FAQs

The Cayman Islands have become the leading offshore jurisdiction for the establishment of mutual funds and private funds. This phenomenal growth has been due in part to the use of innovative legislation and the absence of taxation and exchange controls. This, together with the presence of sophisticated and professional service providers has resulted in the jurisdiction’s reputation for responsible supervision and regulation of funds.

The attraction of the Cayman Islands for offshore funds has been enhanced by the establishment of the Cayman Islands Stock Exchange (the “CSX”) which has enabled funds to obtain listing status where required.

The Mutual Funds Law (2020 Revision) (the "Mutual Funds Law") defines a mutual fund (or a hedge fund and between such definitions there is no distinction under Cayman Islands law) as a company, unit trust or partnership that issues equity interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investor risk and enabling investors to receive profits or gains from the acquisition, holding, management or disposal of investments. Equity interests are defined as a share, trust unit or partnership interest that carries an entitlement to participate in the profits or gains of the company, unit trust or partnership, as the case may be, and which may be redeemed or repurchased at the option of the investor.

The Mutual Funds Law applies to all open-ended funds (funds in which the investors have the right to redeem their interests at their option), except those specifically excluded from regulation.

The Private Funds Law, 2020 (the "Private Funds Law") defines a private fund as a company, unit trust or partnership that offers or issues or has issued investment interests, the purpose or effect of which is the pooling of 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:

• (a) the holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments; and
• (b) the investments are managed as a whole by or on behalf of the operator of the private fund, directly or indirectly,

but does not include:

• i. a person licensed under the Banks and Trust Companies Law (2020 Revision) or the Insurance Law, 2010;
• ii. a person registered under the Building Societies Law (2020 Revision) or the Friendly Societies Law (1998 Revision); or
• iii. any ‘non-fund arrangement’.

See above

All Regulated Mutual Funds are required to:

•  Submit to CIMA a current copy of the fund offering document (other than a section 4(4) fund or a master fund). The offering document must describe the equity interests offered to investors in all material respects and must contain such information as is necessary to enable a prospective investor to make an informed decision as to whether or not to purchase the equity interests.
• Submit to an annual audit and file accounts within six months of the end of the fund’s financial year. This will involve appointing an auditor in the Cayman Islands. All of the major accounting firms are represented on the Island and we would be pleased to provide you with recommendations.
• Pay a prescribed annual registration fee.

Not all master funds are required to register with CIMA:

• The Mutual Funds Law only captures Cayman Islands master funds which issue equitable interests which are redeemable at the option of the feeder fund, therefore a master fund which allows redemptions only with the directors’ or general partners’ consent do not require registration.
• A “master fund” is defined as a mutual fund that is incorporated or established in the Cayman Islands that holds investments and conducts trading activity and has one or more regulated feeder funds. Therefore, a master fund where the feeder is not regulated by CIMA is also not itself required to register with CIMA.
• Master funds incorporated or established outside of the Cayman Islands are not required to register with CIMA.
• Intermediate funds that do not hold investments or conduct trading activity but instead pass such investments through to a master fund are not required to register with CIMA.
• A “regulated feeder fund” will be defined as a regulated mutual fund that conducts more than 51% of its investing through another mutual fund. Therefore master-feeder structures that have several master funds (including certain fund platforms) where the investment into any one master fund is less than 51% of its investing, are not required to register with CIMA.

The master funds that are incorporated or established in the Cayman Islands that hold investments and conduct trading activity and have one or more regulated feeder funds must register with CIMA. This definition includes mutual funds which issue equitable interests that are redeemable at the option of the feeder fund.

The registration process involves the filing of a certificate of incorporation and the applicable registration form as well as the payment of an annual fee. No separate offering document is required for the master fund and where the auditor and administrator of the master fund are the same as for the corresponding regulated feeder fund a separate letter of consent is not required.

Master funds are required to file with CIMA audited financial statements, signed off by a local auditor, within six months of its financial year end and payment of the annual fee.

