Private funds
The Private Funds Act defines a private fund as an entity that offers, issues or has issued equity interests to investors, pooling investor funds with the aim of enabling investors to receive profits or gains from such entity’s acquisition, holding, management or disposal of investments, where:
(i) investors have no day-to-day control over making, holding or disposing of investments; and
(ii) investments are managed by or on behalf of the fund’s operator (meaning its directors, general partners or trustees, as applicable).
The definition excludes certain licensed banks and insurance companies, along with non-fund arrangements listed in a schedule (such as proprietary vehicles, securitisation vehicles, joint ventures and holding vehicles).
Registration with CIMA
A private fund is required to register with CIMA within 21 days of admitting any investors and in any event prior to accepting any capital contributions from investors. Registration as a private fund requires submission to CIMA of the following:
Application form (APP-101-77)
Certificate of incorporation/registration
Constitutional documents
Offering memorandum/summary of terms/other marketing materials (if any)
Consent letter from an approved local auditor and an administrator (if applicable)
Structure chart
Application and registration fees
Registration will be effective from the date the completed application is filed, but confirmation of registration may take 2-4 weeks to receive.
Ongoing regulatory obligations
The principal ongoing regulatory obligations for private funds are:
Pay annual registration fees to CIMA by 15 January in each year
File audited financial statements with CIMA within 6 months of the financial year end, together with a fund annual return
Comply with the operating requirements in the Private Funds Act relating to: (i) valuations; (ii) title verification; and (iii) cash monitoring
Keep a record of the identification codes of any securities traded or held by the fund
Keep the fund’s assets segregated and accounted for separately from the assets of any other person
Update CIMA within 21 days of becoming aware of any material change to any information provided to CIMA upon registration or otherwise
Comply with the Anti-Money Laundering Regulations, including the requirement to have anti-money laundering officers (see Additional Regulatory Obligations below)
Comply with FATCA/CRS notification, due diligence and reporting obligations (see Additional Regulatory Obligations below)
Valuation requirements
Private funds must adopt appropriate and consistent procedures for proper valuation of assets, with valuations to be carried out at least annually in accordance with the accounting standards adopted by the fund.
Valuations can be carried out by:
the fund’s administrator or another appropriately qualified independent third party; or
the fund’s manager or operator, provided: (i) the valuation function is independent of the portfolio management function; or (ii) potential conflicts of interest are properly identified, managed, monitored and disclosed to investors.
The fund’s written valuation policy, including details of the person responsible for valuations must be disclosed to investors. Further details of the requirements are set out in CIMA’s Rule on Calculation of Net Asset Values – Registered Private Funds. Where valuations are not carried out by an independent third party, CIMA may require the fund to have its valuations verified by an auditor or other independent third party.
Title verification
Private funds are required to appoint a custodian for their assets, except where it is neither practical nor proportionate to do so. In practice, this is often the case, except where the private fund is trading publicly listed securities.
In respect of any assets of a private fund not held by a custodian, the private fund is required to appoint one of the following to perform title verification:
the fund’s administrator or another independent third party; or
the fund’s manager or operator, provided: (i) the title verification function is independent of the portfolio management function; or (ii) potential conflicts of interest are properly identified, managed, monitored and disclosed to investors.
Where title verification not carried out by an independent third party, CIMA may require the fund to have its title verification verified by an appropriately qualified independent third party.
Cash monitoring
Private funds must appoint a person to monitor cash flows, ensure cash has been booked in appropriate cash accounts and ensure all payments made by investors have been received. The appointed person may be:
the fund’s administrator, custodian or another independent third party; or
the fund’s manager or operator, provided: (i) the cash monitoring function is independent of the portfolio management function; or (ii) potential conflicts of interest are properly identified, managed, monitored and disclosed to investors.
Where cash monitoring is not carried out by an independent third party, CIMA may require the fund to have its cash monitoring verified by an independent third party.
Private fund marketing materials
Neither the Private Funds Act nor CIMA currently requires a private fund to have an offering document or other marketing materials, but if a private fund does issue any marketing materials to solicit subscriptions from investors, they must be filed with CIMA and comply with CIMA’s Rule on Contents of Marketing Material – Registered Private Funds. The rule sets out specific information that must be contained in any marketing materials, including:
Basic information about the fund’s place and date of formation, type of entity, financial year and terms of its equity interests
Subscription and mandatory redemption/withdrawal procedures
Investment objectives and policy and any investment restrictions
Valuation methodology
Dividend/distribution policy
Material risks and any proposed borrowing
Remuneration of the operator, administrator, manager/ adviser, custodian, prime broker, auditors, legal counsel and any other service providers to the fund
Powers to enter into side letters
Accounting principles to be adopted and frequency of reporting to investors
Biographies of the directors/managers/principals of the fund, its general partner or trustee (as applicable) and its manager/adviser
Description of potential conflicts of interest
Summary of material contracts
Summary of material laws and regulations
Place where fund documents and periodic reports may be inspected and obtained
The private fund and/or its promoters or officers could also incur liability in respect of any marketing materials that contain misrepresentations of fact (made intentionally or negligently), so should take steps to ensure that any factual statements are correct and not misleading.
Anti-Money Laundering (AML)
Cayman Islands investment funds are required to comply with the anti-money laundering, countering the financing of terrorism and countering proliferation financing regime contained primarily in:
Proceeds of Crime Act (as revised)
Terrorism Act (as revised)
Proliferation Financing (Prohibition) Act (as revised)
Anti-Money Laundering Regulations (as revised) (AML Regulations)
CIMA has issued Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands (CIMA Guidance Notes). Although the CIMA Guidance Notes do not themselves have the force of law, a Court will take them into account when determining if a fund has breached any of the primary laws or the AML Regulations listed above.
Under the AML Regulations and CIMA Guidance Notes, all Cayman funds are required to appoint an AML compliance officer (AMLCO), with overall responsibility for the fund’s AML compliance, as well as a money laundering reporting officer (MLRO) and deputy (DMLRO), with specific obligations for reporting suspicions of money laundering to the Cayman authorities. Cayman funds must identify their AMLCO, MLRO and DMLRO to CIMA when they register and notify CIMA of any changes. As most Cayman funds are unstaffed, it is common practice to outsource provision of these officers and AML compliance generally, to third party service providers.
FATCA/CRS
Cayman Islands investment funds will be investment entities and therefore generally required to register and report as financial institutions under the Cayman Islands legislation implementing the Foreign Account Tax Compliance Act of the United States (FATCA) and the OECD’s equivalent scheme, the Common Reporting Standard (CRS). These regimes are intended to facilitate onshore tax compliance by requiring the automatic exchange of information for tax purposes (AEOI). Exceptions include funds that invest in non-financial assets, such as real estate and certain pension funds.
Cayman funds that are not exempted from AEOI reporting are required to obtain a GIIN for FATCA purposes by registering on the IRS web portal within 30 days of commencing business. They must then register on the web portal of the Department of International Tax Co-operation of the Cayman Islands Government (DITC) at DITC Portal (secure.ky) for FATCA and CRS reporting by the end of April following launch and report on any reportable accounts by the end of July following each calendar year end.
Bell Rock Fund Formation & Structuring Services
We routinely advise on all aspects of launching a private fund, from the legal set up requirements, CIMA registration, appointment of service providers suitable to your fund, offshore and experienced independent directors for the general partner and/or manager or investment committee, compliance services, corporate services and more. Please contact to discuss: info@bellrockgroup.com
