By Jonathan Law, Dillon Eustace Cayman
Why re-domicile? Regulation – From the regulatory perspective a move in jurisdiction can result in a lighter or more substantive regime of which the manager wants to take advantage. Additionally and from time to time changes in the regulatory landscape or failure of jurisdictions to adopt and implement international regulatory changes have created issues for managers.
Operations – Operational considerations may include key service providers to the fund requesting or requiring the domicile of the fund to be moved for regulatory alignment or other reasons.
Cost – Whilst often not the sole driver for a decision to re-domicile it is often an additional consideration particularly when the savings are significant. On the other side of course cost may be the deciding factor against a re-domicile if the result would be an increase in cost which could not be passed to the fund.
Marketing – For funds moving from an offshore environment to a more highly regulated jurisdiction there will always be clear and specific reasons for the move whether to further increase the level of regulation and transparency of the fund or to benefit from being established in a market such as the EU.
In short, increased regulation and as a result often increased costs to the fund or manager or both. Additionally, the manager’s decision of original domicile would have been based upon research, inquiry and the development over time of familiarity with the regulatory and operational environment of that jurisdiction. With a move, the change of direction risks bringing with it a lack of familiarity. Managers may also take the approach that some investors may get better regulatory treatment by investing in, for example, an EU regulated fund. The manager’s priorities are typically led by growing AUM but they will also be very sensitive to the likely landscape of regulation in the new jurisdiction.
In the case of those funds that move from one offshore jurisdiction to another there are benefits of moving into a jurisdiction with a similar level of regulation and operational requirements but where, as is often the case with Cayman, there is a much greater degree of investor familiarity and comfort. In its adoption of FATCA, CRS, beneficial ownership reporting and the implementation of other international transparency initiatives Cayman has shown that it prizes its leading offshore jurisdiction title and this may directly or indirectly assist managers.
Managers may set up a parallel fund domiciled in another onshore jurisdiction, typically the EU and that parallel fund will pursue the same strategy or a similar strategy to their offshore fund. The reason managers would choose to do this rather than re-domicile is in recognition of the two distinct investor universes that would be targeted by the respective funds.
How to begin?
At the outset the manager or the fund’s governing body will contact investors and set out the business case leading to the proposal and arguing that it is in the investors’ best interests. The manager will then look at the operational requirements and will typically ask if moving to another jurisdiction is going to increase the staffing requirements for the manager’s middle or back office.
On the one hand the internal mechanisms, permissions and timings arising as a result of the fund’s constitutional documents have to be implemented and managed. At the same time and on the other hand are the regulatory requirements. Typically the lawyers will drive the project once the decision has presented itself to the manager and the initial analysis has been done. The logistics of filing the documents with two sets of entity registries and two sets of regulators needs to be carefully managed.
For vehicles coming into Cayman, the internal requirements will be determined by the fund’s home jurisdiction and the fund’s governing documents. For funds that are leaving Cayman, it comes down to the relevant Cayman law and what is in the funds constitution. There is no mandatory requirement for investors to be given a vote on the re-domiciliation. That said, considering the substantial nature of a move of jurisdiction it is quite typical for the manager to discuss the project with shareholders and in circumstances where no formal vote is taken the manager will commonly offer investors the opportunity to redeem out under a special redemption procedure.
Other considerations include if there is illiquidity in the fund, this will be a factor that the manager has to carefully consider, particularly to the extent that he is not going to keep all investors happy. Another scenario is where a vote is required and there is some element in the documentation that makes the vote more difficult to carry.
Very often, the funds which are coming to Cayman have no investment minimum or have an investment minimum that is lower than the Cayman requirement. For those investors who don’t meet those requirements, either a redemption will have to occur or they have to add to their investments. The directors of the fund directors will need to be registered with the local regulator, all annual audits have to be signed off on by a locally approved auditor and the manager may need to employ the services of a locally regulated administrator. The Cayman AML regime is also particularly stringent and has to be carefully navigated.
When the fund is re-domiciling into an EU member state, immediately the AIFMD or UCITS regimes are relevant. One of the infrastructure conditions on an EU-domiciled regulated fund is that it must appoint a depository or custodian. When it comes to the administrator, often Irish administration firms administer hedge funds in Cayman or Bermuda or BVI so it’s typical that the manager would continue to use the same administrator.
From the operational perspective typically custodians, depositories, auditors, directors, etc, won’t charge an onboarding fee and they will bear any internal costs associated with the re-domiciliation. The bulk of costs are going to be from the attorneys and there will be two sets of lawyers. The manager may well decide that some or all of the costs can legitimately be charged to investors because they are going to benefit from the move. Some managers take the view that they want to be fair and don’t charge any of the costs to the fund or investors.
Legal counsel can advise the manager of the regulatory requirements of the new jurisdiction and what needs to be done to comply. The lawyers will also need to advise and explain issues that might not immediately be obvious, such as data protection, banking secrecy and anti-money laundering laws. These regulatory changes may lead to operational changes and changes to how the manager discloses certain things to investors.