AIFM directive unlikely to cause significant changes in Cayman
The impact of the EU’s AIFM Directive on the Cayman Islands, domicile of choice for the vast majority of hedge funds, is likely to be “fairly small”, according to Peter Cockhill, a partner with law firm Ogier.
Approximately 85% of all hedge funds registered in Cayman are unlikely to have any significant points of contact with Europe. “For the most part the impact of the [directive] will be on distribution or selling. Given the nexus between New York, London and Cayman, principally Cayman funds will be sold into Europe via London,” says Cockhill.
“For the time being we have the benefit of the private place regime in England. That is expected to continue for at least the next couple of years. From an operational perspective, 2015 is more likely to be an interesting date for those selling Cayman funds to European investors,” he adds. In 2015 the EU will decide whether to continue private placement for non-EU funds or to extend its ‘passport’ regime to allow a non-EU fund registered and approved in one jurisdiction to be sold in other EU member states.
However, Cockhill cautions that fund managers and Cayman itself should not be complacent about the directive, scheduled for implementation in July this year. The Cayman Islands Monetary Authority (Cima) is currently engaged in talks with the European Securities and Markets Authority (Esma) on the negotiation of a co-operation agreement, crucial for Cayman-domiciled funds operating in Europe.
While the talks remain private and Cima refuses to comment on progress, Cockhill and others in Cayman are quietly optimistic that there will be no hold-up in a successful conclusion to the talks well before the July deadline. Before starting the talks Cima consulted with the local industry about the co-operation agreement and what regulatory changes might be necessary to enable cross-border co-operation not only with the EU but others and in particular the US.
Draft legislation already drawn up by Cima is expected “to make a few minor tweaks”, says Cockhill. “We expect to see that passed during the current session of the legislative session in Cayman, probably in the next month. In terms of the co-operation agreement [with Esma], we want that in place before June/July.”
These expected changes are likely to be minor, according to Cockhill, because most of the disclosure requirements requested by the EU are already included in the majority of offering documents. Those that do not have such clauses are expected to update their offering or create a second version of a fund for distribution in Europe. Cockhill says this is “a fairly straightforward administrative task”.
Looking at the broader legislative environment, Cockhill and others in Cayman are surprisingly optimistic about the future. One reason for their confidence that the offshore centre will remain is the network of tax information exchange agreements as well as the negotiation of regulatory co-operation agreements.
“All these different initiatives lie one on top of another. They require information exchange, regulatory co-operation. It means you are basically bolting [Cayman] onto the international [hedge fund regulatory] architecture. The Cayman Islands already participates in that way but occasionally is the subject of criticism that it’s outside of the purview of the onshore regulator. Given that the managers typically sit in New York, or London, or Rio de Janeiro, or Hong Kong, they obviously will be managed and supervised by their home regulators,” he notes.
One advantage is that all major fund jurisdictions, including Cayman, are working on a “very clear system based on English common law”, says Cockhill. With the “overlay” of the memoranda of understanding and co-operation agreements “we’re sure we are playing from the same playbook in terms of disclosure, reporting and so on, which if we take a favourable view of the regulatory objective is going to be in the interests of investors everywhere”.
If investors “are looking for a more sophisticated institutional product with less regulation cost and reporting requirements, the likelihood is they will be dealing with Cayman or other offshore funds”, concludes Cockhill.
Nevertheless, Cayman is not complacent. Cima recently undertook a consultation aimed at reviewing its corporate governance guidelines and in particular looking at the provision of directors of the funds industry.
The consultation, which ended this week, is expected to bring some transparency to this area of the fund industry. Since Cayman is the domicile for the majority of hedge funds, typically alongside or in parallel with an onshore vehicle through a master-feeder arrangement, governance in the jurisdiction is more extensive than just the Cayman structure. According to Cockhill this gives Cayman a “leadership position and opportunity” to help shape industry standards and best practice. He expects Cima to take the lead again, using the corporate governance consultation as a basis for a new statement of guidance.
“There’s been a lot of interaction with agencies such as Cayman Finance, the Cayman Islands directors association, Aima [the Alternative Investment Management Association], insurer associations and others. It has gathered a number of views,” says Cockhill. Cima is also understood to have met with “a number of large stakeholders in Cayman” such as pension funds.
“I’m very confident we will have some form of legislation that will take place between now and June but the shape of it I couldn’t tell you,” he continues. Cima is expected to provide an update now the consultation has ended. This should provide the context for the legislation that follows.
Cockhill says Cima has already indicated some of the changes it will instigate. For example, all providers of director services who hold six or more directorships will need to provide their services through a regulated entity, probably one that holds a company manager’s licence in Cayman. “That gives the benefit of an approval process to Cima as to the individuals whose services will be preferred by that organisation, subject to an annual inspection and annual audit. There will be some tightening of the process and procedures,” says Cockhill.
The question of how many directorships are too many is a capacity issue that has stumped most regulators. Cima may opt to set a number but many think that is unlikely given the nature of the funds industry where the board of directors has slightly different duties and responsibilities compared with directors and non-executive directors of public companies.
“Another point of transparency is whether there should be a searchable database,” notes Cockhill. In conjunction with the regulatory consultation, Ernst & Young has been commissioned by Cima to ask industry participants their views on a database and what information it should contain, how to fund it and who would have access to it.
“I think it’s a racing certainty that there will be some disclosure [of directorships], some searchable database that would disclose to an interested person – and who fits into that category is to be determined – as who is a director,” says Cockhill.
This article was first published on Risk