I write in reference to your story “Research website attacks Cayman Islands hedge funds” (16 April 2007). People who are aware of how the Cayman Islands’ financial services regime operates will know that the Richard Freeman article, on which your paper reported, in is far from accurate.
However, for the benefit of those of your readers who may not know, allow me to make the following points.
Cayman Islands law, based on English Common Law, recognises the right of each individual to privacy. In financial matters, this right is codified in the Confidential Relationships Preservation Law.
The law, however, is not intended to shield illegitimate activities and contains significant gateways for disclosure for investigations in criminal and regulatory matters.
Successive governments have also enacted legislation, entered into agreements and have issued guidance to protect our financial systems from abuse. These include the Proceeds of Criminal Conduct Law, the Money Laundering Regulations, the Terrorism (United Nations Measures) (Overseas Territories) Order, Guidance Notes on the Prevention and Detection of Money Laundering, the Mutual Legal Assistance Treaty, and the Tax Information Exchange Agreement with the US.
In addition, the Cayman Islands Monetary Authority has entered into a number of memoranda of understandings with overseas regulators to share information for regulatory supervision and enforcement of relevant laws.
Agreements exist with regulators in Brazil, Canada, the Caribbean, the Isle of Man, Jersey, Panama, and the USA. Others are currently under negotiation.
The Cayman Islands Monetary Authority, as the regulator of our financial services, is entrusted both with respecting the right to privacy and, at the same time, promoting and maintaining a sound financial system, which includes protecting that system from abuse. The Authority’s principal functions are set out in Section 6 of the Monetary Authority Law (2004 Revision).
One of those functions is to provide assistance to overseas regulatory authorities discharging their regulatory functions.
The Authority provides information in response to requests for assistance from overseas regulators on an ongoing basis.
Since 2000 CIMA has processed well over 500 such requests and has provided assistance in 98 percent of cases. In the remaining 2% of cases, either the request was withdrawn or the requesting authority did not provide CIMA with the undertakings required under the Monetary Authority Law that would enable us to provide the requested assistance.
With respect to the Cayman Islands hedge fund industry and its regulation, among the reasons why the majority of hedge funds have chosen to register in this jurisdiction is the efficiency with which applications are dealt with and the local availability of world-class professional service providers.
In addition, there is the fact that we have tailored our regulation of different types of funds to adequately deal with the level of risk posed by the funds.
Those funds that are open to the general public (retail funds) are required to be licensed with CIMA under a prescriptive regime which requires the vetting of the promoter, directors, managers and senior officers.
Those that are non-public funds, which cater to institutional investors or high net worth investors, can be approved as administered funds or registered funds, where the supervision is less direct. However, to qualify, the fund must meet a number of criteria that provide the checks and balances.
For instance, the administrator of an administered fund must be licensed by CIMA and is responsible for ensuring that the fund’s promoter is of sound reputation, that the fund administration is carried out by persons with expertise and that the business of the fund and any offer of equity interest in it is carried out in a proper way.
A registered fund must have a minimum initial investment of US$100,000 (though these funds are typically authorized by CIMA with a minimum subscription of US$1 million or more), or have its equity interest listed on a CIMA-approved stock exchange.
Our overriding regulatory objective for non-public funds is to compel proper disclosure by fund operators so that investors are not misled about the nature of the risk taken. This provision is mandated in the Mutual Funds Law (2003 Revision).
This objective is primarily achieved by requiring these funds to prepare and file offering documents that describe the equity interests in all material aspects such that a prospective investor may make an informed decision whether or not to subscribe.
Our supervision of non-public funds is less direct than that for retail funds for the following reasons.
Either there is an additional measure of supervision by another party (for example, through a CIMA-approved stock exchange, for funds that are listed on one), or the investor is considered to be sufficiently sophisticated, clearly understands the risks involved and is capable of performing its own due diligence, noting the minimum subscription involved.
In addition, all regulated funds are required to file with CIMA a copy of their offering document/private placement memorandum, as well as their annual audited accounts. All audited accounts must be certified by a local auditor approved by the Authority for that purpose.
It is also worth noting that, rather than sheltering fund activity ‘behind a wall of official secrecy’ as the Richard Freeman article claims, Cayman is leading other jurisdictions in building up aggregate data on the funds industry.
The Monetary Authority last month implemented an electronic reporting system whereby all funds will submit their annual audited accounts and other required information via a secure web portal.
This will not only enable us to increase the efficiency of our prudential reviews but will also enable us to begin generating statistics that will vastly improve the quality and reliability of data on hedge funds worldwide.
Cindy Scotland
