There’s been increased focus from the courts and regulators on the duties owed by directors of a Cayman Islands or BVI fund since the financial crisis of 2007-8 and various high profile fund meltdowns. So what duties does a director of a fund actually owe?
In both the Cayman Islands and the BVI, directors’ duties are based on a mix of English common law, statute and regulatory guidance. A director of a corporate fund owes the same duties to the fund as a director of any other Cayman Islands or BVI company owes to its company. Under common law a director owes fiduciary duties and duties of skill, care and diligence.
Directors’ fiduciary duties are:
– to act in good faith in what the director considers is the best interests of the fund;
– to exercise powers for the purposes for which they were conferred and in the fund’s interests;
– to act with unfettered discretion; and
– to avoid conflicts of interest and to disclose personal interests in transactions.
If you are thinking of setting up an offshore hedge fund our new infographic which sets out the key steps is just for you.
The BVI and Cayman are often referred to as “tax neutral” and you might have been told that, for this reason, it would be advantageous to establish your fund in either jurisdiction. What does this actually mean and what does it mean for your fund?
So you’ve got a great idea for your fund’s investment strategy, perhaps you have tested it and developed a track record and maybe you even have proposed seed financing, but who else needs to be involved in setting up and launching your fund? I have set out a list of the key players below.
Cayman and BVI funds are not restricted to using Cayman and BVI service providers. They have the flexibility to appoint service providers from all over the world, subject to some technicalities which are beyond the scope of this blog.
There are a number of ways to structure your offshore fund and the best option for you will depend largely on the location of the manager, your investor base and the type of investments that the fund will make. I have set out a summary of the three most common structures to use for offshore funds in this post.
Securities investment business in or from the Cayman Islands is regulated by the Securities Investment Business Law (Revised) (SIBL). SIBL sets out which securities investment business activities are regulated, and so need a license to do them, and also various exemptions from the licensing requirement.
So how does SIBL work? Continue reading
It is nearly three years since the BVI launched its Approved Manager Regime. The introduction of the Approved Manager Regime at the end of 2012 was the jurisdiction’s first step towards putting together a complete package focused on the smaller and emerging manager and it has been a great success.
My Cayman colleagues will probably jump up and down when I say this; but it is such a success that we now see Cayman funds being set up with BVI Approved Managers, given that the Approved Manager out-performs the Cayman equivalent, the Cayman Islands Securities and Investment Business Law (SIBL) Exempted Manager, both on cost (establishment and ongoing) and because it has the stamp of being a regulated product, which the Cayman equivalent does not. In addition, the Approved Manager offers greater flexibility, as a Cayman Exempted Manager is limited to only acting for funds whose investors fall within the definitions of a “sophisticated investor” or “high net worth person” under SIBL, whilst the Approved Manager has no such limitation.
It seems to have fallen upon me to talk about all the things that can go wrong with your fund! As it happens, suspending NAV calculations, subscriptions and redemptions is not the end of the world that it was once considered. If you keep in mind a few key considerations, chances are you will survive this challenge.
If you want to de-register a BVI fund by cancelling its certificate of recognition, the chances are things haven’t gone as planned. Perhaps the launch was not a success and the fund never traded, perhaps the launch went well but performance was poor and you are winding up. Or maybe things are more positive, you have just realised that you could operate as a closed-end fund and it makes financial sense to de-register or you think you would be better off domiciled in another jurisdiction. Whatever the reason, don’t be down. In the words of Henry Ford, “Failure is only the opportunity to more intelligently begin again”. The good news is, de-registering is pretty easy so we can save you a headache!
There comes a time in a registered Cayman fund’s life when it needs to de-register from the Cayman Islands Monetary Authority (CIMA). This could be early on, if the fund launches but never carries on business, or much later on the fund’s winding up. It could also be anytime in between if the fund is no longer carrying on business as a regulated mutual fund, merges with another fund or transfers to another jurisdiction. A fund can also choose to de-register if it no longer meets the definition of a mutual fund, because it has become a single investor fund or a closed—ended fund, or it has become an exempted mutual fund, where the fund’s shares are held by not more than 15 investors, a majority of whom are capable of appointing or removing the directors of the fund.
