On-Demand Webcast: Cayman Islands Private Funds Law, 2020--The New Regulatory Environment

Irina Gershengoren:In addition, the open-ended funds previously exempt from registration now fall within the scope of Amend and Mutual Funds Law. First, let me welcome Peter Cogan, Managing Partner of EisnerAmper's financial services practice who will be taking Q&A at the end of this webinar. Now, I would like to welcome our special guest, Cassandra Powell, Director of Harbor Trust Company Limited and President of the Cayman Islands Directors Association. Cass, thank you so much for participating in this afternoon's discussion. During today's webinar, we will be covering in closer detail new regulations for private funds, but before we jump to the new private funds law, I'm going to pass it over to Cass, to briefly discuss the recent changes in the Mutual Funds Law.

Cassandra Powell:Thank you, Irina. Good afternoon, everyone, and I trust you can hear me okay. Thank you for joining us this afternoon. We do have a lot of material today. As Lexi noted, we will send everyone after the presentation. Fear not, you will get access to everything. As Irina noted, we have two new pieces of legislation that have come into effect for the investment funds in the Cayman Islands. As noted, all of these, we have a transitional period for existing funds to be registered by the 7th of August, 2020. How did we get here? Why are we here? Just a bit of backstory to these two new pieces of legislations, so the Cayman islands, like many other jurisdictions, are constantly being reviewed and assessed by international bodies across the globe.

One of those such bodies is the European Union. The EU created a list in December, 2017, and this list represented a group of countries that they perceived to offer unfair tax advantages based upon an assessment of compliance with a tax transparency and information exchange standards and the use of tax machines. The Cayman Islands was placed on this list on what was known as the gray list. One of the areas that the Cayman Islands agreed to address based on the EU assessment was relating to economic substance. An agreement and a commitment was given to the EU to address those matters by the end of 2018, which was successfully done.

In April, 2019, the EU confirmed that the Cayman Islands had satisfied the economic substance requirements with the exception of economic substance in relation to investment funds. The Cayman Islands was granted until the end of 2019 to adapt its legislation to address this concern by the EU. Their primary concern related to the existence in Cayman of a large number of unregulated funds named elite private equity or other closed ended funds, which did not fall under the scope of the Mutual funds law and smaller funds with 15 or fewer investors that were exempted from registration under the Mutual Funds Law.

That takes us to where we are today, and the introduction at February 7th, 2020 of the two new pieces of legislation. Firstly, the Mutual Funds Amendment Law. As you guys can see, this law removes the exemption from regulation for investment funds, where the equity interest in the fund are held by 15 or fewer investors, but more than one, and a majority of those investors have the power to appoint or remove the funds operator. These were known as Section 44 Funds. Under the amendment, they're now known as limited investor funds and they are now required, if they meet the provisions of the law, to be registered with CIMA. Existing funds, when this law came into effect on February 7th, having until 7th of August, 2020 to be in compliance.

Any new funds that started business after 7th of February, 2020, needed to comply with registration requirements immediately. That touched on the Mutual Funds Amendment.

Irina Gershengoren:Thank you Cass for this bit overview. Let's now jump to the new regulatory framework for private funds. As of June 13th, as of last Friday, only 520 private funds for just registered under the new law, can you please take us through this new rules and regulations. Cassandra, will you go over that for us?

Cassandra Powell:Sure, certainly. The Private Funds Law 2020, as noted, came into effect on February 7th, 2020. We are now in, what's known as the transitional phase with funds existing funds having to register with CIMA if they fall within scope by 7th of August, 2020. As Irina said, and as I noted, one of the concerns for the EU was the unknown number of private equity or closed ended vehicles that exist in the Cayman Islands. Many of you may be and have heard that, as a starting point, one of the numbers that was thrown out was potentially approximately 29,000. That number represents the number of exempted limited partnerships that are currently existing in the Cayman Islands.

As many of you will know, the LP structure is the typical structure for the private fund space. As of June 13th, as Irina noted, we have 520 funds that have registered under this new legislation. We have a long way to go based on the initial estimate of numbers. We can talk about that as we go through today's call. The key pillars of the Private Funds Law are as noted on the screen. Registration, which is the phase that we're in right now for all existing products, operational regulation and supervision and enforcement. CIMA will apply what's known as risk based approach to the regulatory oversight of private funds. All regulated funds are subject to ongoing monitoring by CIMA, and in keeping with CIMA's current approach, matters will be addressed as they arise in a manner that commensurate with the level of seriousness of that breach.

