New in Fund Regulation in the Caymans

Planning to start financial activities in the Caymans? This material will help you understand the specifics of fund management in this jurisdiction and get basic information about regulative changes in this area.

As strict as in the EU

For a long time, the regulation of funds in the Cayman Islands generally reflected the mild approach of the United Kingdom, rather than the strict approach of the EU. However, in 2014, the Law on Registration and Licensing of Directors was adopted, which established a stricter regime for the registration of hedge funds in the Caymans which resembles the EU regime now. In the territory of the EU, it is prohibited to provide any financial services without a license issued by a special state body. The provision of financial services without authorization entails the imposition of appropriate sanctions.

If you intend to start investing in the Cayman Islands, you should familiarize yourself with the ILPA Principles, which serve as a good starting point for assessing the main problems of institutional investors. For example, here are the principles of the behavior of managers. They have to ensure that:

• their financial incentives must not conflict with the interests of investors;
• their fiduciary duties are strictly observed;
• relevant information, in particular, actual or potential conflicts of interest, and any financial calculations is disclosed to investors in full.

Investors in focus

In the last decade, the islands’ authorities have been actively working with hedge funds to ensure the equal treatment of investors. Steps are also being taken to promote transparency and reconciliation of interests between general partners and partners with limited liability.

The government's approach to funds regulation in the Caymans is ideal for an investor-focused fund management model. A key feature is independent oversight through annual audits of accounts by a designated local auditor. This creates an ecosystem where the details of management are largely determined by the preferences of the investor.

The management of the funds in the Cayman Islands has a wide field for making decisions such as whether to outsource these functions to independent third parties or whether they can be handled by specialists within the company. An important component is a disclosure to investors of any potential risks and conflicts. These decisions are entirely at the discretion of managers and will depend on the specific circumstances of each specific fund. In this, the approach to regulation is clearly in line with the approach of institutional investors.

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