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Cayman disclosure regime presents increased cost, few challenges

The Private Funds Bill 2020 changes how a private funds are classified in the jurisdiction but will only be an added compliance and disclosure step, say experts.

Lawmakers in the Cayman Islands, eager to shed the territory’s reputation as a weak link in the anti-money-laundering chain, have of late been displaying initiative on the topic. But to what end? Their latest attempts to make business dealings in the territory more transparent were not enough to keep it from being added to the EU’s blacklist of ‘non-co-operative jurisdictions’ in February.

Ostensibly a move to bring its disclosure requirements for private funds into line with accepted regimes, the Private Funds Law 2020 was published on February 7, before the EU’s finance ministers added the country to the blacklist on February 18. Experts say the law presents few material challenges and costs for US managers with funds domiciled in the Caymans. Many legitimate funds use Cayman vehicles for their US tax-exempt or foreign investors.

The law inaugurates the six-month registration and compliance period for funds with Cayman Island Monetary Authority (CIMA). It defines what constitutes a private fund and, when it takes full effect in August, will require additional disclosure and compliance measures for funds domiciled there.

But it ultimately doesn’t change how the island regulates private equity-style vehicles.

“It’s not going to impact US managers directly,” said Christian Victory, partner at Appleby in the Cayman Islands. “It will impact the product, and it will impact the bottom line of the products that those investment managers seek to establish and form.”

For new funds domiciled in Cayman, managers will have 21 days upon receiving initial capital commitments to register with the CIMA. But once registered, the specific requirements are similar to what managers are used to performing in compliance with the Investment Advisors Act of 1940.

“US managers who are registered under the Advisors Act in the US are going to be satisfying most of the new requirements anyway,” said Ira Kustin, asset management partner at Paul Hastings. “There may be some additional costs and compliance burden that’s put on US managers that have Cayman funds or Cayman vehicles as part of a larger fund structure.”

Under the new law, funds domiciled will have requirements to have an audit performed by a local auditor, valuation requirements similar to that of the Advisors Act’s custody requirements, as well as cash monitoring and securities identification requirements.

Managers will have to determine whether they want to update their full PPM, add a supplement to their PPM or notify investors directly that the fund is now subject to additional registration requirements.

“Managers will want to update their compliance manual to include some language about this registration requirement as well as the ongoing compliance requirements under the new rule,” said Kustin.

Although the added step of registration with CIMA does change private funds designation in the country, it doesn’t ultimately change how private funds operate.

“It will require us to devote new resources and help our clients in a different way than we’ve helped them before,” said Nick Rogers, partner at Ogier. “But for clients who have battled through and dealt with things like Dodd-Frank, have dealt with SEC fund manager registration, this is a very small extra element that the other legal departments, compliance or the operations group are going to have to add to their to-do list.”