That is our starting point for that legislation. It's key to understand here, does your fund fall within scope or does it not? There are key definitions within the legislation. One of those is, what is a private fund? As highlighted here, the PSL defines private fund as a company, whether that's an exempted company or limited liability company, unit trust or partnership where it's principle business is the offering an issuing of his investment interests, and those words will be key. The purpose or effect of which is the pooling of investor funds, again, that phrase is key, with the aim of spreading investment risk and enabling investors to receive profits or gains from such entities investments. The investment interest carrying an entitlement to participate in the profits or gains of the vehicle, and are not redeemable or re-purchasable at the option of the investor, i.e., they're closed ended.

Its purpose or effect is the pooling of investor funds with the aim of spreading investment risk. There's some key considerations when looking at that definition. First of which is the holders of investment interests do not have day to day control over the acquisition, holding, management or disposal of the investments. The other key consideration is the investments are managed as a whole buyer and behalf of the operator of the private fund. i.e., the directors, the general partner, the trustee, depending on the legal structure, directly or indirectly for reward based on the assets, profits or gains of the company unit trust or partnership. In doing that assessment of what is a private fund, does my fund fall within scope? There's also consideration given for collective investment schemes. Fund operators should consider whether CIVs to be a private fund, if all of the elements included in the definition of a private fund under the PFL are present or otherwise established.

The characteristics for CIVs are that the undertaking does not have a general commercial or industrial purpose. The undertaking pools together capital raised from investors for the purpose of investment, with the view to generating a pool return for those investors and the unit holders or shareholders of the undertaking as a collective group have no day to day discretion or control. It's important to note here, the fact that one or more, but not all of the aforementioned unit holders or shareholders are granted day to day discretion or control should not be taken to show that the undertaken is a collective investment scheme.

What is considered offering and issuing of investment interest? These are key terms within the legislation that will help you as a manager determine whether your fund falls within scope. A lot of this analysis, you will need to do with your legal counsel to determine, am I in scope or am I not in scope? Offering an issuing of investor interest is the commercial activity of taking direct or indirect steps by a private fund or a person or entity acting on its behalf, which is typically the investment manager to procure the transfer commitment of capital from one or more investors to the private fund for the purpose of investing it in accordance with the offering document or summary of terms, or marketing material. This should amount to the activity of offering and issuing investment interest.

Does it matter, what if the activity takes place only once on several occasions or on an ongoing basis? What if the activity occurs only through one entity within the related fund structure, or what if the transfer or commitment of capital takes the form of subscriptions in cash or in kind? Many of you will have those kinds of questions. Essentially, for the purposes of determining what constitutes offering and issuing of investment interest under the PFL, it should be immaterial as to whether the activity only takes place once or several occasions, or if the transfer of capital is in cash or in kind. What CIMA has done to help assist with the consideration here is, they've issued a number of FAQs, which can be found on their website, or we can direct you to them, which help and walk through step by step some of these questions here.

It's important to know that when making that assessment of what's offering an issuing of investor interest, that when capital is invested in a product by an existing investor, this is not likely to be within the scope of what's called raising capital. If you have a vehicle where you have investors that have already invested into that product, are existing investors on record, then the scope of raising capital will be different. Pursuant to the law, it would not be considered as raising new capital. Okay. Another consideration is, what if that collective investment scheme only has one investor? The PFL states that where the CIV only has one investor they're exempted from being required to register as a private fund under the PFL. However, CIMA has stated that the constitutive documents all of the private fund or any other provision or arrangement of binding legal effect.

In this case, resolutions may be considered in that context. That's something that you need to discuss with your legal counsel. Those documents must expressly state that the fund only has, and has only ever intended to have a single investor of record. The question may be, why is it that I need to document this in the documents to my fund if it meets that exemption, therefore is not required to be registered? Why do I still need to document within the fund documents? Because CIMA has various mechanisms to test for every fund. If your fund is a single investor fund, falls out of scope, therefore does not need to be registered with CIMA, depending on how CIMA may become aware of that fund, i.e., it's part of a larger structure, that structure chart is issued to CIMA, or CIMA goes in to do an onsite inspection of the Cayman service provider and samples a number of clients, and they become aware of, say fund A, that's not currently CIMA registered.

