Update – COVID-19, Brexit, and Registration Requirements for PE Funds and Small Mutual Funds in the Cayman Islands
March 11, 2020
By Peter Cogan
On February 18, 2020, the European Union added the Cayman Islands to the non-cooperative jurisdictions for tax purposes list (the “EU blacklist”). Many different perspectives have been given on whether this was justified, whether it was a “foot fault” due to timing and whether this will be rescinded in the fall, which is the next time the list will be updated. Some even speculate this has less to do with the Cayman Islands and more to do with the continuing negotiations between the EU and the United Kingdom regarding Brexit. We have heard a decided “wait and see” from many industry participants as to whether nothing will come of this if, as the Cayman Islands believes will happen, the designation is lifted in the fall. Rather than add more speculation on this subject, there are two key points we wish to highlight as to why the EU blacklist designation is important.
1 - If the designation remains in place, fund raising from EU investors for new funds or the ability to retain existing EU investors in open-ended fund structures may be impacted. In light of the uncertain impact on the global financial markets of the COVID-19 outbreak, any excuse to delay capital commitments or withdraw capital from funds could prove significant.
2 – Investors in EU blacklisted entities may be denied deductibility of payments to such entities and investment vehicles in EU blacklisted jurisdictions face the possibility of increased withholding on interest, dividends and royalties received.
On March 2, the Cayman Islands Monetary Authority (“CIMA”) updated the information posted to their web site regarding the Private Funds Law, 2020. A couple of items of note were contained in this release. In our reading of this release, not all items in the Private Funds Law, 2020 appear to be consistent with the Mutual Funds Law, 2020 Revision. Continued attention to releases from CIMA should be monitored by market participants. Of significant note:
1 – The initial audit required under the rule, originally thought to be delayed until 2021, is very clearly December 31, 2020 for existing calendar-year funds that are first registering during the six month transitional period commencing March 2, 2020 (the “Transitional Period”). Funds being formed in the second half of calendar year 2020 may still be able to defer their initial audit until 2021.
2 – Liquidating funds that can demonstrate that their winding up process will be completed during the Transitional Period do not need to register with CIMA. In the case of these liquidating funds, the manager of the fund will be expected to submit items such as board resolutions, auditor confirmations or other items that prove this winding up process will be completed.
3 – Funds will need to have two natural persons designated as director. Corporate directors (general partners or independent corporate director organizations) will need to have individuals named personally. Independent directors are not required by the Private Funds Law, 2020. Best practices note -- similar to the mutual fund marketplace in the Cayman Islands -- including independent directors on the board and including them in the oversight process may be preferable by many institutional investors and compliance professionals.
4 - Alternative investment vehicles (“AIV”) utilized by private funds as blockers for making investments in portfolio companies received certain limitations from registration. CIMA stated that such vehicles “under a Cayman registered private fund” would not be required to themselves be registered. However, an AIV “under a non-Cayman registered private fund” (ex-U.S.-based fund using a Cayman blocker to invest in a portfolio company) would be required to be registered with CIMA as the fund itself is not registered. In both discussions released by CIMA, the answers were written with a single AIV under a single fund. Not addressed in a specific post is what to do if you use an AIV to invest in a portfolio company on behalf of multiple Cayman registered private funds or if there are some Cayman registered private funds in an AIV alongside unregistered private funds. In the first round of discussions after release of the Private Funds Law, many industry participants focused on the need for registration where there was a pooling of investor interests. Is an AIV with multiple funds a master fund requiring registration or would the fact that all the investor vehicles registering with CIMA allow the AIV to continue to avoid separate reporting, as many fund complexes utilize this approach to investing? We expect further clarity on this as well as other questions that will arise as funds register during the Transitional Period.