Keynote Speech by Mrs. Cindy Scotland Managing Director Cayman

Keynote Speech by
Mrs. Cindy Scotland
Managing Director
Cayman Islands Monetary Authority
at
Campbells’ Fund Focus Conference 2014
14 November 2014
Thank you, Mr. Chairman,
Speakers,
Distinguished delegates,
Ladies and gentlemen, good morning…
Introduction
On behalf of the Cayman Islands Monetary Authority, let me begin by expressing our appreciation for
the opportunity to give this address
I would also like to take this occasion to congratulate Campbells on its twelfth year of staging this
conference. It provides a valuable forum for discussion of topical issues, which are pertinent to the
funds industry as a whole.
New Thinking for New Fund Structures
I note with interest, that the theme chosen for this year’s conference is “New Thinking for New Fund
Structures”. The theme itself is significant and speaks to the fact that not only is the funds industry
changing at an extremely rapid pace, but also that the future landscape is unknown. The theme quite
appropriately therefore aims to open up the necessary dialogue for strategies to secure future growth
and stability.
Globally, 2013 was seen as the year that, according to Institutional Investor magazine, “post-crisis
financial regulations transformed the hedge fund industry’s strategic landscape”. The publication
suggested that 2014 may have seen- “this trend go a step farther as the gulf widens between managers
who can succeed in the new environment and those who cannot.” It further suggests that, “The biggest
risk funds face is strategic: the need to grow assets under management to support margins that have
been under pressure from rising operational costs and investor complaints about fees.” As we approach
the end of 2014, we can see that those assessments were true in large measure.
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In this scenario, the notion of new thinking for new fund structures might very well be required. Some
of the conference sessions build on this theme. For example, the afternoon session on “The Year 2020:
What Will the Funds Industry Landscape be and how to Future-Proof funds”, is based on the premise
that six years from now, the industry may be significantly different and raise new challenges.
However, I will leave to the ‘thought leaders’ on that panel, the clairvoyant task of looking into the
future and speculating about what tomorrow holds and I will limit my substantive remarks to the
Cayman Islands' Regulatory Update.
Regulatory Overview
CIMA, as the primary regulator for the Cayman Islands’ financial services industry, is constantly
reviewing the jurisdiction’s regulatory regime to ensure that adequate measures are in place to protect
investors, maintain jurisdictional integrity, and instil confidence in our jurisdiction.
Let me share with you, from the regulator’s perspective, some of the main developments which have
occurred since the Authority’s 2013 update to this conference last November. These include the
issuance of a Statement of Guidance for Regulated Mutual Funds, and the enactment of the Directors
Registration and Licensing Law, 2014.
SOG for Regulated Mutual Funds
On 6 December 2013, after a period of consultation with industry practitioners, the Authority released
its Statement of Guidance for Regulated Mutual Funds.
The SoG is intended to provide clear guidelines to investors and the operators of regulated funds on
how the Authority expects the operators of regulated funds to properly monitor the activities of their
funds.
In essence, it codifies and sets guidance on the minimum corporate governance standards required by
operators of regulated mutual funds (directors, general partners), and gives the operators a clear
understanding of their primary duties. For example, the SoG requires that the operators must ensure
that the fund has in place a conflict of interest policy, and that the board of directors should meet at
least twice a year.
Directors Registration and Licensing Law, 2014
Another major development which has taken place this year is the enactment of the Directors
Registration and Licensing Law, 2014 (the DRLL). On 4 June, this law came into force in the Cayman
Islands and was greeted by many in the industry who had been waiting with baited breath for its arrival.
The law requires all directors of covered entities– whether resident in the Cayman Islands or elsewhere
– to register with the Cayman Islands Monetary Authority. The law has also introduced a licensing
regime for “Professional Directors” and “Corporate Directors”.