Part of all of their tests may be to look at the documents of that fund. Albeit, it's not currently CIMA registered to say, well, it's claiming that it's out of scope, on what basis is out of scope and how is that documented? It's important to keep that in mind as well when you're looking at your documents. One of the other questions as well is, what if that collective investment scheme only has one investment or one type of investment. What CIMA has said, and this is clearly outlined in the FAQ as well, that they've issued is, the absence of all or any one of the characteristics under each of the concepts in the definition of a private fund, i.e., offering an issuing of investment interest, pooling of investor funds, or spreading of investor risk, does not conclusively demonstrate that a collective investment scheme does not fall under the relevant concept.

It's important to have that discussion with your legal counsel and advisors to say, this is what my structure looks like. This is what my fund looks like. It's only making one investment, or it only has one type of investment, is that sufficient enough for it to be considered out of scope? What does the full structure look like, and can I meet the parameters of the MFL to be considered out of scope?

Irina Gershengoren:Okay. Thank you, Cass. As you mentioned previously that in the last few months, CIMA came out with a few FAQs addressing various fund structures, whether they fall within the scope, out of the scope of the private fund law, can you take us through some examples of the fund structures that fall within the scope and out of scope?

Cassandra Powell:Sure. In issuing the FAQs, what CIMA has attempted to do is add some clarity to what's within the PFL. Again, these are legal documents, this is a new piece of which will be new to many, so the lawyers spent a lot of time digging through this to make sure that they are in the best position to advise their clients. In conjunction with the FAQs, what CIMA has done is, outlined in the FAQs, where they're seeing a lot of questions being asked.

Some of which we just went through is, what's are CIVs and scope and the like, so I'm going to actually present a few sides here just to give you some test cases. Again, I'm not a lawyer, so please do not take this as legal advice. That's where you pay your onshore and your offshore legal counsel for, but I think this will give you a good idea of some of the structuring and where things may fall out. Here is a typical structure where you have your private fund, and we'll consider that it Cayman Islands Private Fund. Your investors are coming into that private fund. By investors, that means we have more than one. The element of pooling seems to be in effect.

Then, via that private fund, is making investments into various portfolio companies. Using this example one on this, your Cayman private fund here appears to fall within scope. This is a very simplified structure. Moving to this example here, say if we take this private fund is a Delaware entity, for example, and the structure has created what's known as a parallel fund, which will generally invest and divest in the same investments at the same time as the main private equity fund, and the parallel fund is a Cayman vehicle. On the face of it, does it look like it fall and meets the definitions of a private fund? You have limited partners coming into the Delaware entity, the Delaware Wayne private equity fund, and you have limited partners coming into the parallel funds for this exercise, is a Cayman fund.

Both of which then invest into portfolio companies to make that investment. On the face of this, that parallel fund, being the Cayman fund that's taking investor capital and making investments, will most likely fall within scope of the PFL and will be required to register. We get to a bit more of a complex structure here. For various tax and regulatory reasons, we have different types of structures, whether US, feeder funds, Cayman feeder funds for the US taxes exempts, and the non US investors. A Cayman master as well. Then that Cayman master then invests into, say for the example we're taking various AIVs, whether it's in Luxembourg, in Cayman, the middle asset B could be a Cayman vehicle, for example. Asset C could be a Cayman vehicle as well.

Looking at this, starting with the feeder fund, the Cayman LP feeder fund, that's taking investment from multiple investors, the US tax exempts and the non US investors, on the face of this, that seems to fall within scope as well and may be required to register. It's also then investing into the master fund, which is taking investments, not only from the Cayman feeder fund, but the Delaware feeder fund as well. There is more than one investor coming into that Cayman master. Then you have the Cayman master that's feeding into asset A, a Luxembourg AIV, for example, and asset B and C, which could be considered Cayman AIVs or whole costs. On the face of this, it appears that not only the Cayman feeder fund LP, but the Cayman master fund as well, will both meet the definition under the PFL, and thus both may require registration.

It's important to note that with CIMA, there are group registration options available so that you can register multiple entities within a structure in one go. Asset B and asset C, because they're considered whole cost or vehicles to facilitate the investment of the master fund, they're not taking investments from any other vehicle, though asset B an asset C appear to be out of scope and not required to be registered. Here we get to a little bit more of a complex structure where we have investors coming into the main fund. For the sake of this discussion, we'll consider the main fund to be a Delaware fund. The manager has created a parallel fund in the Cayman islands, and you've also consider created AIVs, alternative investment vehicles within Cayman.

