Cayman Islands Monetary Authority marks 10,000th fund registration

Paul Scrivener, partner at law firm Solomon Harris,
accepts a replica of certificate number 10,000 on behalf
of The Rutland Fund from CIMA Investment and
Securities Analyst Andrew Graham

Friday,  December 2, 2005

GEORGE TOWN, Cayman Islands: The recent issuing of a certificate of registration to The Rutland Fund, a hedge fund authorised by the Cayman Islands Monetary Authority, was significant on at least two counts.

The first is that The Rutland Fund was the 10,000th fund to be approved by the Authority since the passage of the Mutual Funds Law in 1993 paved the way for the development of investments and securities businesses in and from the Cayman Islands.

The second is that Rutland is part of the newest avenue of investments business into this jurisdiction: funds transferring from Bermuda and the Bahamas specifically to take advantage of exemptions Cayman has under the European Union Savings Tax Directive (EUSD).

Rutland, formally domiciled in Bermuda, is one of at least 80 such funds that CIMA has authorised since 1 July when the EUSD took effect here. Head of CIMA’s Investments and Securities Division Gary Linford, says the Authority has also been dealing with a significant number of enquiries since July.

Why the interest? Under the terms negotiated for the application of the EUSD to funds domiciled in Cayman, approximately 98 percent of such funds are exempt from the reporting obligations of the directive.

The EUSD obligations require that paying agents provide information for EU tax authorities on the amount of interest payments on savings income to or for an individual who is a tax resident of an EU member state, together with details of the recipient.

However, persons who are not resident for tax purposes within the EU, and other entities, including certain trusts and partnerships, corporate structures, other investment vehicles and institutions that do not fall within the narrow scope of the definition, are unaffected.

These specific exemptions have increased Cayman’s attractiveness as a fund domicile compared to jurisdictions like Bermuda and the Bahamas that are not subject to the EUSD.
Paul Scrivener, partner of Solomon Harris, the law firm handling The Rutland Fund’s transfer and registration, says this is ironic, because although Bermuda and the Bahamas had initially seen the EUSD as a great opportunity to develop their funds business at the expense of Cayman, the opposite has happened.

He feels a major reason for this turn of events is Switzerland.
“Switzerland’s rules as to how the directive is applied mean that it is far easier for Swiss banks to invest in jurisdictions that are subject to the directive,” explains Mr. Scrivener. “This is because the concessions agreed by the Cayman Islands with the EU take hedge funds in particular outside the scope of the directive and therefore remove significant burdens on the Swiss banks under the Swiss rules.”

Mr. Scrivener goes on: “Since Swiss banks are major investors in offshore hedge funds, the Swiss rules have led to many Bermudan and some Bahamian funds being left with no option but to relocate to Cayman, resulting in a steady stream of redomicilations that has kept both CIMA and the Cayman law firms busy since the summer.”

Of the 10,000 funds that have been authorised over the years, more than 7,000 are still active, says Mr. Linford, and the pace of new authorisations, not only from Bermuda and the Bahamas but from elsewhere, continues to grow at an average of about 35 per week.

Both men agree that a large part of Cayman’s attractiveness as a domicile for hedge funds is the jurisdiction’s approach to the regulation of these funds. “Cayman’s regulatory environment is ideally suited for the flexibility that hedge fund managers need,” says Mr. Linford. “That and the strength of our professional infrastructure place us in an enviable position compared to our closest rivals.”

“The requirements are not onerous,” Mr. Scrivener confirms. “For a fund wishing to transfer to this jurisdiction, discussions with CIMA at the outset are a definite benefit.”

Mr. Linford explains that CIMA will want to ensure that from a regulatory point of view the fund is in good standing in its current jurisdiction and will wish to make contact with the regulators there.

At the point of re-registration in Cayman, CIMA will typically require the certificate issued by the Cayman Companies Registry that the fund is registered as a Cayman company, the last two years’ audited accounts, an affidavit that all investors meet minimum investment requirements under the Mutual Funds Law and the usual documentation required for any new fund registering under the Mutual Funds Law.

Mr. Scrivener adds: “Much of the work for the transfer centres on working alongside local counsel in the jurisdiction from which the fund is exiting to ensure a smooth transition and revising the offering documents and the fund’s constitutional documents for compliance with Cayman law. Usually, the process takes six to eight weeks depending upon the level of assistance given by the regulator in the jurisdiction from which the fund is exiting.”

He feels the outlook for Cayman’s funds sector is positive, corresponding to the growth worldwide, despite doubts in some quarters.

“The hedge fund industry continues to be one of the fastest growing sectors of the global financial services industry,” says the Solomon Harris partner. “Research indicates that between 1990 and 2004, hedge funds grew in number from around 300 to in excess of 8,000 on a worldwide basis, with assets under management now estimated at between US$800 billion and US$1 trillion.”

“It is certainly true,” Mr. Scrivener continues, “that as more and more players have joined the market the staggering performance figures that funds achieved just a few years ago have become much more difficult to attain. And if you add statements from onshore regulators that hedge funds have the ability to destabilize financial markets, and the occasional hedge fund ‘blow up’ such as Portus and Bayou, one might wonder if the spectacular growth will continue.

"However, in a recent report, the Alternative Investment Management Association (AIMA) states that no evidence has been offered to suggest that hedge fund managers are likely to cause any more disruption to the financial markets than other players.

"And in recent weeks even the executive of the UK Financial Services Authority made reference to hedge funds’ increasing importance and contribution to dynamic marketplaces and to the UK as the centre of hedge fund management in Europe.”

Mr. Scrivener sums up by pointing out that everyone involved with the industry in Cayman continues to be extremely busy. “Whilst there is obviously no room for complacency, there would appear to be no reason why this trend should not continue well into 2006,” he concludes.

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