• Annual Fee. There is an annual fee payable to CIMA of US$4,268 in each year. Such fee must be paid by 15 January subject to penalties. There is also a fund annual return fee payable in each year of US$366.
• Operators. Section 4(3) funds are subject to the ‘four-eyes principle’ and require a minimum of two natural persons acting as directors of the fund where it is structured as a company or for the general partner of the fund where it is structured as a partnership.
• Director Registration. Directors of section 4(3) funds will be to register with CIMA and maintain such registration on an annual basis pursuant to the Directors Registration and Licensing Law (Revised). Directors must also actively deregister from CIMA where such registration is no longer required (or will be subject to ongoing annual fees until such time as they deregister).
• Material Information. Where a section 4(3) fund (a) makes any changes, or becomes aware of any changes, that materially affects any information submitted to CIMA under the provisions of the Mutual Funds Law; or (b) changes its registered office or the location of its principal office, the fund shall within twenty-one days after making the change or becoming aware of the change, as the case may be, file with CIMA the details of the changes (eg by way of an amended offering document or supplement and updated CIMA Form). CIMA will charge a filing fee of US$122 for each filing.
• Annual Audit. A section 4(3) fund shall have its accounts audited annually by an auditor approved by CIMA. Accounts will need to be prepared in accordance with International Financial Reporting Standards or the generally accepted accounting principles of the United States of America, Japan or Switzerland or any non-high-risk jurisdiction. Accounts are required to be filed with CIMA within six months of the financial year end of the section 4(3) fund.
• Fund annual return. A section 4(3) fund will, in respect of each financial year of the fund, be required to submit an annual return in the prescribed form.
• AEOI. Where a section 4(3) fund is a ‘financial institution’ for FATCA or CRS purposes it must comply with the automatic exchange of information requirements. Please see our Guidance Note on the Automatic Exchange of Information for further information.
• AML. All section 4(3) funds must comply with the anti-money laundering regime in the Cayman Islands. Please see our Guidance Note on AML for Funds for further information.
• Data Privacy. The Cayman Islands Data Protection Law, 2017 ("DPL"), came into force on 30 September 2019. A section 4(3) fund is a ‘data controller’ and must comply with the data protection principles set out in the DPL when processing personal data. It must also ensure those principles are complied with where the personal data is processed on behalf of the data controller (e.g., by the administrator of the fund). Please see our Guidance Note on Data Protection for further information.

The Mutual Funds (Amendment) Law, 2020 (the “Amendment Law”) amended the Mutual Funds Law. The primary effect of the Amendment Law was to bring within the scope of CIMA’s regulation, funds with 15 or fewer investors who have the ability to appoint or remove the operator of the fund; these funds were previously referred to as ”exempted funds” and are now referred to as “limited investor funds”.

Limited investor funds are required to register with CIMA in the prescribed form, pay an annual registration fee, submit annual audited accounts audited by a Cayman Islands based auditor (and prepared in the same manner as those required under the Mutual Funds Law) and annual returns, inform CIMA of material changes to the information submitted as part of its registration application and retain appropriate accessible records. In addition, a limited investor fund that is structured as a company is required to have at least two natural persons acting as directors. The directors are required to register with CIMA under the Directors Registration and Licensing Law (Revised).

A certified copy of an extract of the limited investor fund’s constitutional documents needs to be filed with CIMA on registration showing that a majority in number of its investors are capable of appointing or removing the operator of the limited investor fund.

