The Administration of a Fund on the Cayman Islands: the Support and Management of a Fund

The administration of a fund on the Cayman Islands is a separate operational function, which is fully detached from the process of the taking of investment decisions. While the manager is focused on the generation of yield and the formation of the portfolio, the independent administrator takes upon itself the maintenance of the register of participants, the calculation of the value of the net assets and the carrying out of the mandatory procedures of compliance. The presence of such a third party in the structure of the investment business minimises the risks of a conflict of interests, ensuring the protection of the capital of large institutional contributors and private investors.

In the present publication, the specifics of the work of this back office are analysed in detail in the context of the rigid requirements of the Cayman Islands Monetary Authority (CIMA). The readers will find out which types of funds are obliged to engage licensed providers, how the process of interaction with external auditors is structured and what the real role of the administrator is in the passing of anti-money-laundering checks. The practical analysis of the regulatory norms will help to structure an international project without operational failures and claims on the part of the offshore regulator.

The Administration of a Fund on the Cayman Islands: What Is Included in the Duties of the Administrator

The legal nature of the activity of the administrator consists in the creation of an independent operational contour, separated from the investment management. The manager (investment manager) is responsible exclusively for the investment strategy, the choice of assets and the distribution of the capital. In its turn, the administration of a fund on the Cayman Islands covers the entire spectrum of the technical, accounting and legal support of the structure. Although the local legislation in certain cases permits not to engage an external provider directly, the presence of a separate administrator is de facto recognised as a mandatory market regulation. Without this step, large international contributors refuse to enter the project because of the potential risks of the manipulation of the reporting.

The basic functions of the administrator of a fund on the Cayman Islands are divided into three large blocks: the accounting of interests, financial calculations and regulatory support. The provider ensures the maintenance of the statutory register of investors and takes upon itself the carrying out of corporate procedures, including the organisation of meetings of participants and the fixing of changes in the structure of ownership. Through the operational accounts that the administrator opens, the movement of the capital occurs: the distribution of profit, the withholding of commissions for management and the unblocking of the reserved funds of the participants.

Carrying out the comprehensive servicing of a fund on the Cayman Islands, the administrator acts as the central connecting link between the structure and external counterparties. The specialists prepare financial data for the annual mandatory audit, interacting with approved local audit firms. All the collected information is transformed into reporting for CIMA. The daily management of the operational activity of a fund on the Cayman Islands guarantees that any transaction or change in the register of participants will be verified by an independent party.

The direction of the activity and the duties of the administrator

The official services of the administrator also include the mandatory check of the proportionality of the expenses. The professional administration of an investment fund on the Cayman Islands excludes the situation when the remuneration of the management company is accrued incorrectly. The autonomy of the back office makes it possible to precisely fix any withholdings before the payment of the final yield to the contributors.

Which Functions the Administrator of a Fund on the Cayman Islands Performs When Working with Investors

The investment block of the work of the administrator begins long before the crediting of the money to the settlement accounts. The acceptance of every participant is accompanied by a detailed analysis of documents and the filling out of the Subscription Agreement. The independent administrator of a fund on the Cayman Islands carries out the legal registration of investors and opens internal investment accounts for them. This process excludes the direct contact of the management with the money of the contributors before the moment of the confirmation of the legal cleanliness of the transaction.

The security of the structure is based on the multi-level compliance which the service provider organises. Within the framework of the administration of a fund on the Cayman Islands, the specialists carry out the check of politically significant persons, the sanctions screening and the procedure of the identification of the beneficiaries. A mandatory stage is the confirmation of the legality of the sources of the origin of the capital, which minimises the risks of the blocking of the accounts of the fund by correspondent banks. The comprehensive check is carried out both upon the primary entry and throughout the entire life cycle of the investment structure.

The high-quality servicing of the investors of a fund on the Cayman Islands implies constant informational support. Every participant regularly receives official statements from the accounts (Investor Statements), containing up-to-date data about the movement of the capital. Such support by the forces of a third party prevents the concealment of losses on the part of unscrupulous managers.