Looking at this structure, the Cayman parallel fund is taking in investors and it's making investments in this umbrella entity for investors to participate, alternative to the main fund, based on the definitions, it appears that the parallel fund would need to be registered in its own right. The feeder fund that's above the main Delaware fund, this could be an SPV formed to accommodate investment in the fund by one or more investors that feeder fund, if it's having multiple investors come in and it's making that investment into that Delaware fund, for example, and if that feeder fund as an SPV is taking direct investments and say, for example, that's a Cayman vehicle, then that may need to be considered for registration as well.

The AIV, the alternative investment vehicle on the other side of this structure that could be for investors that subscribed into the main fund or a parallel fund, investors are coming directly into that AIV. The AIV is not investing into the main fund, but is investing into a portfolio company, for example, A, B, C at the bottom there. These companies may be in a country that imposes withholding tax, for example. The AAV has been established as a blocker, for example. Again, that assessment also has to be done on that AIV, if it's a Cayman vehicle, is it taking multiple investors? Is it making investments? Is it pooling an investor capital for profit and gain, and is it being managed by typically the investment manager with the investors having no control? That AIV in itself may meet the definition of a private fund and itself may have to be registered.

You can see where things can get a little bit complicated depending on what each of these vehicles has been established for. Where are they taking capital, where are they making investments, and what type of investments that they're making. It's very important that you have your legal counsel work with you to go through your various structures. Okay. When we look at funds that are in scope, I'm sure many of you may be hoping and thinking that, based on my structure, I may be out of scope. Where the investment fund does not constitute a non-fund arrangement as listed in the schedule to the PFL, those funds may be considered out of scope. Some of those examples of non-fund arrangements include pension funds, securitization, SPVs, joint ventures, single family office vehicles, just to name a few.

Again, all of these are listed in the schedule to the law. Just from illustrative purposes, I thought I would drop in here some examples. This first one is a single family office, but when we take a look at this in terms of what that family office is involved in, we can see the scope for a number of different types of structures, private equity that can be utilized. But what key is here is that, it's a single family as the originating investment source here for this entity, and as such, there's no pooling concept to be considered. Therefore, a single family office pursuant to the legislation and the schedule is considered out of scope and not having to register.

The second example here, just to give you an illustration is, SPV vehicles and different types of those, again, as detailed in the legislation, where you can see that they've been set up for certain types of securitization and structured that way. Again, this is another example of what would be considered out of scope for this vehicle.

Irina Gershengoren:Thank you, Cass. These charts were very helpful. Al last, but now last, but not least topic, what are the registration requirements for this fast approaching deadline? As we know, there's a lot of funds still need to get registered.

Cassandra Powell:We do. It's important, it's part of the PFL to understand, when does the funding to be registered, is the first context. The PFL requires close ended funds to apply for registration with CIMA within 21 days of accepting capital commitment for investors, and they must be registered prior to accepting capital contribution from investors for the purposes of investments. When this legislation was drafted, there was a lot of discussion with legal counsel who understood that parties, sponsors, managers and the like who were setting up these types of structures could not be restricted from having conversations with potential investors to come in, if that was going to run a foul of some sort of timing restriction to be registered with CIMA.

These provisions were put in place, which clearly then do not restrict managers from having verbal conversations and marketing that vehicle. Immediate registration aspect now is the 7th of August deadline. For existing vehicles that were in existence prior to Feb 7th, when the law came into effect, we have a transitional period for these, and to come up to compliance by the 7th of August, 2020. Doing that, there is a lot of background work that needs to take place, not only with the managers themselves, but also as I've been saying, with your legal counsel. Because there are certain requirements for that the private funds have to meet that we're going to run through right now.

For many of you, as you look through this, it very much has an AIFMD feel, which is very intentional. Because remember as well, a lot of this has been driven by the EU. When we consider some of these requirements, if you're managing AIFMD products or operating or have operated in that space, much of this will look similar to you. One of the core things that's required for private funds deals with the valuation of assets. The law requires appropriate and consistent valuation procedures, and that valuations be carried out at least annually. Such valuation can be performed by any of the manager or operators of private fund, subject to functional independence or conflicts management requirements, an independent valuator or an administrator. Let's touch on two things here.

Many of you may be asking, and your products may only be providing performance numbers and NAV numbers closer to end of the life cycle of that vehicle. This was the discussion that was had with the regulator to determine, why was the, at least annually, requirement dropped in here? From CIMA's perspective, the view is, even if investors do not require the performance numbers and so forth at a more frequent places, it's good market practice that they are aware of what the performance is. Remember, in all of this legislation, whether it's PFL or the Mutual Fund Amendment, investor protection is what's key here. This is what, from a regulatory's perspective, what's being driven at.

