman Islands (US IGA) and implementing legislation and regulations which have been adopted by the Cayman Islands. If a fund fails to comply with these requirements then a 30% withholding tax may be imposed on payments to the fund of United States source income and proceeds from the sale of property that could give rise to United States source interest or dividends. 

4.2 Almost every open-ended Cayman investment fund will be a Reporting Cayman Islands Financial Institution for this purpose. The Cayman legislation requires Reporting Cayman Islands Financial Institutions to make an annual report to the Cayman Islands Tax Information Exchange Authority (TIA). Any information provided to the Cayman TIA will be shared with the Internal Revenue Service of the United States.

4.3 In addition, over 100 countries have signed the OECD Multilateral Competent Authority Agreement and Common Reporting Standard (CRS) for the implementation of the automatic exchange of tax information based on the OECD's Multilateral Convention on Mutual Administrative Assistance in Tax Matters. The CRS is similar in form and substance to the US IGA.

4.4 As a result, a Cayman fund will be required to:

(a)  register with the US Internal Revenue Service in order to obtain a Global Intermediary Identification Number (GIIN) and, accordingly, give one or more individuals authority to complete such registration. This is typically applied for by the manager on the fund’s behalf following incorporation of the fund.  The individual making the application must have been properly authorised by the fund to do so;

(b)  conduct requisite due diligence on all of its investors in order to identify the tax residency of each investor and to determine whether the interest held by that investor constitutes a “reportable account” under the regulations issued under the US IGA and CRS. Generally, funds address this by (i) seeking appropriate self-certifications and beneficial ownership information from investors at the time of subscription, and (ii) engaging the fund administrator or another specialist provider to assist with the fund’s FATCA and CRS due diligence and reporting obligations;

(c) provide notification to the Cayman TIA of certain prescribed details, and to identify a Principal Point of Contact and a Change Notice Person. This notification is generally required to be made by 30 April in the year following registration of the fund; and

(d)  report the requisite information on each of its “reportable accounts” to the TIA prior to the applicable deadlines. Reporting periods are generally calendar years, with the reports themselves generally due on or before 31 July in the year following the relevant reporting year; and

(e)  file a CRS compliance form by 15 September in each year (or as otherwise advised by the TIA)

5 Directors Registration and Licensing Act

5.1 Registrable funds are “covered entities” for the purposes of the Directors Registration and Licensing Act (DRL Act). Every director of a covered entity must be a corporate director, a professional director or a registered director under the DRL Act. The most common are registered directors, being natural persons appointed as directors for fewer than 20 covered entities.

5.2 Directors registered or licensed under the DRL Act must renew their registration or licence by January 15 of each year. If an individual ceases to be a director of any covered entities within a calendar year he or she will need to de-register before the end of such year in order to avoid an obligation to pay renewal fees for the following year.

5.3 Funds that are not registered with CIMA are not covered entities for the purposes of the DRL Act and individuals do not need to register under the DRL Act in order to serve as directors of such funds.

6 Data Protection Act

The Cayman Islands Data Protection Act, 2017 (DP Act) provides a framework of rights and duties to regulate the processing of individuals' personal data broadly based on the same internationally recognised privacy principles that form the basis for other data protection laws globally. Under the DP Act, any entity established in the Cayman Islands that handles any individual's personal information has certain obligations with respect to that information and must ensure that such individual is formally apprised of by whom, and for what purpose, any of their personal data is being used. This applies whether the data processing takes place within the Cayman Islands and regardless of whether the personal data relates to Cayman individuals.

The fund will be responsible for complying with the requirements of the DP Act and the data protection principles in respect of personal data processed by the fund or on behalf of the fund by any third party processors such as its administrator and other service providers (each a data processor). The Cayman fund must ensure that investors are provided with an appropriate privacy notice and that contracts with service providers that process personal data on behalf of the fund comply with the DP Act.

Breaches under the DP Act could result in fines of CI $100,000 (US $122,000) and certain offences are punishable by imprisonment. Other monetary penalties of up to Cl $250,000 (US $305,000) are also possible in certain circumstances. For our full briefing see Cayman Islands Data Protection Law: An Ogier Client Guide.

MANAGEMENT, ADMINISTRATION AND CORPORATE GOVERNANCE

7 General

7.1 A Cayman exempted company must have at least one director. Registrable funds must have at least two directors. There are no residency, shareholding or qualification requirements in relation to directors, except (in the case of registrable funds) for registration under the DRL Act as referred to above.

7.2 There is no Cayman requirement for an investment fund to have any director or shareholder meetings in the Cayman Islands. Registrable funds structured as exempted companies are expected to have at least two board meetings a year.

