FUND STRUCTURING Alternative structuring arrangements for funds are attracting attention as managers look to fi nd ways to reduce entry costs and deliver cost savings to investors, as Jennifer Parsons of 46 CAYMAN FUNDS | 2016 ALTERNATIVES Mourant Ozannes describes. In June 2015, the British Virgin Islands introduced “incubator funds” to appeal to start-up managers and friends and family funds. These ‘‘regulation light’’ vehicles were undoubtedly a response to a growing segment of the investment advisory market looking for structuring alternatives beyond traditional structures and the increasing costs of regulatory compliance. Cayman, however, did not need to amend its legislation to provide such an alternative, as an alternative had existed for some time under the Mutual Funds Law. Commonly referred to as “4(4) funds”, these are mutual funds that are not required to register under the Mutual Funds Law if they meet the following exemption criteria: a) the equity interests are held by not more than 15 investors; and b) a majority of the investors are capable of appointing and removing the operator of the fund. The operator refers to the board of directors, general partner or trustee, as applicable. Both prongs of the above test must be met to qualify for the exemption. From a documentation standpoint, the governing document of the fund (ie, memorandum and articles of association of a company, limited partnership agreement of a limited partnership or trust deed or declaration of trust of a trust) must contain appropriate provisions that ensure the appointment and removal of the operator is done in accordance with the requirements under the Mutual Funds Law. Similarly, the fund must take steps, whether through its manager, a third party administrator or registrar and transfer agent, or otherwise, to carefully monitor its number of investors. At the time of registration with the Cayman Islands Monetary Authority (CIMA), the requirement for a majority of the investors to be able to appoint and remove the operator is no longer required. It is therefore prudent to consider drafting the fund’s governing document to contemplate both scenarios, thereby avoiding the need to amend the document at a later date, and any investor consent issues that may arise on amendment. Similarly, the offering memorandum for the fund can include broadly drafted language refl ecting the fund’s intention to register with CIMA when it is required to do so and outlining the regulatory obligations applicable to registered funds. There are several noteworthy knock-on effects that arise in the case of 4(4) funds. If the unregistered fund is a feeder fund that invests all or substantially all of its assets into a master fund, the exemption from registration of the feeder fund with CIMA negates any requirement to register the master fund with CIMA, assuming there are no other “regulated feeder funds” within the same structure. One must be careful to ensure that the governing documents of the master fund meet the same requirements noted above for appointment and removal of the operator, but two levels of registration are avoided, at least until such time as either fund exceeds 15 investors. Equally important to note, because the funds are not CIMA-registered, there will be no annual requirement to fi le audited fi nancial statements with CIMA or to fi le fund annual returns. Although most funds will still produce audited fi nancial statements, in line with investor expectations, there would not be the requirement for local (Cayman) auditor signoff where a fund is not CIMA-registered, resulting in cost and time savings.
Cayman Funds 2016
To see the actual publication please follow the link above