The check of the participants of a fund on the Cayman Islands, organised in such a way, is built on the following principles:

• the end-to-end monitoring of transactions for the subject of suspicious activity;

• the maintenance of a continuous history of all the subscriptions and operations of the redemption of interests;

• the storage of the personal data of investors in a protected contour in accordance with the rules of confidentiality of the jurisdiction.

The institutional administration of a fund on the Cayman Islands creates a transparent environment, where investors are protected from the unilateral actions of the management. The authority of the jurisdiction to a large extent rests precisely on the rigid regulation of the interaction between administrators and contributors.

The Calculation of the NAV and Reporting: How the Administration of an Investment Fund on the Cayman Islands Is Carried Out

The calculation of the value of the net assets (Net Asset Value or NAV) acts as the main indicator of the success of a fund. By law, the assessment of the assets of a fund on the Cayman Islands cannot be carried out exclusively by the forces of the management company in order to avoid the overstatement of the indicators of yield. The regulatory rules oblige funds to have a documented methodology of assessment, approved by the directors. The professional administration ensures the strict following of this methodology upon every calculation cycle.

For open structures, the calculation of the NAV of a fund on the Cayman Islands is carried out monthly or quarterly, for closed ones — at least once a year. In the course of this procedure, the administrator sums up the market value of all the available assets and subtracts the current liabilities. On the basis of the obtained sum, the calculation of the value of the interest of a fund on the Cayman Islands is made, determining the price of entry of new investors. Specific assets that do not have a direct market quotation are assessed according to the special regulations of CIMA for the minimisation of the subjective factor.

The formed financial reporting of a fund on the Cayman Islands is transferred to the external auditor for verification. The administrator provides the audit firm with primary documents, statements and confirmations of transactions. The precise NAV of an investment fund on the Cayman Islands lies at the basis of the auditor's conclusion, which is then directed to the regulator. The independent confirmation of the financial indicators guarantees the investors the objectivity of the reflection of their profit.

The Requirements of CIMA for the Administration of a Fund on the Cayman Islands and the Significance of the Independent Administrator

The current regulation of funds on the Cayman Islands relies on the norms of the specialised laws on mutual (Mutual Funds Act) and private (Private Funds Act) funds. The official rules of CIMA rigidly regulate the principles of corporate management, internal control and the segregation of assets. Although the directors of the fund bear the ultimate responsibility before the law, the operational management of a fund on the Cayman Islands is practically fully delegated to the licensed administrator. Such a distribution of duties is fixed in the regulatory acts of the regulator as a basic element of the reduction of operational risks.

The administrator helps to fulfil the prescriptions of the anti-money-laundering legislation (Anti-Money Laundering Regulations). The appointed specialists may perform the functions of a compliance officer (AMLCO) and an officer on reports on the legalisation of illegal money (MLRO). The state regulation of investment funds on the Cayman Islands obliges these roles to collect internal reports on suspicious operations and to directly contact the Financial Reporting Authority. The procedures of control are built in such a way as to exclude any pressure on the part of the owners of the fund.

The rigid requirements of CIMA determine the procedure of the separation of the functions of storage and accounting. Carrying out the comprehensive regulation of an investment fund on the Cayman Islands, the supervisory body requires of closed funds the provision of the independent monitoring of the monetary funds and the verification of the title of the assets. The appointment of an accredited third party fully closes this need.

The full-fledged administration of an investment fund on the Cayman Islands ensures the observance of the international standards of compliance, including the requirements on the automatic exchange of tax information. The administrator collects the self-certifications of investors for the subsequent sending of the data within the framework of the standards of reporting of the USA (FATCA) and of the Organisation for Economic Cooperation and Development (CRS). This relieves the founders of the risks of the recognition of the structure as unlawful at the international level.

Conclusion

The effective administration of a fund on the Cayman Islands is a basic condition for the protection of the interests of investors and the maintenance of the impeccable legal cleanliness of the business. The transfer of the operational tasks, the calculations of the net assets and the functions of compliance to an independent licensed partner makes it possible for the managers to focus on the investment strategy, guaranteeing at the same time the full correspondence to the rigid prescriptions of the offshore regulator CIMA.