• Annual Fee. There is an annual fee payable to CIMA of US$4,268 in each year. Such fee must be paid by 15 January subject to penalties. There is also a fund annual return fee payable in each year of US$366.
• Operators. Section 4(4) funds are subject to the ‘four-eyes principle’ and require a minimum of two natural persons acting as directors of the fund where it is structured as a company or for the general partner of the fund where it is structured as a partnership.
• Director Registration. Directors of section 4(4) funds will be to register with CIMA and maintain such registration on an annual basis pursuant to the Directors Registration and Licensing Law (Revised). Directors must also actively deregister from CIMA where such registration is no longer required (or will be subject to ongoing annual fees until such time as they deregister).
• Material Information. Where a section 4(4) fund (a) makes any changes, or becomes aware of any changes, that materially affects any information submitted to CIMA under the provisions of the Mutual Funds Law; or (b) changes its registered office or the location of its principal office, the fund shall within twenty-one days after making the change or becoming aware of the change, as the case may be, file with CIMA the details of the changes (eg by way of an amended offering document or supplement and updated CIMA Form). CIMA will charge a filing fee of US$122 for each filing.
• Annual Audit. A section 4(4) fund shall have its accounts audited annually by an auditor approved by CIMA. Accounts will need to be prepared in accordance with International Financial Reporting Standards or the generally accepted accounting principles of the United States of America, Japan or Switzerland or any non-high-risk jurisdiction. Accounts are required to be filed with CIMA within six months of the financial year end of the section 4(4) fund.
• Fund annual return. A section 4(4) fund will, in respect of each financial year of the fund, be required to submit an annual return in the prescribed form.
• AEOI. Where a section 4(4) fund is a ‘financial institution’ for FATCA or CRS purposes it must comply with the automatic exchange of information requirements. Please see our Guidance Note on the Automatic Exchange of Information for further information.
• AML. All section 4(4) funds must comply with the anti-money laundering regime in the Cayman Islands. Please see our Guidance Note on AML for Funds for further information.
• Data Privacy. The Cayman Islands Data Protection Law, 2017 ("DPL"), came into force on 30 September 2019. A section 4(4) fund is a ‘data controller’ and must comply with the data protection principles set out in the DPL when processing personal data. It must also ensure those principles are complied with where the personal data is processed on behalf of the data controller (e.g., by the administrator of the fund). Please see our Guidance Note on Data Protection for further information.

If CIMA determines that a section 4(4) fund is (i) or is likely to become insolvent, (ii) carrying on its business fraudulently, (iii) winding up its business in a manner that is prejudicial to its investors or creditors, (iv) not in compliance with the Mutual Funds Law or the Anti-Money Laundering Regulations (Revised), (v) being managed in a manner which is not “fit and proper” or (vi) operated or managed by a person who is not “fit or proper” to hold the position of operator, manager or officer, CIMA may take various punitive actions; including, canceling the section 4(4) fund’s registration, imposing conditions on the fund, appointing a person to advise the fund on proper conduct and requiring removal and replacement of the promoter, directors, general partner or, manager of the fund. Any operator appointed by CIMA will have all the powers necessary to conduct the business and affairs of the fund in the best interests of the fund’s investors and creditors. The Grand Court may also grant CIMA authority to take such other action deemed necessary to protect the interests of the fund’s investors and creditors. CIMA may communicate directly with the investors of a section 4(4) fund. Costs associated with enforcement, including appointment of advisors and operators, are expenses of the section 4(4) fund. General Partners, managers and other operators are responsible for compliance by the section 4(4) fund with the Mutual Funds Law.

In addition to the requirements set out under the Mutual Funds Law, a section 4(4) fund is subject to the general regulatory oversight of CIMA which includes the requirement to comply with CIMA’s rules, statements of guidance, policies and procedures. Of note, section 4(4) funds must comply with the Statements of Guidance on Corporate Governance and Nature, accessibility and retention of records each of which can be accessed by clicking on the relevant link.