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The law applies only to directors of Cayman mutual funds which are registered with, and regulated by,
the Authority. Accordingly, a director of a mutual fund which is exempted from registration with CIMA
under section (4) of the Mutual Funds Law (2013 Revision) or any other Cayman domiciled investment
fund which is not registered with, and regulated by, CIMA is not affected by the law. The directors of
Cayman Islands exempted companies which are not “Covered Entities” within the meaning of the law,
are not impacted by the DRLL.
This legislation was, in part, intended to close the gap between the Authority’s oversight of corporate
directors and natural persons acting as directors. Prior to the enactment of this law, the Authority
regulated only some corporate directors, and did not regulate natural persons at all. This anomaly gave
rise to inconsistencies in the treatment of individuals and entities that carry on similar activities. It also
presented significant challenges in supervising and sanctioning individuals who, for one reason or
another, might have been considered unsuitable to be directors of covered entities.
The new law also gives the Authority the right to refuse approval for directors required to be registered
or licensed under this law, if it deems them to be unsuitable. For example, in the event that it receives
information that the director has been convicted of a criminal offence involving fraud or dishonesty; or
is the subject of an adverse finding, financial penalty, sanction or disciplinary action by a regulator, selfregulatory organization or a professional disciplinary body.
The deadline for registration of individuals who are directors of fewer than 20 entities was 3 September
2014. CIMA registered and licensed over 8,000 directors by that deadline.
CIMA’s in-house working group designed a new online portal called the “Director Gateway” to facilitate
the registration process and acceptance of credit card payments. CIMA facilitates the registration and
licensing of directors exclusively through this portal, in line with the Authority’s objectives to gradually
phase out manual filings by licensees and registrants. Electronic filing of Directors’ information is an
important element in improving data quality and significantly enhances the Authority’s ability to
effectively carry out its mandate under the Monetary Authority Law.
Professional directors who are appointed as directors for 20 or more entities, as well as corporate
directors that fall under the provisions of the Directors Registration and Licensing Law, must be licensed
by 3 December 2014. The required director information must be updated annually by 15 January of each
subsequent year.
The sections which relate to directors’ capacity have not yet come into force, and will not until they are
approved by the government of the Cayman Islands.
Exempted Limited Partnership Law, 2014
Also of note, is that on 2 July 2014, the Exempted Limited Partnership Law, 2014, came into force in the
Cayman Islands. This development is another significant one for the jurisdiction, because the Cayman
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Islands continues to be the leading offshore jurisdiction for the establishment of both hedge funds and
private equity funds.
In Cayman, private equity funds are typically structured as exempted limited partnerships, or ELPs, and
the introduction of the new law is aimed at enhancing the attractiveness of the Cayman Islands as a
leading offshore jurisdiction for private equity funds.
While the corporate entity continues to be the overwhelming most popular structure of choice for the
Cayman master fund, the use of exempted limited partnerships for master funds is not yet widespread
here. Data available for 2013 shows that the ELP vehicle type accounted for only 2 percent of Cayman
master funds.
The new ELP law is intended to grant even greater contractual flexibility to the general partner and
limited partners of ELPs in order that they can regulate their affairs within the limited partnership
agreement. In addition, it reflects some developing trends in the formation, regulation and operation of
private equity funds. This, in turn, is expected to provide greater facility to adopt the master/feeder
structure, with the potential to make it more attractive for asset managers to use the Cayman Islands
for their product offerings.
The ELP might therefore, be one of the ‘new’ fund structures to think about.
FATCA and AIFMD
Regulatory developments outside of our jurisdiction also often have a significant impact on the way we
conduct business here in the Cayman Islands. Among the recent external regulatory initiatives which we
are obliged to take into account are the U.S. Foreign Account Tax Compliance Act (FATCA), and the
Alternative Investment Fund Managers Directive (AIFMD) in Europe.
