Japan opens to Cayman funds

The Cayman Islands Monetary Authority (CIMA) will introduce new regulations effective November 19th to provide a new regulatory regime for mutual funds that are marketed to the public in Japan. The Caymans is the largest offshore centre in the world, with 3,593 registered funds as of December, 2002, many of which are hedge funds.

Spencer Privett, an associate at Caymans law firm Maples and Calder, says the standards for selection of foreign unit trusts set by the Japan Securities Dealer's Association were vague regarding requirements for foreign regulatory regimes. (Privett will become a partner as of December 1st.) Although the JSDA did not object to the distribution of Cayman-registered funds, it was unwilling to provide guidelines or interpretations to members.

Therefore some distributors and local lawyers took the view that Cayman law did not comply with JSDA requirements. This was not a universal view: there are now 20 Cayman-domiciled funds sold to the Japanese retail public. But the lack of clarity has made the Caymans a no-go zone for many players.

According to Privett, there are benefits to Cayman-domiciled funds over those from rival offshore centres such as Bermuda. The costs of establishing a fund are lower and the restrictions are fewer; for example the Caymans does not require detailed contents in a fund prospectus, and the timetable to establish a fund is shorter. This translates into less expensive funds for Japanese investors.

These advantages, however, gave some Japanese distributors pause. Therefore the CIMA has written new regulations to meet such concerns. For example, now for the first time, prospectuses must disclose the rights and restrictions attached to securities, including the terms of their issue and redemption and the method of calculating NAVs or redemption prices. An auditor is also required.

The government did, however, include a grandfather clause to exempt existing funds registered in Japan from having to adopt the new rules, if the fund manager doesn't want to do so. The new regulations only apply to those Cayman funds to be sold to the Japanese public.

According to the CIMA, over 91% of all domiciled funds are sold on a private placement basis. There is a large business of selling these funds privately to Japanese investors which is unaffected by this change.

Maples and Calder has been involved for over a year on this issue, as it handles Cayman-related issues. It approached those Japanese law firms that were advising distributors against using Cayman funds to determine their objections. It then brokered a deal between these Japanese counterparts, the JSDA and the CIMA to determine what the CIMA had to do to convince Japanese doubters that Cayman-domiciled funds were appropriate for the retail public.

Japan is the only jurisdiction where this has been an issue, mainly because of the JSDA's reluctance to clarify its guidelines. Cayman-domiciled funds are available to retail investors throughout the region.