Securities Investment Business Law

Legal Guide Securities Investment Business Law The Securities Investment Business Law of the Cayman Islands (the SIB Law) regulates the conduct of certain securities investment activities, including dealing, arranging deals in, managing or advising on assets, rights, interests or certain other specific financial instruments or transactions, in or from within the Cayman Islands. Typically, the SIB Law will apply to any Cayman Islands companies (including LLCs i ) and partnerships, foreign companies registered in the Cayman Islands, or any foreign incorporated entities which have established a place of business in the Cayman Islands who engage in what the SIB Law defines as securities investment business either in or from the Cayman Islands. If the SIB Law applies to an entity and its activities, then that entity must apply to the Cayman Islands Monetary Authority (CIMA) for a licence under the SIB Law unless otherwise specifically exempted from holding a licence under the SIB Law. Does the SIB Law apply to me? Any Cayman Islands company (including an LLC), partnership or foreign company registered in the Cayman Islands, or any foreign incorporated entity which has established a place of business in the Cayman Islands and which is acting or proposing to act as an investment manager, investment advisor or general partner and is undertaking any activity likely to fall within the description of securities investment business above could potentially come within the scope of the SIB Law. A physical presence in the Cayman Islands is not required for the SIB Law to apply. Whether or not the SIB Law applies will involve a highly fact specific analysis and you should contact your usual Harneys contact for further information or assistance. What are securities and what is securities investment business? Under the SIB Law, securities are broadly defined to include shares, stocks, interests in partnerships, LLC interests, trust units, debt instruments, warrants, certificates, options, futures and rights or contractual entitlements under CFDs (contracts for difference). Securities investment business is defined as undertaking any one or more of the following activities in the course of business with respect to securities: dealing in securities, which includes buying, selling, subscribing for or underwriting securities as an agent or principal in certain circumstances arranging deals in securities, which includes making arrangements with respect to the buying, selling, subscribing for or underwriting securities as an agent or principal managing securities, which includes managing securities belonging to another person in circumstances involving the exercise of discretion advising on securities, which includes giving advice to third parties in their capacity as an investor or potential investor or as agent for an investor or potential investor; or giving advice on the merits of buying, selling, subscribing for or underwriting securities or the exercise of any rights conferred by a security, as an agent or principal The full details of activities which are caught by the SIB Law are set out in Schedule 2 of the SIB Law. Under the SIB Law, a licence may also be required where the description or title under which a person carries on business suggests they are undertaking securities investment business; or if the person makes any representations (written or otherwise) that they are carrying on securities investment business or otherwise holds themselves out as carrying on securities investment business. 1

Are any activities excluded from the definition of securities investment business? There are however certain activities which are not considered securities investment business under the SIB Law and persons undertaking these activities will therefore be out of scope for the purposes of licensing or registration under the SIB Law. These include: dealing in securities evidencing indebtedness in respect of any loan, credit, guarantee or other similar financial accommodation or assurance which such person or his principal has made, granted or provided a company, partnership, LLC or trust issuing, redeeming or repurchasing securities that it has issued a company disposing of its treasury shares dealing in options, futures or contracts for differences where none of the parties are individuals and where the sole or main purpose of the transaction is for risk management purposes in connection with nonsecurities investment business a person dealing in securities in connection with the disposal of goods or supply of services where the supplier of the goods or services does not hold himself out as dealing in securities and does not solicit the public to deal in securities dealing in securities, arranging deals in securities, or advising on securities in the course of any profession or business not otherwise constituting securities investment business where such dealing, arranging or advising is an incidental part of that profession or business and is not separately remunerated an employer dealing in securities in connection with an employee share or pension scheme a company, partnership, LLC or trust acting as principal on its own behalf dealing in securities by applying its proprietary assets making arrangements for the sole purpose of providing finance to enable a person to deal in securities Are there any exemptions from the licensing requirement? The SIB Law also provides that certain categories of persons will be exempted from the requirement to obtain a licence, as Excluded Persons. Some examples of Excluded Persons include: a group company (including LLCs) that carries on securities investment business exclusively for one or more companies (including LLCs) within the same group a person who carries on securities investment business exclusively for a sophisticated person (a listed or regulated entity, or an experienced investor that invests more than US$100,000 per transaction), a high net worth person (an individual with a net worth of at least US$1,000,000 or a person with total assets of at least US$5,000,000) or an entity whose investors are either sophisticated persons or high net worth persons (Sophisticated Investors) a business regulated by a recognised regulatory authority in the country in which the securities investment business is being conducted Excluded Persons that fall within these categories must make an annual exemption filing and pay an annual fee to CIMA which currently stands at US$6,098. In addition, the following persons are also Excluded Persons but do not need to make any filings with CIMA: a person being part of a joint enterprise where the other person carries on securities investment business and such business is carried on for the purpose of the joint enterprise certain Government or statutory bodies or public authorities a person carrying on securities investment business only in the course of acting in any of the following capacities: director, partner, LLC manager, liquidator, trustee in bankruptcy, receiver of an estate or company (including an LLC), executor or administrator of an estate, and a trustee acting together with co-trustees in their capacity as such, or acting for a beneficiary under the trust, provided that in each case that person: is not separately remunerated for any of the activities which constitute the carrying on of such securities investment business other than as part of any remuneration the person receives for acting in that capacity does not hold himself out as carrying on securities investment business other than as a necessary or incidental part of performing functions in that capacity is acting on behalf of a company (including an LLC), partnership or trust that is otherwise licensed or exempted from licensing under the SIB Law Whilst Excluded Persons are not required to obtain a licence, they may nevertheless be subject to certain provisions of the SIB Law including that they may be required to provide CIMA with an auditors report on their anti-money laundering systems and procedures for 2

