Judgment – In the matter of FIA Leveraged Fund
In our December 2011 client briefing we advised on the passing of the Mutual Funds (Amendment) Bill 2011 which provided for the registration of master funds in the Cayman Islands. As we noted at that time, and as discussed with a number of our clients in the months that followed, there were a number of issues and questions that arose out of the legislation which required some clarification.
One of the questions that arose, in particular, was the position with regard to Cayman Islands Master Funds that had a single Regulated Feeder Fund as its only investor. Such structures, commonly known as “one- legged master funds”, are not uncommon in the Cayman Islands and are often established where a promoter is seeking the flexibility to add further feeders (for example, to allow for a US feeder fund) at a later date.
An issue arose in the interpretation of the amended Mutual Funds Law with regard to whether such master funds fit within the definition of a “mutual fund” on the basis that as a matter of technicality there was no pooling of “investor” interests at the level of the master fund, given that it had only a single investor.
Unfortunately, the Mutual Funds Law and the 2011 Amendment appeared to contain some ambiguity in this regard.
The view taken by many Cayman Islands law firms was that, under a strict interpretation of the law, such one-legged master funds did not require registration on the basis that such master funds did not fit the definition of a “mutual fund” within the meaning of the law.
We and a number of other firms had endeavoured to obtain a definitive guidance note from the Cayman Islands Monetary Authority on this point. To date we had been unable to do so.
As such, in light of the uncertainty, many of the firms had until today been advising their clients that master funds within such structures did not, absent positive published confirmation to the contrary from the relevant authorities, require registration under the amended Mutual Funds Law.
The purpose of this briefing paper is to advise that on 15 February 2012, the Financial Services Secretariat of the Ministry of Finance in the Cayman Islands has issued an industry advisory providing clarification on the position of the Cayman Islands Monetary Authority and the Cayman Islands Government with regard to Master Funds with only one Regulated Feeder Fund as its sole investor.
The industry advisory provided today recognises that there is an interpretation held by a number of practitioners that a Master Fund which has only one Regulated Feeder Fund does not require to be registered with the Cayman Islands Monetary Authority and goes on to state that both the Government and the Cayman Islands Monetary Authority disagree with such interpretation.
However, they have advised that to avoid any ambiguity it is the intention of the Government to draft a further amending bill to the Mutual Funds Law to provide for clarity that a Master Fund with only a single Regulated Feeder Fund must be registered with the Cayman Islands Monetary Authority and further, it is their expectation that this law will be passed before the current 21 March 2012 deadline by which Master Funds should register with CIMA.
Campbells Funds Team is therefore advising that all Cayman Islands Master Fund structures not already in the process of registering or preparing for registration, regardless of the number of investors, should re-examine their position under the interpretation of the law as clarified by Government and the Cayman Islands Monetary Authority and, in advance of the enactment to be expected shortly, prepare where necessary for registration of such structures.
We at Campbells will immediately start contacting our asset management clients with master fund structures to clarify their position in light of this development.
This advisory is for general guidance only. It is not intended to be, nor should it be used for, a substitute for specific legal advice on any particular transaction or set of circumstances.
Should you have any queries regarding the above, or if we can be of any assistance, please do not hesitate to contact your usual Campbells contact or any of the following: