CIMA Implements New Rules For Retail Funds

by Amanda Banks, for LawAndTax-News.com, London

06 May 2008

Funds licensed in the Cayman Islands have become subject to three new rules issued by the Cayman Islands Monetary Authority (CIMA) to further enhance regulation of the retail-funds sector.

The rules, which were recently approved by the government, became effective Monday, 28th April with their publication in the Cayman Islands Gazette.

They are: the Rule on the Contents of Offering Documents, which outlines the information to be included in offering documents; the Rule on the Calculation of Asset Values, which requires funds to specify their policy for calculating the funds asset values, and the Rule on the Segregation of Assets for Licensed Funds.

The rules are intended to ensure that prospective retail investors are able to make informed investment decisions, and enhance the overall protection of investors and their assets in the licensed funds.

The rules apply to all funds licensed pursuant to s.4(1)(a) of the Mutual Funds Law (2007 Revision) - except those subject to the Retail Mutual Funds (Japan) Regulations 2003 (as amended).

The new rules formalise what has been common practice among Cayman-licensed funds. In codifying these practices, Cayman is now officially in line with the Objectives and Principles of Securities Regulation, the standard issued by the International Organization of Securities Commissions (IOSCO).

The new measures also fill regulatory gaps, with respect to the IOSCO principles, that the International Monetary Fund (IMF) identified in its assessment of the Cayman financial sector in 2003.

CIMA's Managing Director, Cindy Scotland, noted that the Authority has a consistent focus on complying with appropriate international regulatory standards and practices - and suggested that this is the latest example.

"These rules meet the relevant IOSCO principles with respect to retail funds, while being adaptable enough to provide for competitive flexibility. The rules also leave the successful regulatory framework for non-public funds unchanged," explained Mrs Scotland.

The Rule on the Contents of Offering Documents stipulates that a fund's offering document describe the fund's equity interests in all material respects.

Additionally, the document must contain such other information as is necessary to enable a prospective investor to make an informed decision as to whether or not to subscribe to or purchase the fund's equity interest.

It also strengthens the Mutual Funds Law requirements by setting out the minimum information that must be included in an offering document for a licensed fund.

Under the Rule on the Calculation of Asset Values, licensees must now also establish, implement and maintain a net asset value (NAV) calculation policy, and must outline the scope of such a policy. This rule mandates that the policy be "fair, reliable, of high quality and verifiable".

Finally, the Rule on the Segregation of Assets for Licensed Funds calls for a fund's portfolio (i.e., all financial assets and liabilities) to be segregated and accounted for separately from any assets of any service provider.

Also, licensed funds must ensure that service providers do not use the portfolio to finance their own or any other operations in any way.

Another requirement is that funds ensure, by contract, that service providers who hold or manage the portfolio are regulated by CIMA or by a recognised overseas regulatory authority or another regulator approved by CIMA.

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