Recognising the world-wide trend and phenomenal growth in mutual funds, the Cayman Islands enacted its Mutual Funds Law in 1993. The primary objective of the law was to provide for the flexible but effective regulation of an important sector of the financial industry.
Regulation of Funds and Fund Administrators is undertaken by the Cayman Islands Monetary Authority which has numerous powers to enforce provisions of the Mutual Funds Law, including the power to revoke a mutual fund licence.
The Mutual Funds Law is uncomplicated. There are no unnecessarily prohibitive licensing provisions or restrictive measures calling for local custodians, managers, directors or auditors (other than local sign off). Rather, the legislation recognises that most of those engaged in the industry are already strictly regulated or controlled within or outside of Cayman.
There are also no restrictions placed on investment objectives, risk, rates of return or other commercial matters, given the institutional and sophisticated nature of investors in Cayman Funds and given the Law mandates that the offering memorandum comprehensively describe such matters to an extent which will enable investors to properly assess suitability of the Fund for their particular investment.
A Fund must be qualified under the Law before commencing operations. To do so the Fund may either obtain its own licence, appoint a licensed Fund Administrator to provide its principal office, or be registered if it requires a minimum investment of USD 100,000 or if its equity interests are listed on a stock exchange.
The continuing strength of the Fund Industry in the Cayman Islands has played an integral part in the remarkable success of the Cayman Islands Stock Exchange (“CSX”). The CSX opened its doors for business in July 1997 and since then has become one of the world’s fastest growing bourses with well over 2,000 Fund Listings to date. This achievement is heightened by the calibre of institutional business which the Exchange has attracted.
For funds with sophisticated investment strategies, such as Hedge Funds, the Exchange offers two distinct advantages. There are no restrictions on the investment policies of the Fund and no accounting requirements that demand extensive disclosure of a Fund’s investment portfolio, including its short positions. The Exchange does require disclosure of the usual financial information contained in audited accounts, prepared in accordance with International Accounting Standards or a recognised GAAP acceptable to the Exchange.
Auditors serve a significant role in maintaining the high standing of the Cayman Islands Funds Industry. The “Big Four” audit firms are all represented in the Cayman Islands and they have available the resources and facilities of their representative offices around the world. These firms recognise the international aspects of Cayman’s business community and utilise professional staff comprised of qualified members from a wide cross-section of internationally recognised accounting institutes. Complex offshore Fund structures, complex securities and multi-jurisdiction coordination are frequently dealt with by the Cayman Islands’ audit firms.