Master fund registration update

A number of bills and regulations have recently been proposed for consideration by the Cayman Islands government which are relevant to the operation of Cayman Islands mutual funds. Most pertinent of these is the Mutual Funds (Amendment) Bill, 2012 which was gazetted on 28 November 2012, writes Walkers Partner Michael Padarin. 

The Bill seeks to amend the Mutual Funds Law of the Cayman Islands, particularly in relation to the provisions relating to the regulation of master funds in the Cayman Islands. 

Clarification of master funds registration requirements  

Of the proposed amendments introduced by the Bill, the area which is likely to be of most interest to operators of Cayman Islands domiciled mutual funds are amendments to the definitions of “feeder fund”, “master fund” and “regulated feeder fund”, which seek to address a number of ambiguities in the current law which permit certain master funds and intermediate funds to avoid the requirement to register as mutual funds. 

The Cayman Islands Monetary Authority has previously expressed its intention to ensure that all master funds are registered and thus we would expect that the proposed registration elements of the Bill will be passed without amendment. Operators of master funds which are not currently registered will need to prepare for registration in the coming months. 

In our view, if the Bill is passed in its current form, the following will apply: 

Cayman Islands domiciled master funds, having a single regulated Cayman Islands feeder fund will be required to be registered as mutual funds under the Law. Such structures are not technically required to be registered under current law. 

Cayman Islands domiciled master funds in master feeder structures utilising an intermediate fund vehicle, will also be required to be registered as mutual funds under the Law. A number of such master funds are currently not required to register. 

Intermediate funds, with the sole purpose of acting as a pass through vehicle, or vehicle to extract carried interest or other incentive fees, will NOT be required to register as mutual funds. 

Cayman Islands domiciled funds, which accept investments from a third party fund of fund investor, which is itself a Cayman Islands regulated mutual fund, will NOT be required solely as a result of accepting such investments, to register as mutual funds. 

Whilst the Bill introduces certainty in relation to master fund registration requirements, the status of certain intermediate funds remains unclear, in particular intermediate funds which hold assets and do more than merely act as a conduit vehicle. 

Arguably, some intermediate funds may be caught under the new definition of “master fund” introduced by the Bill.  

This requires an entity to be registered if, amongst other things, it: “holds investments and conducts trading activities for the principal purpose of implementing the overall investment strategy of the regulated feeder fund”.  

Operators of mutual funds utilising an intermediate fund structure will need to look closely at the purpose and operations of the intermediate vehicle to determine whether it is required to be registered as a master fund under the Law if the Bill passes in its current form.