The Mutual Funds Law provides for a penalty of US$120,000 for a section 4(4) fund failing to comply with the conditions contained in its license or providing false or misleading information to CIMA. The operator of a section 4(4) fund which fails to file the fund’s annual audit within six months of the financial year end of the fund (subject to extension by CIMA) commits an offence and is liable on conviction to a fine of US$25,000. Where a person operates a section 4(4) fund in contravention of the Mutual Funds Law such person commits an offence and is liable on conviction to a fine of US$120,000. Where a person represents in any way that he/she is carrying on or attempting to carry on business in or from the Cayman Islands as a section 4(4) fund and is not registered with CIMA, such person is guilty of an offence and liable on conviction to a fine of US$120,000. In addition, CIMA has extensive power to impose a significant administrative fine of up to US$1.2 million for a breach of the Anti-Money Laundering Regulations (Revised) of the Cayman Islands.

The Private Funds Law requires closed-ended private funds to register with CIMA. The Private Funds Law imposes extended administrative and operational requirements upon previously exempted closed-ended funds.

In addition to private funds, the Private Funds Law also provides for ‘alternative investment vehicles’ and ‘restricted scope private funds’.

An alternative investment vehicle is a company, unit trust, partnership or other similar vehicle that is formed in accordance with the constitutional documents of a private fund for the purposes of making, holding and disposing of one or more investments wholly or mainly related to the business of that private fund; and only has as its members, partners or trust beneficiaries, persons that are members, partners or trust beneficiaries of the private fund. Where International Financial Reporting Standards or the generally accepted accounting principles of the United States of America, Japan, Switzerland or a non-high risk jurisdiction permit consolidated or combined financial account reporting and a private fund chooses to report consolidated or combined financial statements with an alternative investment vehicle, the requirements under the Private Funds Law relating to audit, valuation, safe keeping, cash monitoring and identification of securities do not apply to such alternative investment vehicle.

A restricted scope private fund is a private fund that is an exempted limited partnership that is managed or advised by a person who is licensed or registered by CIMA or authorised or registered by a recognised overseas regulatory authority and in which all of the investors are non-retail in nature, being either high net worth persons or sophisticated persons. Details regarding the implications for registration and ongoing requirements for restricted scope private fund are expected in due course.

Private Funds do not include entities which constitute ‘non-fund arrangements’. The Private Funds Law specified the following non-fund arrangements:

• pension funds;
• securitisation special purpose vehicles;
• contracts of insurance;iv. oint ventures;
• proprietary vehicles;
• officer, manager or employee incentive, participation or compensation schemes, and programmes or schemes to similar effect;
• holding vehicles;
• iindividual investment management arrangements;
• pure deposit-based schemes;
• arrangements not operated by way of business;
• debt issues and debt issuing vehicles;
• common accounts;
• franchise arrangements;
• timeshare and long-term holiday product schemes;
• schemes involving the issue of certificates representing investments;
• clearing services;
• settlement services; funeral plan contracts;
• individual pension accounts;
• structured finance vehicles;
• preferred equity financing vehicles;
• a fund of whose investment interests are listed on a stock exchange (including an over-the-counter-market) specified by CIMA by notice in the Gazette;
• occupational and personal pension schemes;
• sovereign wealth funds; and
• single family offices

The Private Funds Law requires a private fund to ensure it has certain ongoing operating provisions in place relating to annual audits, annual returns, retention of records, valuation of assets, safekeeping of fund assets, cash monitoring and identification of securities which can be summarised as follows:

