Licensing Of Cayman Securities Firms Coming Into Force

Tax-News.com, New York

27 November 2002

This article describing developments in the Cayman Islands Regulatory Regime has been kindly provided by law firm Conyers Dill & Pearman.

The Securities Investment Business Law, 2001 (the "Law") was passed in March 2002. It is due to come into force early 2003 on a date to be appointed by order made by the Governor in Council of the Cayman Islands. The aim of the Law is to regulate the business of securities investment in the Cayman Islands and provide an appropriate structure for the regulation of securities brokers, including market makers, arrangers, investment advisors and investment managers. The fundamental objective of the law is to define activity that requires a licence and then to ensure that such activity is undertaken by fit and proper persons in accordance with accepted supervisory standards of conduct for securities investment business. The Cayman Islands Monetary Authority is directly responsible for the licensing, supervision and enforcement of such licences.

The definition of securities investment business ("SIB") includes managing the securities of another person in circumstances involving the exercise of a discretion and advising a person on securities if:

• the advice is given to that person in their capacity as an investor or as an agent for an investor; and
• the advice is on the merits of dealing in the security or of exercising a right conferred by a security to deal in securities.

The Law applies to any person, company, foreign company or partnership that is resident in, incorporated in or registered in the Cayman Islands or which has established a place of business in the Cayman Islands and is carrying on SIB. For example, an investment adviser or investment manager that is a Cayman Islands entity or has a physical presence in the Cayman Islands and is conducting SIB from the Cayman Islands, will be covered by the Law. Such an entity will require to be licenced under the Law unless its activities are covered by one of the exemptions contained within the Law.

The exemptions include:

• a group company that carries on SIB exclusively for one or more companies within the same group; and
• an entity that carries on SIB exclusively for a "sophisticated person" or a "high net worth person". A sophisticated person includes a person:
  • regulated by the Monetary Authority (which would include a Cayman Islands regulated mutual fund);
  • regulated by a recognised overseas regulatory authority;
  • any of whose securities are listed on a recognised securities exchange; or
  • who by virtue of knowledge and experience in financial and business matters is to be reasonably regarded as capable of evaluating the merits of a proposed transaction; and participates in a transaction with a value or in monetary amounts of at least US$1,000,000 in the case of each single transaction.
• a high net worth person means an individual whose net worth is at least US$1,000,000 or has total assets of not less than US$5,000,000.

Entities falling within these exemptions will be required to file an annual declaration with the Cayman Islands Monetary Authority confirming that they fall within such an exemption and pay an annual fee of US$1,250. The declaration must be signed by a director or partner of the entity and electronic filing of the form will be accepted on the basis that original forms will be forwarded within one month. When submitting the form, the Monetary Authority must be advised who will be responsible for dealing with queries and the payment of annual fees. If none of the exemptions apply the SIB provider must apply to the Cayman Islands Monetary Authority for a licence otherwise it commits an offence and is liable on summary conviction to a fine and/or imprisonment.

On August 14 2002, the Securities Investment Business Law, 2002 (Commencement) Order 2002 was approved by the Cayman Islands Executive Council. In practical terms this means that the application of the excluded person/registrant regime of the Law will come into force from August 14th 2002. It obliges anyone carrying on SIB to examine their status under the Law and consider whether they should now apply for one of the exemptions under the Law, or potentially be subject to its licensing requirements. There will be a transitional period of six months from the effective date of the Law during which any person lawfully carrying on SIB immediately prior to the commencement of the Law may continue to do so before being required to apply for an exemption or obtain a licence.

Two practical examples of the application of this regime are where:

• a restricted mutual funds administrator (which can provide services for up to 10 related funds) is carrying on SIB exclusively for a sophisticated person (which includes a regulated mutual fund). In these circumstances, that entity will be able to register under the Law's excluded person/registrant regime and will not be required to be licenced under the Mutual Funds Law.
• A promoter of a Cayman Islands fund wishes to establish a Cayman based investment manager. Previously this would have fallen under the definition of mutual fund administration under the Mutual Funds Law and required such an entity to be licensed under that law. With the proposed exemptions, provided that the manager only manages funds which are:
  • in the same group of companies as the manager; or
  • have a minimum subscription for an investor in the fund of US$100,000, then an exemption can be applied for.

For further information, please contact Kieran Loughran at kpjloughran@cdp.bm.

Recommended