The Cayman Islands Government is in the process of changing its Segregated Portfolio Company (SPC) Law, which has been successful in the insurance sector for the formation of captive insurance companies, to make it more useful for mutual funds and multi-issuer structured finance vehicles.
The legislation originated in 1998. The SPC is an exempted company which may create one or more segregated portfolios in order to segregate the assets and liabilities of the company held within or on behalf of the portfolio from the assets and liabilities of other portfolios. As originally passed, SPCs were available only to certain types of insurance company.
In 2002 amendments extended the provisions relating to segregated portfolios to any exempted company. In essence, the new law provided that any new company may apply to be registered as a segregated portfolio company. A segregated portfolio company must pay additional fees and must provide notice to the Registrar of the names of all segregated portfolio accounts created.
The changes now in process will allow an existing company to convert into an SPC, although a number of criteria will need to be met, including the written consent of each creditor of the company and the approval of the Cayman Islands Monetary Authority (CIMA). An SPC will also be able to create separate portfolios by reference to a series of shares, as well as by reference to separate classes of shares.
An improvement to the current SPC structure, adopted from Guernsey legislation, will ensure that there will now be no ‘flow over’ from an insolvent cell to general assets. A key change for mutual fund issuers is a provision that secured creditors will now be able to enforce their security against a segregated portfolio, despite the existence of a receivership order against that portfolio. This will ensure that a segregated portfolio will be acceptable to – and will be rated by – the rating agencies in the same manner as an exempt company.
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