• Annual audit of private fund. A private fund shall have its accounts audited annually by an auditor approved by CIMA. Accounts will need to be prepared in accordance with International Financial Reporting Standards or the generally accepted accounting principles of the United States of America, Japan or Switzerland or any non-high-risk jurisdiction.
• Annual return. A private fund will, in respect of each financial year of the private fund, be required to submit an annual return in the prescribed form.
• Retention of records. A private fund shall maintain its records in an accessible manner and in accordance with rules, statements of principle and guidance issued by CIMA under section 34 of the Monetary Authority Law (2018 Revision). This requirement includes an obligation to maintain a record of the identification codes of any securities that are regularly traded or held on a consistent basis.
• Valuation. A private fund shall have appropriate and consistent procedures for the purposes of proper valuations of its assets, which shall ensure that valuations are conducted in accordance with the requirements in the Private Funds Law. Valuations of the assets of a private fund shall be carried out at a frequency that is appropriate to the assets held by the private fund and, in any case, on at least an annual basis. Valuations of the assets of a private fund shall be performed by (a) an independent third party that is appropriately professionally qualified to conduct valuations in a non-high-risk jurisdiction or (b) the manager or operator of the private fund, or a person who has a “control relationship” with the manager of the private fund. If the valuation is undertaken by the latter of these options then it must be independent from the portfolio management function and potential conflicts of interest must be properly identified, managed, monitored and disclosed to investors. Alternatively, the valuation function could be undertaken by an administrator not falling under option (a) who is appointed by the private fund.
• Safekeeping of fund assets. A private fund shall appoint a custodian to hold in custody, in segregated accounts opened in the name, or for the account, of the private fund, the custodial fund assets and verify that the private fund holds title to any other fund assets and maintain a record of those other fund assets. A private fund is not required to appoint a custodian if it notifies CIMA that it is neither practical nor proportionate to do so, having regard to the nature of the private fund and the type of assets it holds. In this scenario the private fund shall appoint either an administrator or another independent third party or the manager or operator, or a person with a control relationship with the manager of the private fund, provided that the verification function is kept separate and conflicts of interest are identified, managed and monitored in the same way that the valuation function is administered as set out above.
• Cash monitoring. The Private Funds Law requires that monitoring of cash flows and checking of cash accounts and receipt of investor payments be carried out by any of the manager or operator of the private fund (subject to functional independence or conflicts management requirements), an independent administrator, independent custodian or other independent third party.

• Annual Fee. There is an annual fee payable to CIMA of US$4,268 in each year. Such fee must be paid by 15 January subject to penalties. There is also a fund annual return fee payable in each year of US$366.
• Material Information. Where a private fund (a) makes any changes, or becomes aware of any changes, that materially affects any information submitted to CIMA under the provisions of the Private Funds Law; or (b) changes its registered office or the location of its principal office, the private fund shall within twenty-one days after making the change or becoming aware of the change, as the case may be, file with CIMA the details of the changes. CIMA will charge a filing fee of US$122 for each filing.
• Operators. Private funds are subject to the ‘four-eyes principle’ and require a minimum of two natural persons acting as directors of the fund where it is structured as a company or for the general partner of the fund where it is structured as a partnership.
• Operating Conditions. The Private Funds Law requires a private fund to ensure it has certain ongoing operating provisions in place relating to annual audits, annual returns, retention of records, valuation of assets, safekeeping of fund assets, cash monitoring and identification of securities which can found at this link.
• AEOI. Where a private fund is a ‘financial institution’ for FATCA or CRS purposes it must comply with the automatic exchange of information requirements.
• AML. All private funds must comply with the anti-money laundering regime in the Cayman Islands. Please see our Guidance Note on AML for Funds for further information.
• Data Privacy. The Cayman Islands Data Protection Law, 2017 ("DPL"), came into force on 30 September 2019. A private fund is a ‘data controller’ and must comply with the data protection principles set out in the DPL when processing personal data. It must also ensure those principles are complied with where the personal data is processed on behalf of the data controller (e.g., by the administrator of the fund). 

The Private Funds Law provides for a penalty of US$24,390 for a private fund failing to file any changes to Material Information, comply with the Operating Conditions or file its Annual Audit. In addition, CIMA has extensive power to impose a significant administrative fine of up to US$1.2 million for a breach of the Anti-Money Laundering Regulations (Revised) of the Cayman Islands. It is also expected that private funds will be subject to additional administrative fines under other regulatory laws in the Cayman Islands once the relevant amendments are made to include private funds. The monetary amount of the administrative fine will depend on various considerations including whether the breach is committed by an individual or a body corporate and if the breach is classified as minor, serious or very serious.