In relation to FATCA, on 4 July 2014, the Tax Information Authority (International Tax Compliance)
(United States of America) Regulations, 2014, and the Tax Information Authority (International Tax
Compliance) (United Kingdom) Regulations, 2014, were issued. They provide the legal obligations in
relation to FATCA as a matter of Cayman Islands law. These regulations set out the fundamental
obligations of a financial institution.
With regard to the AIFMD, on 22 July 2014, the transitional period for the implementation of the AIFMD
expired, and from that date Cayman Islands funds can only be marketed in the member states of the EU
in compliance with the requirements of the AIFMD, unless a relevant exemption applies.
The Authority has signed Memoranda of Understanding with 27 European regulators to enable the
continued marketing of Cayman Islands hedge funds throughout the European Union. However, since
the expiration of the transitional period on July 22, CIMA has seen an increase in requests for attestation
letters from the Member States seeking confirmation that CIMA is able to effectively comply with the
agreed terms of the cooperation agreements with the Member State.
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One element of the AIFMD is that depositories based in third countries are required to be subject to
effective prudential regulation, including minimum capital requirements and supervision. An industry
survey will soon be conducted to determine the level of interest within the industry for the provision of
such services.
Another development is that CIMA’s Board of Directors recently approved the establishment of an
internal Task Force to look at the possibility of a framework for a new category of fund – an AIFMD Fund
– that wishes to market in the European Union or European Economic Area. This open or close-ended
fund would create a flexible “opt-in” regime.
The Task Force will be chaired by me, or my designate, and will seek participation from selected
members of the industry with relevant expertise.
State of the Industry
As I mentioned a moment ago, the Cayman Islands remains the leader in fund domiciliation. At the end
of September 2014, the total number of regulated funds was 11,292. This figure comprised 8,056
registered funds, 2,733 master funds, 397 administered funds and 106 licensed funds.
The number of Cayman-authorised funds remains consistently well in excess of the number in other
jurisdictions. Our nearest competitors are the British Virgin Islands, with 2,186 as at 30 June 2014, the
latest period for which figures are available. They were followed by Jersey, with 1,283 for the same
reporting period.
With regard to administrators, as at 30 September 2014, there were 117 mutual fund administrators
licensed by the Cayman Islands Monetary Authority. This figure consisted of 84 administrators with full
licences, 31 with restricted licences and 2 with exempted licences.
National Risk Assessment
The Government of the Cayman Islands recently launched a National Risk Assessment, in preparation for
review of the Cayman Islands by the Caribbean Financial Action Task Force in 2017, and by the
International Monetary Fund some time thereafter.
The Authority is playing a very active role in this process. CIMA staff members are chairing six of the
eight NRA Working Groups, and we have at least two members on all six of those Working Groups.
Prior to this, we have conducted a self-assessment of the current regulatory framework against relevant
international standards and are working towards remedying any gaps which have been identified.
The Authority also has conducted a preliminary gap analysis with respect to the new FATF 40
Recommendations, with particular emphasis on those recommendations that relate to preventative
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measures for the financial sector. Furthermore, CIMA has begun a risk assessment of its licensees using
the Enterprise Risk Management approach.
Conclusion
Let me state, in conclusion, that corporate governance remains one of the top priorities for the Cayman
Islands, and by extension, for CIMA. In recent times, the focus has been on the governance structure of
hedge funds.
The Cayman Islands Hedge Fund Corporate Governance Survey which the Authority commissioned last
year, was a key component of a wider effort to consult with all stakeholders in the industry. The findings
contributed to the Statement of Guidance which we subsequently issued.
An important part of CIMA’s mandate is the requirement to ensure that operators of regulated funds do
not act in a manner prejudicial to investors and creditors. It is a responsibility which we take very
seriously.
However, our actions will continue to be informed by consultation with all relevant stakeholders, as we
seek not only to maintain a vibrant hedge funds industry in the Cayman Islands, but also to embrace
where appropriate, new thinking towards our jurisdiction’s fund structures whether old or new.
Thank you very much, and I wish you a successful conference.
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