New partnership audit regulations require changes for all partnerships

Cayman Islands: Mutual Funds Law amendment and Private Funds Law

Authored by Kristen Hughes

To enhance best practices and strengthen investor confidence, the Cayman Islands enacted new and revised legislation, which has a direct impact on entities domiciled in the Cayman Islands. These legal amendments also result in the Cayman Islands being fully compliant with international regulations, specifically meeting criteria specified by the Council of the European Union. The revisions to the existing Mutual Funds Law (MFL) and a new Private Funds Law (PFL) (collectively, the Laws) were enacted on Feb. 7, 2020. The Laws subject all private open and closed-ended funds formed in the Cayman Islands to register with the Cayman Islands Monetary Authority (CIMA.)

Amendment to the Mutual Funds Law

The MFL removes the previous exemption under Section 4(4) from registration for funds that have 15 or less investors. Due to this amendment, entities with greater than one, but less than 15 investors are no longer exempt from the MFL and are required to register with CIMA in order to comply.

Private Funds Law

The PFL establishes a framework to monitor closed-end funds (i.e., private funds) which are beyond the scope of the MFL and it requires private funds to register with CIMA. The PFL defines private funds as a company, unit, trust or partnership in which:

  • The principal business is offering and issuing investment interests
  • The purpose is to pool investor funds to diversify risks to allow investors to realize profits from the holding, management and disposal of investments
  • The investors do not have day-to-day control over the entity’s investment objectives
  • Investment interests are not redeemable at the option of the investor
  • The investments are managed by the fund’s operator for reward, based on the entity’s assets, profits or gains

A private fund is deemed to carry on or attempt to carry on business in or from the Cayman Islands if it is:

  1. Established in the Cayman Islands; or
  2. Established outside of the Cayman Islands and makes an offer of its interests to the public of the Cayman Islands; and
  3. Is in receipt of capital contributions from investors, with the purpose of making investments

Each fund structure should be individually analyzed to determine whether it falls under the PFL.

What are the new PFL requirements?

In addition to registering with CIMA and being subject to review and oversight by CIMA on an ongoing basis, all regulated funds (both open and closed-end funds) are also required to:

  • File annual audited financial statements within six months of year-end with an exception for funds with a financial year-end prior to Dec. 31, 2020, which are given an additional three months to file within this initial period of registration. Financial statements must be prepared in accordance with International Financial Reporting Standards (IFRS) or generally accepted accounting principles (GAAP) of the United States, Japan, Switzerland or other non-high-risk jurisdiction (being any jurisdiction that is not on the high risk list issued by the Financial Action Task Force). These must be signed off by a CIMA-approved, Cayman-based auditor.
  • File a Fund Annual Return (FAR) with CIMA each year
  • Have a minimum of two directors or managing members who must be registered with CIMA
  • Pay an annual fee to CIMA by Jan. 15 of each year

The PFL also seeks proper recordkeeping and transparency. To achieve this, a registered private fund must also comply with certain ongoing obligations, including:

  1. Valuation of assets – Private funds must adopt and consistently apply valuation procedures, at least on an annual basis. These should be performed by an appropriate, professionally qualified independent third party, or by the manager/operator of the fund where the valuation function is independent from the portfolio management function or where potential conflicts of interest are properly identified and disclosed to the investors.
  2. Safekeeping of assets (custody) – A custodian must hold any physical assets and maintain a record of the fund assets. Where engaging a custodian is not practical (given the nature of the fund and type of assets), the requirement can be fulfilled by the manager of the fund, an independent administrator or another independent third party. In this case, CIMA should be notified.
  3. Cash monitoring – Cash flows must be monitored, including ensuring that all cash has been recorded in accounts under the fund’s name and that all cash receipts from investors have been received and recorded. 
  4. Identification of securities – A private fund that regularly trades securities, or holds securities on a consistent basis, must maintain a record of the identification codes of the securities.

Entities will need to review their procedures relating to valuation, custody, cash monitoring and identification of securities to ensure compliance with the Laws. Where the above procedures are performed internally (and not by an independent third party), this must be disclosed to investors in addition to how conflicts of interest, if any, are identified and addressed.

Registration timeline

Existing funds had six months from the commencement of the PFL and the MFL to register, which concluded on Aug. 7, 2020 (the transition period). After the transition period, a fund may not accept any capital contributions until it is registered with CIMA. For registration after the transition period, funds will need to pay the annual registration fee of $3,500 and an application fee of $300. All new funds must submit an application for registration within 21 days of its acceptance of capital commitments, and must be completed before accepting any capital contributions from investors.

CIMA has created a website with frequently asked questions. For more information on this topic or to learn how Baker Tilly’s Value Architects™ can assist with the requirement to obtain an audit from a CIMA registered audit firm, contact our team. 

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