In addition if CIMA determines that a private fund is (i) or is likely to become insolvent, (ii) carrying on its business fraudulently, (iii) winding up its business in a manner that is prejudicial to its investors or creditors, (iv) not in compliance with the Private Funds Law or the Anti-Money Laundering Regulations (Revised), (v) being managed in a manner which is not “fit and proper” or (vi) operated or managed by a person who is not “fit or proper” to hold the position of operator, manager or officer, CIMA may take various punitive actions; including, canceling the private fund’s registration, imposing conditions on the fund, appointing a person to advise the fund on proper conduct and requiring removal and replacement of the promoter, directors, general partner or, manager of the fund. Any operator appointed by CIMA will have all the powers necessary to conduct the business and affairs of the fund in the best interests of the fund’s investors and creditors. The Grand Court may also grant CIMA authority to take such other action deemed necessary to protect the interests of the fund’s investors and creditors. CIMA may communicate directly with the investors of a private fund. Costs associated with enforcement, including appointment of advisors and operators, are expenses of the private fund. General Partners, managers and other operators are responsible for compliance by the private fund with the Private Funds Law.

In addition to the requirements set out under the Private Funds Law, a private fund is subject to the general regulatory oversight of CIMA which includes the requirement to comply with CIMA’s rules, statements of guidance, policies and procedures. Of note, private funds must comply with the Statements of Guidance on and each of which can be accessed by clicking on the relevant link.

There are three vehicles available in the Cayman Islands through which to operate a mutual fund or private fund:

1. CORPORATE VEHICLES. Corporate mutual funds are commonly established as exempted companies, under the Companies Law (as Revised). Mutual funds may also be established as limited liability companies (“LLCs”) or segregated portfolio companies. Under the segregated portfolio structure separate and distinct “pots” or “pools” of assets (referred to as “Portfolios”) are created. The assets and liabilities of one Portfolio are legally segregated and protected from those of every other Portfolio and are also separate and distinct from a segregated portfolio company’s non-portfolio assets.

Typical structures include:

• (i) Single/Two Class Structures - either:
  • (a) a ‘single class structure’ of redeemable shares issued to all investors with all shareholders having the right to vote; or
  • (b) a ‘two or more share class structure’ with a small class of voting shares usually held by the manager or promoter and one or more classes of non-voting redeemable shares offered to investors at an initial subscription price and thereafter at net asset value per share.
• (ii) Side by Side Structures – where an investment manager typically provides services to both an onshore structure and an offshore structure (e.g. a United States domestic limited partnership, which receives investments from United States investors and a Cayman Islands exempted company, which receives investments from non-United States investors).
• (iii) Umbrella Funds - multiple classes of shares with separate investment funds established for each class of shares. The articles of association of these funds typically ‘ring fence’ assets and liabilities internally between classes of shares (i.e. the assets of one class of shares cannot be claimed by the holders of another class of shares in the event of a diminution in value of one class of shares). These arrangements however do not protect the fund as a whole from claims from outside creditors unless the fund uses the segregated portfolio structure.
• (iv) Master/Feeder Funds - usually established with a Cayman Islands exempted company as the master fund, into which the investment portfolios of separate feeder funds, established as domestic limited partnerships in the United States and as offshore corporate funds in the Cayman Islands, invest.

2. PARTNERSHIP STRUCTURES

Private funds are generally established as exempted limited partnerships which have certain advantages including the following:

• investment performance is allocated to each partner’s capital account in proportion to his investment from the date of investment to the date of redemption or withdrawal; and
• incentive fees are calculated on each partner’s capital account and are charged to that account, generally at fiscal year end and at each withdrawal date.

3. UNIT TRUSTS

A unit trust may be registered as a mutual fund if each trust unit is redeemable at the option of the investor. Provided that none of the investors of the unit trust are or are likely to become resident or domiciled in the Cayman Islands, they may also be registered as exempted trusts under the Trusts Law (as Revised) which will entitle them to apply for a 50 year tax undertaking.