8 Role and responsibilities of the board of directors

8.1 Directors owe duties at common law (including fiduciary duties); statutory duties; and duties to third parties in contract or in tort. For guidance on these duties, please see our Briefing Note entitled, “Acting as a Director of a Cayman Islands Company”.

8.2 Two notable developments in recent years have helped to clarify the duties of a director of a Cayman registrable fund.  The first is the judgment handed down in Weavering Macro Fixed Income Fund Limited (In Liquidation) v Peterson and Ekstrom, which offers a helpful description of the actions that would evidence that directors of a regulated mutual fund are meeting their duties of skill, care and diligence. The second is the publication of CIMA’s “Statement of Guidance for Regulated Funds – Corporate Governance” (SOG).

8.3 From these sources, it can be determined that directors must exercise independent judgment, always acting in the best interest of the fund, taking into consideration the interests of the investors as a whole. They are required to act honestly and in good faith at all times. Directors must operate with due skill, care and diligence and should ensure they have sufficient and relevant knowledge and experience to carry out their duties. The directors must ensure that the fund’s investment strategy is clearly described in the offering documents and should regularly monitor whether the investment manager is acting in accordance with the defined investment criteria, investment strategy and restrictions. The directors are responsible for approving the appointment and removal of service providers and for ensuring that the roles and responsibilities of such providers are clearly set out.  They should ensure that the terms of the fund’s contracts with its service providers are consistent with industry standard. They must also regularly verify or seek confirmation from service providers that they are acting in accordance with the fund’s constitutional and offering documents. The directors should at all material times inform themselves of the fund’s investment activities, performance and financial position, including conducting inquisitorial reviews of the fund’s financial results and audited financial statements and monitoring the fund’s net asset valuation policy and the calculation of its net asset value.

8.4 The SOG provides that directors should hold regular board meetings, which should be at least twice per year, or more frequently where the circumstances or size, nature and complexity of the fund’s operations require. Board meetings are not required to take place in the Cayman Islands. The board should fully, accurately and clearly record all meetings and any material decisions and/or considerations.

8.5 The directors of a Cayman fund are responsible for the overall management of the fund.  However, subject to paragraph 8.3 above, the directors may delegate certain duties to service providers.

9 Common law and statutory liability arising from offering of shares

9.1 A corporate investment fund, whether or not it is a mutual fund within the meaning of the MF Law, as well as potentially its directors, may also incur civil liability as a result of the offering of the fund’s shares. Liability may arise in respect of all or any of the following:

(a) misrepresentation, where shares are subscribed for in reliance upon an offering document containing a misrepresentation (whether innocent, negligent or fraudulent);

(b) negligent misstatement, if the plaintiff can establish that the defendant owed him a “duty of care” not to cause loss or damage of the kind caused by breach of that duty; and

(c) breach of contract. In principle, a statement in a prospectus may become incorporated as a term of the contract of allotment between the company and a subscriber or, in the case of an issue of securities by way of an offer for sale, in the contract of purchase between the issuing house and the purchaser of the securities. Breach of any such term would result in a claim for damages for breach of contract.  The contractual measure of damages is that necessary to put the innocent party in the economic position s/he expected from due performance of the contract. When it is either not possible or not desirable to compensate the innocent party in that way, a court may award damages designed to restore that party to the economic position s/he occupied at the time the contract was entered into while avoiding either party being unjustly enriched.

9.2 The above deals with the position under Cayman Islands law.  It may be more likely, in fact, that claims relating to a false representation or negligent misstatement are dealt with under the laws of, and before the courts of, the jurisdiction in which the misrepresentation or inaccurate statement was made.  With regard to contractual claims, it is likely that any claim would be determined in accordance with the governing law of the relevant contract. In the case of the subscription agreement, this is usually, explicitly or by implication, the law of the Cayman Islands.

9.3 Criminal liability may also arise where a person, by any deception, dishonestly obtains for himself or herself or for another any pecuniary advantage or dishonestly obtains property belonging to another, with the intention of permanently depriving the other of it; and where an officer of a company, with intent to deceive members or creditors of the company about its affairs, publishes or concurs in publishing a written statement or account which to his or her knowledge is or may be misleading, false or deceptive in a material particular.

If you have any questions relating to the foregoing and would like to discuss further, please reach out to your usual Ogier contact or one of the contacts listed here.

About Ogier

Ogier provides practical advice on BVI, Cayman Islands, Guernsey, Jersey and Luxembourg law through its global network of offices. Ours is the only firm to advise on these five laws. We regularly win awards for the quality of our client service, our work and our people.

Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

Regulatory information can be found at www.ogier.com

ogier.com