GLOBAL REGULATIONS HIT ALL JURISDICTIONS ALIKE: CAYMAN IS KEEPING ITS EDGE, BUT PRACTICAL IMPLEMENTATION A MAJOR CHALLENGE FOR MANAGERS
There is no doubt that Cayman Islands remain the favorite domicile for alternative investment funds globally. Cayman is a full service jurisdiction complying with all international standards, but it’s also business-friendly, with a lot of demand to have all relevant industry services located there: 184 banks, 149 trust companies, 108 mutual fund administrators, and 739 insurance companies operate from Cayman. And, of course, over 10,000 funds are registered with CIMA, the Cayman regulator.
Looking at data from the US Securities and Exchange Commission (SEC) for both hedge funds and private equity funds, just under 50% of the funds that are registered with the SEC are domiciled in the US, and almost 38% are registered in the Cayman Islands. After that there is a huge drop-off with other jurisdictions such as Ireland, Luxembourg and Bermuda garnering between 1% and 5%, with Cayman actually increasing its market share over the recent past.
Cayman has also stepped on the governance side. Through the new Directors Registration and Licensing Law, CIMA has now contact details and up-to-date information and can monitor and know every single director serving Cayman funds. Approximately 8,000 directors were registered either as professional or registered directors right after the law came into effect, and that number keeps growing.
New regulations keep coming in faster than vendors can develop their systems
Global regulatory initiatives like AIFMD, Annex IV, Dodd-Frank, Form PF, US and UK FATCA as well as the upcoming Common Reporting Standard (CRS) are hitting all fund and investment jurisdictions in the same way, so every jurisdiction ends up dealing with the exact same issues. The issue is that all of these regulatory efforts involve massive amounts of data that is collected. That data needs to be aggregated, calculated, reconciled, disaggregated, and transmitted. Even the submission of the reporting itself is highly technical.
Meeting all of these new requirements is not a simple matter of printing out a report and emailing it off. Even some of the Extensible Markup Language (XML) formats which are used in reporting threw people for a loop last year when the first FATCA reporting came around. The assumption was that you could just easily produce an XML file, but you cannot. It takes months of development. New regulations keep coming in faster than vendors can develop their systems to track everything accurately, which creates additional challenges.
FATCA and CRS data has never been collected before
Roundtable participants say they cannot stress enough how difficult the practical implementation challenges will be for managers. The complexity and education involved in addressing all reporting and logistical details has been highly underestimated. FATCA and CRS data has never been collected before. These are classifications that are more challenging than what was initially expected when the rules were being written, partly due to the nuances across all of the IGA (intergovernmental) jurisdictions. A major education and outreach process has to reach tens of thousands of investors to explain the relevance of these regulations.
In some ways Cayman probably has an advantage over other jurisdictions because there are an estimated 23,000 entities which are already registered as financial institutions with the Tax Information Authority (TIA) here in Cayman. That is one of the highest numbers across any jurisdiction in the world.
The 2016 Opalesque Cayman Roundtable took place end of 2016 in George Town, Cayman Islands, with:
- Craig Smith, Partner, PwC
- Jason Allison, Partner, Walkers
- Karen Watson, Global Head of Fund Operations, MaplesFS
- Leanne Golding, Senior Vice President, The Harbour Trust Co. Ltd.
- Peter Huber, Global Head of Fiduciary Services, MaplesFS
The panel also discussed:
- What is driving the growth of alternative investments? Which regions are growing the strongest? (pages 7-10)
- Why Cayman domiciled hedge funds have a market share of almost 100% in Hong Kong (page 10)
- What benefits is Cayman Enterprise City offering investment managers and service / technology providers? (page 9)
- Why and how are institutions getting more “hands on” in seeding and forming new funds? (pages 11-12, 15)
- Why advisory boards on master funds set up as Cayman limited partnership are becoming more common (pages 12-13)
- Will the new Cayman LLC law increase or decrease the number of governance committees? (page 13)
- What support are Cayman based service providers offering start up funds (page 15)
- The pros and cons to institutionalization of alternative investments (page 16)
- Why Cayman’s strong public-private partnership is a massive strength of the jurisdiction (pages 7, 18)
- How are blockchain and virtual currencies entering the world of alternatives? (pages 20, 22)
- How large US managers deal with cyber security threats (page 24)
- Will Cayman’s new EU Connected Funds be a game changer for the industry? (page 19).