compliance with Cayman s Anti-Money Laundering Regulations. Director registration Under the Director Registration and Licensing Law (DRLL), all directors (which also includes LLC managers), whether natural persons or corporate directors and whether resident in the Cayman Islands or elsewhere, who act as directors or LLC managers of certain Excluded Persons must be registered with, or in certain circumstances be licensed by, CIMA. This requirement applies to Excluded Persons which are carrying on securities investment business exclusively for one or more group companies (including LLCs) within the same group or exclusively for Sophisticated Investors. An application fee is payable to CIMA together with annual fees, which must be paid by 15 January of each year. There are heavy penalties for non-compliance with the DRLL including significant fines and imprisonment. What is the licensing process? Where a licence is required under the SIB Law, an applicant for a licence will have to satisfy CIMA that: it will be able to comply with the SIB Law and the regulations made under the SIB Law it will be able to comply with the Anti-Money Laundering Regulations it will not be against the public interest to approve the application it has personnel with the necessary skills, knowledge and experience, as well as such facilities and books and records as CIMA considers appropriate its senior officers and managers are fit and proper persons CIMA may issue an unconditional licence or a licence subject to such conditions as it considers appropriate. The licence may be restricted, so that securities investment business may only be carried out with certain clients, or unrestricted. Under the SIB Law, the carrying on of securities investment business without a licence is a criminal offence in the Cayman Islands punishable by either a substantial fine and/or by imprisonment. CIMA may also levy additional fines, which may accrue on a daily basis, in the case of a continuing offence. Directors and officers A licensee that is a company or a corporate general partner of a partnership must have at least two directors or, if the licensee is a company that does not have directors, such as an LLC, at least two managers. No alterations in the senior officers of a licensee that is a company may be made without the prior written approval of CIMA. A licensee must immediately remove or replace a senior officer who is convicted in any country of an offence involving dishonesty. Change in ownership No shares or partnership interests or LLC interests in a licensee may be issued or transferred without the prior approval of CIMA. CIMA may exempt licensees whose shares or interests are publicly traded on a recognised securities exchange subject to conditions requiring notification of acquisitions of more than 10% of the shares or voting rights and the provision of information to enable CIMA to assess whether the acquirers are fit and proper persons. Enforcement by CIMA The SIB Law provides CIMA with a broad range of enforcement powers. These include: imposing conditions on the grant of a licence, applying for injunctions or restitution orders to deal with disgorgement of client assets, requiring the substitution of an officer or director, divesting ownership or control acquired in breach of the SIB Law, and revoking a licence. CIMA may also, at the expense of the licensee, appoint a person to advise the licensee on the proper conduct of its affairs and to report to CIMA, and CIMA may appoint a controller with the same powers as those of a receiver or manager of a business appointed under the Bankruptcy Law. A licensee may appeal to the Grand Court of the Cayman Islands against any decision of CIMA to revoke its licence or to appoint a controller of its business. CIMA also has the power under the Monetary Authority Law (MAL) to impose significant administrative fines of up to CI$1 million (US$1.2 million) for breach of certain provisions of the Anti-Money Laundering Regulations. Breaches of other Cayman regulatory laws and regulations, including the SIB Law and Mutual Funds Law, are also expected to be classified as prescribed matters in the future, so that CIMA will then be able to impose administrative fines for their breach, using its powers under the MAL. The level of an administrative fine will depend on various factors including whether the breach is committed by an individual or a body corporate and if the breach is classified as minor, serious or very serious. How does the SIB Law work in practice? To put the SIB Law into context, we have set out below a list of typical cases where the person should be asking whether they need to be licensed. Investment managers A Cayman Islands exempted company which provides discretionary asset management services to an investment fund will be carrying on securities investment business. If the manager is providing services only to a fund that is regulated by CIMA then the manager would qualify as an Excluded Person on the basis that it is providing services only to sophisticated persons. On the other hand, if the manager is 3

