Private Funds Law: Governance & Regulatory Advisory
The Cayman Islands Monetary Authority (CIMA) has now extended the four eyes principle to Private Funds. The four eyes principle can be satisfied by a minimum of two (2) Directors for Private Funds that are companies or two (2) natural persons named in respect of a General Partner or Corporate director of a Private Fund. It is not currently a requirement that these individuals be CIMA Registered Directors or independent of the Fund Sponsor.
In conjunction with the CIMA requirement, Private Fund Sponsors, Investment Managers and/or Operators have also been considering how their structures can be efficiently enhanced to include a layer of professional, independent governance and/or how they can leverage regulatory advisory services in order to comply with the new Cayman operating requirements.
More and more, we see the dual pressures of this increased regulatory complexity and scrutiny, particularly surrounding potential conflicts of interest, instigating this conversation.
| Director of a GP Company; Managing Member or Board of Managers of a GP LLC | Member of a Governance or Advisory Committee | Regulatory Compliance Framework or Regulatory Advisory* |
| A Director or Managing Member has full fiduciary duty and overall responsibility for GP actions taken on behalf of the Funds.
Board or Manager roles would typically be appointed by the GP Managing Member(s) and have specified responsibilities for approval of certain actions or changes proposed by the GP. Areas of responsibility typically focus on investor protection – potential conflicts, offering terms and/or regulatory obligations. DMS appointments are full-service professionals with extensive experience, supported by advanced governance technology and infrastructure resources. Complete independence from legal counsel and the other service providers to the Funds. Cost efficient solutions are provided by leveraging the financial benefits of our economies of scale. |
Partnership Governance or Advisory Committee roles would typically be appointed by the GP and have specified responsibilities for approval of certain actions or changes proposed by the GP. Areas of responsibility typically focus on investor protection such as potential conflicts, offering terms and/or regulatory obligations.
DMS appointments are full-service professionals with extensive experience, supported by advanced governance technology and infrastructure resources. Complete independence from legal counsel and the other service providers to the Funds. Cost efficient solutions are provided by leveraging the financial benefits of our economies of scale. |
A Contractual Regulatory Advisory service is provided by highly experienced, Cayman regulatory specialists.
Establishment of policy and procedure framework for fund level compliance requirements including, but not limited to, cash monitoring, asset safekeep/title verification and segregation, valuation, AML, CRS, DPL, etc. (plug and play format with annual updates). Provision of regulatory updates and summary of industry developments relevant to the alternative asset management industry in the Cayman Islands and PFL/MFL requirements (quarterly or at relevant frequency for governing body meetings). Attending calls on request to discuss regulatory compliance matters. Cost efficient solutions are provided by leveraging the financial benefits of our economies of scale. |
*Need/Gap – Many Sponsors of private funds will be determining how to meet and demonstrate compliance with the various new compliance and operating requirements of the Private Funds and Mutual Funds laws.
Those experienced in similar, largely equivalent requirements under EU AIFMD depo functions are aware of the potential unforeseen challenges that will require specific enhancements to the fund level compliance framework.
The DMS Solution
The Cayman Islands Private Funds Law (“PFL”) and Rules on Calculation of Asset Values & Segregation of Assets create ongoing compliance obligations at the fund level which will be new to asset managers who have historically only dealt with regulatory compliance as an obligation for their own operations. Given that many closed end structures subject to the PFL such as PE funds are structured as limited partnerships where the manager itself is the GP, being clear on where the obligations reside can be more difficult.
Sections 16, 17, 18 & 19 of the PFL create ongoing compliance obligations with the force of law. Responsibility for compliance rests on the “operator”, which for limited partnerships is the GP.
Funds registered under the PFL are subject to oversight by the Cayman Islands Monetary Authority (“CIMA”). CIMA has been granted the power to impose administrative fines for PFL breaches under the Monetary Authority (Administrative Fines) (Amendment) Regulations, 2020. Failure by the operator/GP to ensure compliance with the PFL generally (and therefore Sections 16, 17, 18 & 19) is designated as “very serious” (page 142) and therefore subject to the maximum fine of approximately US$1.25 million as set out in the Monetary Authority Law.
Given that most of the above noted requirements offer options for compliance, DMS has created a Compliance Evaluation Tool (“CET”) to guide you through the process of assessing and maintaining compliance with these PFL requirements.
The CET will guide you through the possible options so you can make decisions that are most appropriate for your operations, document existing processes at the fund level, where possible provide template language and facilitate periodic reviews to ensure continuing compliance.
To find out more please contact your usual DMS representative or contact us below.