The Cayman Islands Stock Exchange (CSX) recently amended its Listing Rules to raise the standards of operation and governance of CSX listed investment funds, particularly retail, closed ended, umbrella and exchange traded funds.  Here we look at changes in Chapter 9 of the rules.

Investment Funds: Operation and governance

Mutual funds are now branded 'investment funds', which are defined as "any company, unit trust, partnership or other entity which engages in the collective or other investment of its capital for the benefit of its investor".  The new rules call for the listing documents to include details of the directors and service providers of such funds.  In essence these are designed to help investors assess the strength of the management of the fund.  In the listing document, the directors and any relevant service providers (such as investment manager, investment adviser, administrator or custodian) have to disclose a list of material details, generally identifying themselves and their ability to do their job (including who regulates them).  They also need to summarise their remuneration and other relevant contract details such as indemnities, termination payments or restrictions of liability, and any connections or potential conflicts of interest which they may have.

As well as these requirements there are some specific additions, including:

Directors' Experience- The listing document must provide a summary of at least the past five years of all directors' relevant experience.

Custody- The listing document should describe the custody arrangements for the fund's assets including the name of the custodian and its details.  Although Custodians may be an associate of the investment fund, its directors, the investment manager, investment adviser or the administrator, they must be a separate legal entity, with any relationship/affiliation being disclosed.

NAV- An investment fund must be able to demonstrate to the CSX that it has adequate arrangements for calculating the net asset value (NAV) of its listed securities or appoint an investment fund administrator to do so.

New disclosure requirements for suspensions

The investment fund must notify the CSX, without delay, of any suspension in the calculation of NAV, subscriptions or redemptions with reasons and a plan of action. Once there has been a suspension, the CSX should be given regular updates of progress, and if redemptions are suspended then the fund should also suspend subscriptions.  The CSX must also be notified of  the lifting of any suspension.

Retail Funds

A retail fund is "an investment fund (other than an ETF (see below)) which is not restricted to qualified investors” (a qualified investor is an investor of at least US$100,000 who states he knows what he is doing and can afford to lose all of his investment).  Such funds must have a majority of independent directors, an authorised and regulated investment manager and an independent administrator, both from a recognised jurisdiction.  The administrator must either provide the prices of the underlying assets or verify them.  At the front of the listing document for such funds there must be a key information summary, covering (as a minimum): investment objectives and policy; risk factors; fees payable by investors and the investment fund; and contact details. The summary must include a statement that potential investors should read the whole document and seek professional investment advice.  Retail funds should provide prompt six monthly financial reports in addition to their annual reports.

Exchange traded funds (ETFs)

ETFs linked directly, or indirectly, to specific equity or debt securities, indices, currencies, interest rates, swap rates, exchange rates and certain commodities such as oil, gold and silver may be admitted to listing, but must include the identifier “ETF” in their name.  The CSX has to be satisfied that the fund can be properly valued, and will generally require underlying assets to be listed and/or traded on CSX or another recognised regulated open market.  The NAV of the securities of an ETF must be calculated and notified to the CSX on a daily basis.  The fund’s listing document should include investment strategy, leverage and valuation information and state that they are only suitable for sufficiently experienced investors.

Closed-ended funds

A closed-ended fund must include in the terms of its constitution a provision that it will obtain the prior approval of its listed security holders for certain material changes (such as the constitution, investment policies or the rights of any class of listed securities).  It must also notify any intention to extend the life of, or terminate, the investment fund or to compulsorily redeem all of its securities.  Its listing document must disclose details of any substantial shareholder, of any pre-emptive rights and the transferability of any subscription rights.

Umbrella funds

An umbrella fund is defined as “an investment fund (excluding segregated portfolio companies incorporated in a recognised jurisdiction for investment fund incorporation or establishment) with one or more sub-fund”.  The new rules provide that where there is more than one sub-fund, details of the various sub-funds must be disclosed in the listing document, along with (a) the financial information for all of the sub-funds; and (b) information regarding litigation and material claims against any of the sub-funds.

Further amendments– Chapter 9 also affects the rules for side-pockets and property funds.

Conclusion

These rule changes demonstrate the continuing commitment of the Cayman Islands regulators to ensuring good corporate governance and adequate disclosure to investors.

This article is published to give general information about updates to the Listing process and should not be construed as legal advice.  For specific assistance, please contact us on info@solomonharris.com

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