In the valuation of assets, the regulatory approach is that your investors must be kept abreast of how that fund is performing, even though they rightly know that they're not going to receive any repayments or distributions until a certain parameters or lifecycle has been reached. That's important to know. The other important aspect here is, who can carry out that valuation? As a law is written, it can be done internally, or it can be done externally by engaging a third party. If it's done internally, which many private equity closed end funds may currently be doing, then what the law says and what the regulator's looking for is that you have properly disclosed that in your marketing material, your offering documents, your constitutive documents, whatever the case may be that the investors are seeing, that you have appropriately disclosed that this evaluation is being done internally, and that you have a process and procedures to manage any conflicts that may arise in you doing so.

That independence or management of any conflicts is a key aspect that carries out through the remaining requirements as well. If we turn to safekeeping of fun assets, so the law requires a custodian to hold private fund assets, which is capable of physical delivery or capable of registration in a custodial account, except where that neither practical or proportionate given the nature of the private fund and the type of investments assets held, and to verify Title II and maintain records of those fund assets. Where having a custodian is neither practical nor proportionate, given the nature of the private fund and the type of assets, Title verification can, once again, be carried out by the manager or operator of the fund, but again, subject to functional independence or conflict management requirements, it can also be done by an independent administrator or another independent third party.

Cash monitoring is another key requirement here for private funds. The legislation has been drafted quite broadly and deals with around keeping of records where those records are being kept, who's keeping those records. The PFL 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 all the private fund or subject to functional independence or conflict management requirements, once again, or it can be carried out by an independent administrator, independent custodian or independent third party. It's interesting to note here that, if it's conducted internally, the operator should engage a third party such as an auditor. Again, we'll touch on one of the audit requirement shortly, for the auditor to provide independent verification that the cash monitoring was done throughout the year as part of their audit process.

In looking at this requirement for cash monitoring, the question that many managers sponsors may ask is, so what party decides what is proper regarding cash management process? Is that the manager of this vehicle, or is it CIMA? Remember as well, one of the key pillars here is regulation and supervision. That will entail, from a regulatory standpoint, that CIMA carries out monitoring on all of these vehicles. CIMA will asses the structure, the policies and procedures that are in place to seek to confirm the process around cash management and cash monitoring that a manager has put in place, based on the investment strategy of the fund is sufficient having regard to the type of assets that are being held. We expect as well, that CIMA will be issuing shortly rules around cash monitoring in terms of establishing appropriate policies and procedures for that requirement.

The fourth requirement here is the identification of securities. Again, this law requires private funds that regularly trade securities, or holds them on a consistent basis to maintain a record of the identification codes of the securities and questions. As I've said, in regards to asset valuation, safekeeping, and cash monitoring, all can be done internally, or all can be engaged and outsourced to a third party. But if done internally, the manager operator has to appropriately disclose and have processes and procedures in place as to how they deal with any potential conflicts and what the processes and procedures are around each of those categories, and disclose that appropriately to the investors.

As part of the PFL as well, one of the provisions, which may be very easy for some of the existing managers to meet, but may be a new requirement now for some managers is with respect to audited counts. The PFL includes a requirement that all private funds, which are subject to PFL, have the accounts audited annually by a Cayman Islands based auditor. The audited accounts must be submitted along with, what's known as the Fund Annual Return, to CIMA within six months of the end of each financial year. The private fund is actually required to submit an audit for the 2020 financial year within six months of its financial year end. It's important to note here that a number of the structures, the question has been asked about side-by-side reporting. If your audits currently are being done on shore by a US audit firm, but it includes a Cayman vehicle side by side, but currently the only opinion is the US opinion, which is rightly so, as a Cayman vehicle was currently not required to be registered, will CIMA accept that side by side reporting?

CIMA will, so as long as the Cayman entity is accounted for and audited, and there is obviously a Cayman opinion in respect of that Cayman entity, CIMA will accept consolidated financial statements. One of the other things as well is the liquidation and winding up. Many of you may ask, given by nature of what that vehicle is doing, are those vehicles exempt from registration? The way the PFL is worded is, a private fund that submits evidence, i.e., resolutions, auditor confirmations to CIMA, that its liquidation or winding up will be completed prior to the end of the transition period, i.e., August 7th, 2020, it will not be required to apply for registration. It's important to know what is meant by completed.