So I was sitting at a presentation in Rio de Janeiro (tough life, I know) recently. The topic was regulation in offshore funds and I had finished my remarks on how awesome the Cayman Islands are and why everyone should set up funds there. I’ll be honest and say that I was now looking forward to that evening’s caipirinhas by the pool.
I had talked about FATCA and AIFMD as part of my section of the presentation. However the next session had many more acronyms, including OECD CRS. This acronym stuck out as a sore thumb mainly as it is the next reporting requirement to be implemented in the Cayman Islands and the British Virgin Islands.
So, your fund is up and running, your portfolio performance is in the upper quartile for your asset group, you’re attracting more and more interest. Your own marketing (or your newly appointed marketing team) is beginning to gain traction and you are now at the stage where you are bringing in more investors. In fact, you have a closing in just over two weeks which will significantly bump up your asset under management figure. Is it time to break out the next bottle of Cristal (or whatever your preferred choice is – Highland Park single malt is always a popular choice of your average Cayman attorney and we’re always happy to help celebrate your success)?
Whilst you’re basking in the slight glow of your success, you stop and think. Wait. Is there a Cayman regulatory issue I have to deal with? Wasn’t there a magical number set out in the offering memorandum that I have to think about?
Last month, the BVI launched the incubator fund and the approved fund. These fast and low-cost options for managers wanting to set up a regulated fund are a great addition to the BVI funds industry. It is not surprising that everyone is talking about them. If you have missed this, have a read of my last post.
It is taking the internet a bit of time to catch up with the developments in the BVI and I have noticed that much of the general information available on BVI funds is out of date.
For anyone thinking of establishing a new fund in the BVI I have set out a brief guide to each of the BVI fund products below. I try to limit the use of acronyms but you will need to know that the funds industry in the BVI is governed by the Securities and Investment Business Act (SIBA) and regulated by the Financial Services Commission (FSC).
An incubator fund will be restricted to having a maximum of 20 investors, each investing no less than $20,000, and a cap on assets under management of the fund of $20,000,000. The incubator fund is aimed at the start-up manager looking to launch quickly (approval is given within two days of submitting a complete application) with low cost, minimal regulatory hurdles and no mandatory functionaries. It can operate as an incubator fund for up to three years. At that point, if the fund has proved to be viable, it will need to convert to a private, professional or approved fund. Alternatively, it can wind up its operations.
As part of the Cayman Islands’ continual evolution of its regulatory environment, in 2014 the Directors Registration and Licensing Law introduced a requirement that all prospective directors of a Cayman Islands regulated corporate mutual fund must be registered or licensed with the Cayman Islands Monetary Authority (CIMA) before they are appointed as directors. This applies to individuals and corporate directors of mutual funds which are regulated by CIMA, whether they are resident in the Cayman Islands or elsewhere and also applies to directors of certain companies which are registered under an exemption to the Cayman Islands Securities Investment Business Law. If a director does not register or become licensed, the director could be exposed to heavy penalties, including fines and imprisonment.
The impact of FATCA on Cayman and BVI funds
After getting to grips with the EU Alternative Investment Fund Managers Directive, many Cayman and BVI fund compliance departments are now turning their focus to reviewing what they need to do to comply with the US Foreign Account Tax Compliance Act (FATCA). Although Cayman and BVI funds are not directly subject to FATCA, the Cayman Islands and BVI have each introduced legislation implementing FATCA requirements for ‘financial institutions’ to identify and report certain US accounts. The Cayman Islands and BVI have also each entered into an intergovernmental agreement with the United Kingdom (UK FATCA) which set out similar due diligence and reporting obligations for ‘financial institutions’ to identify and report certain UK accounts, without imposing a withholding tax regime for non-compliance (as applies under FATCA). The majority of Cayman Islands and BVI mutual funds fall within the definition of an ‘investment entity’ and are generally classified as a ‘financial institution’ for FATCA and UK FATCA purposes and so have information gathering and reporting obligations.