While proposed private fund regulatory changes are keeping chief compliance officers busy here in the U.S., the Cayman Islands also saw several shifts in recent years that are still not fully understood by private fund managers in the U.S. and elsewhere.
Enter Isatou Smith, managing director at EisnerAmper Governance Cayman, who has agreed to share her expertise.
Isatou has been active in the investment funds industry for over 15 years and has significant regulatory and corporate governance experience with investment funds and their operations, having been previously employed by the Cayman Islands Monetary Authority (CIMA) as a senior analyst in the Investments and Securities Division.
Managing the operations team at EisnerAmper Governance Cayman, Isatou acts as an independent director for investment funds, including several sponsored by large global asset managers. She also fulfills compliance requirements for investment entities.
Prior to joining EisnerAmper Governance, Isatou acted as an independent director through Lainston International Management (Cayman) Ltd. There she was responsible for the management of a portfolio of director and compliance clients, among other duties. Prior to her tenure at Lainston, she was a director at Intertrust Fund Services (Cayman) Limited (formerly Walkers Fund Services) where she also provided director services to a wide range of investment fund structures with varying investment strategies across multiple jurisdictions.
At CIMA, she was instrumental in the evolution of key regulatory developments and led a large team of investments and securities analysts responsible for the on-going monitoring and regulation of investment funds, mutual fund administrators and securities investment business licensees.
Isatou is a professionally accredited director with the Institute of Chartered Secretaries Canada (ICSA) and is also a member of the Association of Certified Anti-Money Laundering Specialists (ACAMS) and of the Cayman Islands Directors Association (CIDA).
Vailakis: Thank you, Isatou, for agreeing to share your insights about Cayman private fund regulation with Alternatives Watch.
Given the ever-evolving regulatory environment we’ve seen in recent years, what are the two most prominent things for private funds to keep in mind?
Smith: Thank you, Nancy.
I certainly agree that the Cayman regulatory landscape continues to evolve for funds.
Two of the most prominent topics are changes to the Anti-Money Laundering (AML) and compliance regime, and the economic substance requirements.
While it was always a requirement for a fund administrator to be conducting AML checks, it’s now necessary to have individuals appointed as Cayman AML officers.
Not all fund administrators provide that service to fund managers, requiring many to find another provider for officerships. A diversity of providers is viewed favorably by CIMA, to avoid conflicts of interest.
With respect to economic substance, it really comes down to a few key elements, including most specifically whether the entities are conducting a relevant activity, and if so, then certain requirements have to be met. Currently, funds are not in scope for economic substance, but one of the relevant activities is in fact fund management.
What fund managers have a difficult time coming to grips with is having the decisions on the holding and selling of the investments happen here in Cayman. The process has grown more robust and service offerings have evolved to be able to provide those services to investment managers here on the island, with professionals who have the proper allocation and exit expertise.
Vailakis: Given that you previously worked for CIMA, what takeaways do you have from that experience that inform your compliance and governance client work?
Smith: Yes, having worked at CIMA, and having been involved in a lot of the legislation and regulatory framework that is still around today has been a huge plus, given my subsequent governance and compliance roles. As I was involved in establishing the framework, I have clear insight into the intent of the legislation surrounding the functions that we carry out on a daily basis.
It’s certainly not a bad thing to be able to pick up the phone to ask a former colleague for assistance if a client matter requires it; I’m ahead of the curve in my fiduciary roles.
Vailakis: Please speak a bit more about economic substance considerations for private fund managers.
Smith: Sure. Once an entity is determined to be conducting a relevant activity, then they have to ensure compliance with the economic substance test which includes three factors.
First, you have to ensure that you’re conducting core income generating activity in relation to that relevant activity, which in this case would be fund management.
Second, you have to ensure that the entity is directed and managed in an appropriate manner in the Cayman Islands in relation to fund management, which means that you should have the majority of your board of directors here.
Third, you should have an adequate amount of operating expenditure here and adequate physical presence with the proper number of full-time employees, all relevant to the income being derived from fund management.
We are often asked: what is the core income generating activity for a fund manager?
Some of those core income generating activities are: making decisions on the holding and selling of investments; calculating risk and reserves; making decisions on currency and interest rate fluctuations; and also preparing reports or returns to investors or for delivery to the Cayman Islands Monetary Authority.
Vailakis: What are some common misconceptions about establishing and maintaining offshore feeder funds in Cayman?
Smith: The most common misconceptions are that it is costly to establish and maintain a fund here in Cayman and that is administratively burdensome. Some people think that Cayman is overly regulated.
There’s certainly a cost factor, but once you have the fund structure set up, the administrative burden falls to the key service providers involved.
All service providers are familiar with the human requirements, and all are aware of their responsibilities under Cayman law.
Picking great service providers who will work well together to ensure that the fund is functioning the way that it’s supposed to be, from the board of directors to the auditor, fund administrator and AML officers, is the key.
Having the right service providers that match the needs of the fund and the strategy that the manager wants to implement, is critical for a fund’s success and to mitigate the administrative burden that is often misconstrued about the claiming jurisdiction.
I provide services to many types of funds by strategy, SPVs and fund structures that have varying approaches. We work with emerging fund managers, and we work with large, established well known fund managers in the industry as well. It’s very important to not only be working with very successful blue-chip managers, but also to be a part of the journey for emerging fund managers. Given the expertise that we have in house, with my direct CIMA experience, we’re able to provide that guidance and step in from the beginning.
We show fund managers what needs to be done, so their counsel can set up the fund structure correctly at the outset, so that they’re educated, prepared and already starting off on solid ground, ready to check the compliance and governance boxes accurately and efficiently.