Completion of the liquidation or winding up process means that the private fund has disposed of all of its investments and has made final investor distributions. If your vehicle is in that particular state, where it's divested of all investments, it's made final investor distributions, then perhaps then it meets that exemption and can evidence that to CIMA, which means then it could apply as out of scope and not be required to register. Another thing that's important to note is part of the requirements for the private funds is in relation to the operators i.e., the directors, and whether that's individual directors, if it's an exempted company, management board members, for example, or the general partner.

 CIMA, much like what they're doing on the mutual fund side will extend the four eyes principle to a private fund. The directors of a private fund structured as a company or the managers of a limited liability company that operates as a private fund do not however need to register with CIMA under the directors registration and licensing law. That is a distinction between the PFL and the Mutual Funds Law, where on the mutual fund side, those directors are subject to the DRLL. Here, they're not. If it's a corporate director or a general partner, for example, two natural persons must be named in respect of those entities as part of the registration of the PFL of the private fund. What are the actual registration requirements?

We've outlined those here in broad strokes, and note as well, that the timeline for registration keeps with all of the other fund types. i.e., it's currently five business days to register a vehicle. For private fund, the fund must be registered by a Cayman based provider i.e., your registered office, your legal counsel. There are a handful of professional service providers, such as Harbor that are operating as submitters to CIMA to help with this process. Important to note that the application fee, as detailed there, is payable. However, the registration fee of US 4,002.6829 is waived for this first year for funds that are registering prior to August 7th.

If you register at August 8th, 2020, that full registration fee becomes due and payable. Note that that registration fee comes into effect every calendar year at January, and must be paid by January 15th of every year. Also outlined there is, things like the administrators that have consent, if it's applicable, if you're hired a third party administrator, the auditor's letter of consent if it's available. Again, what CIMA has said that they understand that the timing it might take to find service providers, negotiate with an audit firm. That letter of consent does not necessarily need to be part of the registration application, but it must be available when the first audit cycle comes around.

A few things in terms of marketing, it's key to note that CIMA has asked, either for the marketing materials offering documents, or summary of terms, they understand that some vehicles may not have those documents, but instead, the terms are within the constitutive documents of the fund. That constitute document must then be formed part of the registration. If however, a fund has separate marketing or materials offering documents, that sort of thing, those are the documents that form part of the registration. CIMA has recently, and may issue rules for contents of marketing materials. Some of those high level are outlined on your screen. We can certainly provide a copy of those rules after. There are ongoing obligations that many of the funds will have to meet, i.e., annual fee, the annual return to CIMA audit by a local based sign-off auditor and retaining records and adhering to CIMA's published rules and guidance.

It's interesting to note as well, that any changes with respect to your fund must be filed with CIMA within 21 days. This is interesting. The question's been asked, specifically around the structure chart for some of this, where vehicles may ad blocker entities on a regular basis. The new structure chart must be submitted within 21 days, unfortunately. There are various penalties that come into play, and we've outlined those there. It's important to note that many of you may be aware CIMA has the power to impose administrative fines. That legislation came into effect in 2018. I think, just generally, before we get into questions, key next steps here is, a manager must in conjunction with their legal counsel, conduct an assessment of their Cayman funds, all of their Cayman vehicles to determine what's in scope and what's out of scope.

A lot of this as well will be incumbent on the manager of the private fund to do what's known as the self assessment as well of their existing operations and their service providers, to make changes that may be required to meet the requirements for valuation, custody monitoring and securities. It's important to note here that the distinction in the hedge fund space is that most of this, and the concept of outsourcing is fairly standard. That's industry practice. What's happening here is the concept of outsourcing is being introduced with potentially third parties for evaluation and custody, which is a new concept for private equity managers, and something they need to do to better understand. It's very much being driven right now by regulatory requirements, as opposed to investor demand that we see the distinction on the hedge fund side.

Managers do need to take a really close look at what their operations are, what their understanding of the AML requirements are. Many of you will know that you should be familiar with the AML requirements and the appointment of AML officers as that came into effect in 2018. Your vehicles should have those service providers appointed, but when you get down to the granularity, do you understand what the AML regulations are asking for in terms of investor due diligence and KYC, the ability to take money in, what KYC is required before you pay monies out, and all of the timing that comes with that and the implications of that. This is where it make better sense for you to engage a Cayman based administrator, who this is their bread and butter. They do this every day. That they will have that skill set to be able to suss out those things for you.

It's important that that self assessment takes place, and remember as well, that, as a manager, not only looking at this from a commercial perspective, but you're looking at this from an investor protection perspective and a regulatory perspective, which is a new concept now and a way of looking at this. Are you best placed to be able to continue to do some of this in-house, or does it make sense for you to engage a third party? The PFL. All Irina, over to you.

