Category: Administration

Registering Cayman Master Funds

On the 22nd of December 2011 following the gazetting of a change to the Mutual Fund Law (2009 Revision) called The Mutual Funds (Amendment) Law 2011 (Law 32 of 2011), certain Master Funds are now required to register with the Cayman Islands Monetary Authority.

This legislation appears to be intended to allay fears over the formation of unregulated entities in the Cayman.  Prior to this enactment most Master Funds were able to avoid registration under the Mutual Funds Law because the investors in these funds were feeder funds (rarely more than three) and funds with less than 15 investors were exempt from registration.  This meant that the Master Funds operated beneath the Cayman  regulatory radar with no requirement for these funds to register or file returns.  The legislation attempts to address this and of course creates another income stream in the bargain for the island.

Whilst new funds will need to comply with the registration requirements, existing Master Funds will also need to revisit their structure to establish whether or not they need to register.  They have 90 days from the commencement of the law to do so unless the Cayman Government decide to extend the deadline by a further 60 days.

A Master Fund is defined as a mutual fund that is incorporated or established in the Cayman Islands that holds investments and conducts trading activities and has one or more regulated feeder funds.  This means that if there is a feeder fund that is regulated by the Cayman Island Monetary Authority in the fund structure then this will create a registration requirement for that fund.  A feeder fund is defined as a mutual fund that conducts more than 51% of its investing through another mutual fund.  The 15 investor rule will not apply to a Master Fund.

So what does it mean for a fund that meets the new definition of a Master Fund?

  • A registration fee is payable
  • A copy of the certificate of Incorporation will need to be filed 
  • If the Master Fund has an offering document – this will need to be filed on registration and updates will need to be filed too.  Most Cayman funds incorporate the details of the Master Fund in their Cayman Feeder documents so there should normally be no additional filing requirement.
  • Where the auditor and administrator of the Master Fund are different to the regulated feeder fund then consent letters from them need to be filed.
  • A completed Form MF4 will need to be submitted – signed by an Operator – defined in the Mutual Fund Law as being a trustee, general partner or director depending on the legal structure of the fund.  

    One potentially useful future aspect of the Form MF4, from a due diligence perspective is that the form requires a declaration if the fund has any investors other than the regulated feeder funds to a Master structure – although the way the form is currently drafted the answer will almost always be affirmative because of the US Onshore Limited Partnership Feeder if one exists, but if the form develops over time this declaration may become a useful double check in relation to other investors able to invest directly.

Time to do some form filling and to get that cheque book out again.

©Jaitly LLP

The “independent” administrator…….

The “independent” administrator……….

As reports come in about the appointment of independent administrators it is perhaps worth adding a note of caution to the panacea that such an appointment suggests.  As ever, the devil is in the detail and the appointment of an independent administrator on its own may be insufficient.  

Why is that?

The appointment of an independent administrator is an indicator that there may have been a change in mind set by fund managers whether driven by investor demand or by market best practice.  That is a good thing – but how good it is, depends on the contractual terms that have been agreed between the administrator and the fund to which it has been appointed.  It also depends on the administrator’s experience  and infrastructure as to whether the agreed services can be provided to an adequate standard.

It is possible to find independent administrators to funds who in fact provide nothing more than what the industry calls a NAV lite service or who simply provide transfer agency services.  There is absolutely nothing wrong in the provision of these services – it is simply important to understand that the service provided is limited to that service alone.  

Tread cautiously too where independent valuation services are provided as they may not always be as independent as you might presume.

It is not uncommon to find wording in the offering memoranda of funds where an independent administrator is responsible for verifying the valuations used by the fund to state that where it is not possible to obtain independent verification then the values used will be those provided by the board of directors or the investment manager to the fund.  From the administrator’s point of view this is perfectly reasonable and is important in managing their own risks in providing such services to the fund.  But where does this leave the investor who believes that the net asset value that they have received from the administrator comprises prices fully verified by the administrator?  Because this wording is so common I generally try to insist that an obligation is created whether by side letter or by amending the fund’s documentation that the administrator or the manager is obliged to inform my investor where the net asset value comprises non independently verified prices (or prices provided by the directors and managers) which form say more than 5% of the net asset value.   This is essential so that the investor is able to form a better view of the values that comprise the net asset value being reported to them.

It is also not uncommon to find that the contractual terms for the provision of price verification are drafted in such a way that the administrator is protected if they rely on prices provided by the manager or directors of the fund and so there is little obligation contractually to seek out independent verification where current publicly traded price information is not available.  When one starts to look at the contractual documentation of a fund – because everyone is so concerned about managing the risks that may attach to them – it is sometimes difficult to see who if anyone is contractually responsible for the valuation of a fund.  

Investors need to insist that contractual obligations are created so that there is proper independent verification of prices used for a net asset value – if necessary as ‘agreed upon procedures’ if the uncertainties in valuation are so inherently risky.   There is nothing wrong in a fund investing in securities that have inherent uncertainties around their valuation – what is important in such instances is that there is a clear and replicatable set of steps and processes that would enable an independent third party to apply them and reach the same price/value – and that these steps and processes are reviewed and checked as being applied by an independent party.

So what should an investor look for in an independent administrator?   Here are some basic questions and issues to consider:

  • Is the administrator’s business  sufficiently diversified so as not to be dependent on the fund manager’s business?
  • Does the administrator have the capacity and infrastructure to deal with the investment strategies of the fund (don’t necessarily be seduced by a big name – get to know the team that will service the fund – there can be infinite variety between teams)  Can they meet the necessary deadlines?  Administrators can grow too quickly and lack safe capacity.  Does the administrator understand the fund’s strategy and have teams with the requisite experience to deal with it.  e.g. appropriate valuation teams?
  • Does the administrator have robust quality control procedures and a good supervisory and training environment?
  • Do the contractual arrangements create a real responsibility to provide a “Full Service Net Asset Value and Transfer Agency Service” to the fund and its investors?
  • Is there a mechanism in place to inform investors if the net asset value includes non independently verified prices over an agreed threshold and whose responsibility is it to report it?
  • What history does the administrator have with previously reported problems on funds?  Is there any litigation that you should be aware of and consider?
  • Have you done any due diligence on the administrator and the team that will service the fund you are investing in?
  • Who owns the administrator?  Is the administrator able to invest in the funds it services – and does it?  Are there any other conflicts of interest that need to be considered?

If you can get suitable comfort on these issues then indeed you will have an independent administrator worthy of that name on the fund you are about to invest in.

©Jaitly LLP