providing services to an unregulated fund then in order for the manager to qualify as an Excluded Person the investors in the fund would have to be sophisticated persons or high net worth persons. The investment manager must register as an Excluded Person and pay a registration and annual fee to CIMA. Brokers and market makers Brokers will be carrying on securities investment business and so are required to be licensed. It is possible that a broker may be able to rely on the exemptions referred to above. However, it should be noted that the securities investment business must be carried on exclusively for the right category of person (ie sophisticated, high net worth persons, etc). Cayman companies issuing their own shares This does not constitute securities investment business. It falls within the list of excluded activities. Buying and selling securities for your own account A person does not require a licence or a declaration of exemption where they are engaging in securities transactions on their own behalf, as principal, or agent for their principal. The purpose for engaging in securities transactions may be for risk management where the main business is other than securities business. Such activities are not considered securities investment business. Other excluded activities are detailed above in the section Are any activities excluded from the definition of securities investment business? A word of caution, if the principal holds itself out generally as a market maker, its activities may then fall within the definition of securities investment business, which would require the principal to obtain a licence. General partner of a partnership What is the position of a Cayman Islands exempted company which is a general partner of a Cayman Islands exempted limited partnership established as a private equity fund and which has control and management of the investments of the partnership? General partners carrying out securities investment business on behalf of the partnership are specifically excluded from the need to be licensed under the SIB Law as long as they are remunerated through their general partnership interest and not separately for the investment services and provided that they do not hold themselves out as carrying on securities investment business. This category of exemption does not require a declaration of exemption to be filed with CIMA. Contrast this to a Delaware limited liability company registered as a foreign company which is a general partner of a Cayman Islands exempted limited partnership established as a private equity fund. The Delaware LLC also acts as an investment adviser to an onshore fund and is remunerated by that fund for those services. As a registered foreign company, the Delaware LLC is subject to the SIB Law. Although the role as general partner of the Cayman Islands partnership would mean that the Delaware LLC could be an Excluded Person exempt from registration, the fact that it is carrying on securities investment business in its work for the onshore fund and separately remunerated for that would mean that it would have to register as an Excluded Person. If the onshore fund were not able to qualify as a high net worth individual or sophisticated person, full licencing may be required. Trustees Many trustees (other than essentially private trustees not carrying on a business) may be carrying on securities investment business. However, such trustees are likely to be Excluded Persons that are exempt from registration. Directors of an exempted company As is the case with trustees, directors of an exempted company which handle the trading in securities on behalf of the company of which they are directors are likely to be carrying on securities investment business. However, they are likely to be Excluded Persons that are exempt from registration. False or misleading market and insider trading The SIB Law also sets out that it is an offence to create or do anything which is calculated to create a false or misleading appearance of active trading in any securities listed on the Cayman Islands Stock Exchange (CSX) or a false or misleading appearance with respect to the market for, or price of, any such securities. Any individual who has information as an insider also commits an offence of insider dealing if they deal in CSX listed securities that are price-affected in relation to the information, encourage another person to deal in those securities, or disclose the information to another person otherwise than in the proper performance of their employment, office or profession. The SIB Law sets out certain defences that are available, including if the person is able to show that they would have done what they did even if they did not have the information. These offences are punishable on conviction by either a substantial fine and/or by imprisonment. For more information and key contacts please visit 4

i Limited liability company formed under the Cayman Islands Limited Liability Companies Law (LLC). Harneys, June 18 Harneys is a leading international offshore law firm. From more than 12 offices around the globe, Harneys advises the world s top law firms, financial institutions and corporations on the laws of Bermuda, British Virgin Islands, Cayman Islands, Cyprus and Anguilla. For more information about Harneys please visit www. or contact us at marketing@. The foregoing is for general information only and not intended to be relied upon for legal advice in any specific or individual situation. Bermuda legal services are provided through an exclusive association with Zuill & Co which is an independently owned and controlled Bermudian law firm. 5