Irina Gershengoren:Yeah. Thank you, Cass, for this insightful presentation. A quick reminder to everyone, please submit your questions at any time in the Q&A widget on your screen, and we'll do our best to address the questions by the end of the webcast, if the time permits. With that, I'm going to pass it over to my colleague, Peter Cogan for Q&A. Peter.

Peter Cogan:Yep. Thank you, Irina, and thank you, Cass. This was really, really informative. We have some questions coming in, and I'm guessing that, as we go through these, we are going to run out of time. But we'll hit them right away. Some of them sound interrelated so I'm going to try and maybe summarize some of these. Let's focus, the master feeder structure and many master feeder structures, there's a lot of different lingo between the hedge fund and the private equity fund space. One of the questions dealt with a Cayman master where there's only one Cayman offshore feeder. The feeder clearly is registered, has to register, will have the reporting obligation. This master, the only outside investor is the feeder, but it has a share class for the GP to get its incentive allocation. The basic question there, would that master be subject itself to registration?

Cassandra Powell:It could be. The PFL speaks specifically to that, that by nature of it being a master does not automatically exempt it. It's scoped out of that. It in itself could be required if it meets the parameters under the law.

Peter Cogan:Yep. This relates to another question where someone was talking internal and external, and I think you were talking about the structuring. You have these SPVs that are only to make one investment so it's really what we would look at as an internal type of entity. There's no outside investors in it. So it's purely tax structuring.

Cassandra Powell:Correct.

Peter Cogan:Again, theoretically that one would be scoped out of registration.

Cassandra Powell:Correct. Yep. As I said, key here, all of the definitions and working through the characteristics of that definition, that's in the law.

Peter Cogan:Right. The question on costs, and that's a really, really difficult thing to assess, because it depends on how much internal, how much external, but do you have any? Is there any broad based budgeting something that someone can expect for the cost to comply with this new law?

That is a difficult question because it comes down to, of course, as well, do you have a complex of funds, where there are economies that can be achieved when you're using, if you are looking at outsourcing to use the same administrator, use the same audit firm, for example, that economies that can be achieved there? Or are you a single fund? For example. There are some additional costs that come with it, namely obviously the registration component, the annual fee, and now having local audit sign off. The view was that many of these already had audits done elsewhere. To add in the component now of the local audit sign-off is a nominal amount that that's being expected.

The big picture here is that you're in this space as we see across the globe, every jurisdiction, every offshore jurisdiction and investment fund jurisdiction is going through these similar exercises from a regulatory perspective. Some jurisdictions do have lower costs from the setup phase of things and the registration side of things. But then, you have to balance that with that jurisdiction, from an investor perspective and investor protection and investor perception, where do you want to be? From a Cayman Islands, as a jurisdiction perspective, there are a lot of pros that we hope balances out the additional costs that will naturally come with enhanced regulation, but that additional cost you see across the globe.

This is why it's very important that managers turn to this as ASAP to have those discussions and say, listen, my operational setup and my internal setup may be fit for purpose here. I may not need to outsource and hire an administrator, but the assessment needs to be done. With increased regulation, there will be some increased costs, but hopefully, we've managed to structure this, and by giving the waiver of the registration fee in this first period, that we can assist with managers getting up to compliance in this first little while.

Peter Cogan:Great. Let me ask a side question on that, because I think what I've been focusing in on as I've been following this is it can be done in stages. There's a lot of us fund managers out there. They've set up a Cayman entity. It may be a small organization, there may be 10 employees at the fund managers. You have two GPs, you have two finance professionals, and then other support staff. A lot that was embedded in the law was the custody, the cash controls, the valuation. It would be really difficult to expect those organizations to go out and independently do everything. I think you highlighted that there was the exemption in the law of where the internal people could do that. If the fund document was crafted that way, so all of this has been disclosed to the investors before launch, is there anything that you'd be advising a client to do now after registration to disclose again, to the investors that this is it. We're not engaging an outside director today. We're not engaging a separate valuation, an agent, our finance professionals will be holding the custody assets?

Cassandra Powell:Yeah. As you said, it comes down to disclosure and what you're putting in the hands of your investors. If you have this appropriately disclosed in your marketing documents, offering memoranda, whatever your summary of terms, whatever the document is that the investors are seeing or have seen, that's the document that goes as part of your registration with CIMA. Remember as well, as highlighted, CIMA will take a look, on a risk-based approach here, will take a look of those policies and procedures that have been disclosed and what's disclosed to say, is it fit for purpose given the strategy? And may require some, some tweaks and changes as they go through the process. But it's important that managers get that into the hands of their investors to say, under the new regime our fund falls within scope. We've had to now register, which is to your benefit, from an investor protection standpoint, we now fall under the remit of this regulator who will be carrying out ongoing monitoring and supervision.

