In June 2011, Premier McKeeva Bush announced a proposal to require new and existing master funds in open-ended master/feeder structures to register with the Cayman Islands Monetary Authority. Following a consultation period with industry and CIMA which lasted several months, the Mutual Funds (Amendment) Law 2011 came into effect on 22 December 2011.
While new master funds established on or after 22 December 2011 are immediately subject to the Amendment and may require to register prior to commencing activity, those master funds already in existence as at 22 December 2011 and to which the Amendment applies have until 21 March 2012 to comply. A short extension to that grandfathering period may be granted.
In the past, although some Cayman master funds in open-ended master/feeder structures had been registered with CIMA under the Mutual Funds Law, the majority had been structured in such a way that registration would not be required (with the Cayman feeder fund(s) in such structure typically being the only vehicle(s) registered with CIMA).
The Amendment is one of the most significant changes to the regulatory regime affecting Cayman domiciled hedge fund structures in recent years, not least owing to the immediate impact on new master funds falling within its scope and the short timeframe to perform a backfill exercise on several thousand existing structures to determine which existing master funds are required to be registered within the grandfathering period. However many, if not all, open-ended master funds in similar structures domiciled in certain other jurisdictions (including Ireland, Jersey and the British Virgin Islands) are subject to regulation by financial services regulators in those jurisdictions and so, while a concept new to Cayman, the revised requirements are not considered to be outside industry or regulatory norms.
Master funds caught by the amendment
The Amendment applies to “master funds”, as defined, and effectively removes the “15 investor exception” in section 4(4)(a) of the Mutual Funds Law with respect to those master funds. The “15 investor exception” served historically as the means by which many master funds were exempt from registration and will still be available for other “mutual funds” other than “master funds”.
The defined term of “master fund” covers many, but not all, master funds, as that term is used in ordinary parlance. For the purposes of the Amendment, a “master fund means a mutual fund that is incorporated or established in the Islands, that holds investments and conducts trading activities and has one or more regulated feeder funds”. A “regulated feeder fund” is a mutual fund registered with CIMA that “conducts more than 51 per cent of its investing through another mutual fund”. The existing definition of “mutual fund” remains unchanged with respect to master funds, so that an affected “master fund” is required to fall within the original definition as well.
In practice, therefore, not all Cayman master funds in open/ended master-feeder structures fall within the ambit of the Amendment and are subject to its registration requirements. Some may not currently fall within the scope of the requirements but may nonetheless choose to be registered in order to avoid inadvertently failing to be registered at a later date when the Amendment becomes applicable to them. Others may elect to be registered for other regulatory or investor-driven reasons. A detailed analysis on a structure-by-structure basis, taking into account the present and future legal and commercial considerations applicable to each master/feeder structure is therefore required. Master funds established outside Cayman are not affected.
Consequences of master fund registration
Once registered, a master fund is required to comply with many of the same duties and obligations to which CIMA-registered hedge funds are already subject. Such requirements include (i) the payment of an annual fee and (ii) the requirement to file audited financial statements signed off by a Cayman-approved auditor and an FAR Form (Fund Annual Return) within six months of the financial year end unless extended by CIMA.
There are a number of significant concessions. The annual fee is set at CI$2,500 (US$3,048), which is lower than the annual fees payable by other types of registered fund and – a key point for clients in terms of keeping costs low – a master fund is not required to adopt or file its own offering document.
The registration process involves submission of (a) the master fund’s certificate of incorporation (or equivalent), (b) a Form MF4 disclosing, amongst other things, details of the master fund’s feeders and service providers and (c) the annual fee. Consent letters from the administrator and auditor are not required if the service providers are the same as those of the CIMA-regulated feeder fund(s).
New master funds falling within the definition of “master fund” will require to be registered with CIMA before commencing activity as a “master fund”.
To the extent not already performed, an assessment of each Cayman master fund existing as at 22 December 2011 must be done as quickly as possible to ascertain whether or not a particular master fund will require to be registered. If registration is required, that registration application must be submitted by 21 March 2012. Although it is possible that an extension may be granted, it is perhaps unlikely that this will be announced until close to the expiry of the existing grandfathering period and therefore the existence of a longer period to comply should not be assumed.
The offering document of each feeder fund should make appropriate disclosure of the status of the corresponding Cayman master fund (whether regulated or otherwise). It is expected that the offering document applicable to an existing structure will be updated at the next available opportunity.