Investment Services and Fund Establishment

Introduction to Financial Business in the Cayman Islands

Over the last 40 years the Cayman Islands have developed into one of the largest global financial centres worldwide with a developed expertise and infrastructure tailored to the efficient conduct of international financial business. The 21st century has seen the Cayman Islands welcome an increasingly globally mobilized workforce of lawyers, chartered accountants and other professional corporate managers. Technological developments have enabled these specialists to base themselves in the Cayman Islands whilst still efficiently performing work for clients located all around the globe.

Accordingly, the Cayman Islands provides a full range of services including those relating to banking, trusts, mutual funds, company management, insurance business, captives, securities business, structured financing, vessel registration, and listing on the Cayman Islands stock exchange (“CSX”).

About Us

DIAMOND LAW is purely a law firm and does not provide any potentially conflicting non-legal services. Therefore we are proud to be able to state that we can be truly independent and unbiased in the legal advice provided and yet still benefit from existing local connections with independent third party service providers.

We currently advise:

• fund managers / advisers;
• fund administrators;
• fund promoters;
• investors;
• overseas companies;
• banks;
• wealthy individuals; and
• financial advisers.

We provide advice not only on the establishment of new funds but on those issues which may arise with regards pre-existing funds.

The Cayman Islands Monetary Authority

 www.cimoney.com.ky

The Cayman Islands Monetary Authority ("the Authority") was established as a body corporate under The Monetary Authority Law (which was brought into force on 1st January, 1997). It was created to enhance the Cayman Islands’ ability to maintain a well regulated financial services regime and monetary stability. The law aims to ensure that only those with sound reputation and appropriate expertise are permitted to establish and administer investment funds in the Cayman Islands.

In the Cayman Islands there is a close working relationship between CIMA and the private sector. This has created a business environment that is efficient and comparatively free of time-consuming bureaucracy.

The Authority regulates or at least requires registration of mutual funds. These are defined under the law as “any company, trust or partnership either incorporated or established in the Cayman Islands, or outside the Cayman Islands, which issues equity interest redeemable or re-purchasable at the option of the investor, the purpose of which is the pooling of investors funds with the aim of spreading investment risk and enabling investors to receive profits or gains from investments”.

Mutual Funds / Hedge Funds

The Cayman Islands are a leading centre for the establishment of mutual funds and hedge funds. As of 31 March 2007 there were 7,861 registered mutual funds, 553 administered mutual funds and 108 licensed mutual funds. The number of funds registered each year continues to grow year on year. Last year there were over 1,000 new funds registered. The Cayman Islands is the lead domicile for the establishment of hedge funds and recent figures show that some 75% of all hedge funds are established here.

(Hedge Fund – a term of art used to describe those types of higher risk investment funds where the investment parameters will be more widely drafted and a higher risk investment strategy is adopted then is typical in the more traditional investment or mutual fund).

The Cayman Islands is a popular jurisdiction for the establishment of funds for the following reasons:

• No applicable taxes or exchange controls;
• Availability of world-class funds related expertise;
• Modern, flexible, sympathetic and constantly reviewed legal framework designed to accommodate all suitable types of investment fund vehicles, such as corporations, limited partnerships, unit trusts and segregated portfolio companies;
• geographic location and time zone is in line with the North American market;
• Appropriately light regulation, for funds marketed only to sophisticated or high net worth investors;
• Few or no restrictions on the investment activities of the fund;
• Few or no restrictions on the location of directors or service-providers to the fund; and
• An excellent and trusted reputation known worldwide.

Closed-ended funds (those with no redemption or repurchase rights for the investors) and those funds with no more than 15 investors the majority of whom are able to appoint or remove the operators of the fund (i.e. directors, trustees and general partners) are not regulated. We advise on both the establishment of such funds and; in the case of private equity and similar vehicles, structuring of the manner in which their portfolio investments are held.

Investment Fund Structures

There are 3 main types of structure available:

• Company (including segregated portfolio companies);
• partnership; and
• trust.

The Cayman Islands has laws related to all 3 areas. The three particular types of structure generally used for operating mutual funds are the exempted company, the exempted limited partnership and the unit trust.

Exempted Company

The exempted company may redeem or purchase its own shares and may therefore operate as an open-ended corporate fund. The Companies Law also allows existing funds established in other jurisdictions to continue their operations here in the Cayman Islands and there is specific law relating to this process.

Exempted Limited Partnership

The exempted limited partnership provides a second unincorporated vehicle and it can be formed as easily as the exempted company or the unit trust.

Unit Trust

These are established under a deed with beneficiaries holding units with rights as defined within the trust deed.

Regulation of Investment Funds

Cayman Islands investment fund regulation is designed to foster the creation of investment funds by avoiding a prohibitive licensing and regulatory regime. There are no measures stipulating the requirement of local custodians, managers or directors (but such services are available if required).

The Cayman Islands Monetary Authority and the legislation understand that the financial services industry is subject to sufficient internal regulation and, further more, strict regulation by authorities in overseas jurisdictions in which these funds will be marketed.  Thus, reliance to a large extent on self regulation within the industry is seen as reasonable and appropriate.

The law requires that the offering memorandum for a mutual fund sufficiently describes the nature of the investment interest and contains sufficient information to enable the investor to make a fully informed decision as to whether to invest or not.

A regulated investment fund must qualify under the law before starting business. To do so it may either obtain its own licence from CIMA, appoint a licensed mutual fund administrator to provide its principal office, or be automatically registered if investment is only open to sophisticated investors (minimum investment requirement of US$100,000).

There are therefore three categories of funds regulated under the law:

• the registered investment fund (most common)
• the administered fund (uncommon); and
• the licensed fund (uncommon);