That can only be in the best interest of the investors. In doing so, as part of that, here are the disclosures around valuation, here are the policies and procedures that we feel appropriately address those requirements. Putting it all back in the hands of your investors, that they know exactly what you're doing and how you're dealing with this.

Peter Cogan: Great. A couple of questions came in on liquidations. One organization talks about, they have a main private equity vehicle, and then the investment goes public and they spin off that investment into a side vehicle, which in effect, would take the investment through the liquidation, or someone talked about that there's an entity that has a single illiquid asset that's stuck in there due to halted trading.

There was a concept of a group registration, so I'm thinking on that one where they're doing the spinoff funds, you'd probably do the group registration, but if you just have this one vehicle out there. Yeah, go ahead.

Cassandra Powell:Yeah. If that's spinoff fund meets the definition of a private fund under the legislation. Yes. If it doesn't, then it doesn't need to be. CIMA will have a holistic overview of the entire structure based on the structure chart that's given of the entity that's registered. I think this gets back to the fact that we talk about currently, there are about 520 registered, and there was an initial starting point out of about 30,000. CIMA will potentially have that holistic view of that 30,000, but it may not be that number that actually has to register pursuant to the legislation. That spinoff vehicle, if it meets the definition, yes, it would need to register, yes. There's a group option for registration. But this is where it's key that that assessment is done. What is it doing? Who is making that investment? Is it simply holding and for a specific tax regulatory structuring purpose that has it fall outside of scope? That's the assessment that is important that needs to be done right now.

Peter Cogan:Okay. I think you mentioned this, but I want to clarify it on the private equity fund side. There is in fact, no requirement to utilize a Cayman fund administrator. Technically, the administrators would not have to register with Cayman's, but there could be some positive on other compliance with the laws if you're using a registered administrator. Is that correct?

Cassandra Powell:That is correct. As I said, you don't have to use a Cayman based administrator, but obviously, there are certainly benefits to using an administrator that's on the ground, that's very familiar with the AML requirements and the AML regulations, as they are constantly changing as recently as February of this year. It's key for managers to understand, if they're operating a Cayman vehicle that falls within scope and is now falls under the remit of CIMA, that, from a breaches perspective, CIMA is not looking to find people left, right and center. What they're looking to see, that you're taking steps to put certain things, policies, procedures, operations in place that will bring your fund into compliance. Some of those things may mean minor breaches that they can work with you on, but they're absolutely certain things like the AML requirements that are hard and fast.

There is no scope for you to negotiate with them there in terms of that requirement. If you've hired a Cayman-based administrator who is fully understanding of what the regulations are, what needs to happen for investors coming in, what needs to be done before you can pay those investors out. The fact that regulations have changed whereby the equivalency jurisdictions aspect goes away in August of this year, the red gate section, where some of you may be familiar. You can take money in if it was coming from a bank in a schedule three country, that went away.

Various nuances like that, that your administrator would be familiar with. That, from an efficiency and operational and ensuring compliance perspective, if you're able to do that then certainly that can only help you and your structure and your investors.

Peter Cogan:Great. Thank you, Cass. I'm not going to get through all the questions. There's a few more that have been popping in. We're running out of time right now. We will try and get back to everyone with their questions, make sure they're answered. Some of the questions may actually be in the presentation materials that we send out to you. I'm going to cut it here. I'm going to thank you all for attending. We hope you did find this presentation very helpful. I thought it was a good dialogue, and again, Cass, Irina, myself, we're here to help, if you need it. We look forward to continuing to engage in a dialogue on the Cayman Island Law. Thank you, everybody. Thank you, Cass. Thank you, Irina.

Cassandra Powell: Thank you guys so much.

Irina Gershengoren:Lexi.

Lexi:Thank you for taking the time to join us, and we hope you enjoyed today's presentation on Cayman Islands Private Funds Law, 2020, the new regulatory environment. A special thanks to our speakers for delivering this insightful program. The recording of today's session will be available on demand later today, and can be accessed using the same link you used to join. We would appreciate if you would complete our evaluation survey, which will pop up at the conclusion of this presentation, so please keep this window open. Thank you for joining our webcast today.