Hot Topics For managers of Cayman funds - March 2019 - assets.kpmg
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Hot Topics For managers of Cayman funds March 2019 kpmg.ky
Overview Cayman EU & US Tax Other
Regulatory Regulatory
Contents
Global Thought Leadership
New Top 10 Trends in Asset Management for 2019 4
Cayman Regulatory
New Cayman Islands Economic Substance Bill 6
New Cayman Master Feeder Redemptions 8
New AIFMD – MFL (2019 Revision), SIBL (2019 Revision) 10
Updated Cayman AML Requirements 12
Cayman Data Protection Law 14
EU & US Regulatory
AIFMD & UCITS rules for Depositaries and Sub-Custodians 16
Updated Senior Managers & Certification Regime (“SMCR”) 18
New SEC: 2018 Investigations 20
NFA: Cybersecurity Interpretive Notice Amendment 22
SEC: Fee Risk Alert 24
© 2018 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
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This Document is CONFIDENTIAL and its circulation and use are RESTRICTED. © 2019 KPMG, a Cayman Islands partnership and a member
Hot Topics: March 2019 firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 2
All rights reserved.
Document Classification: KPMG ConfidentialOverview Cayman EU & US Tax Other
Regulatory Regulatory
Contents
Tax
2018 German Investment Tax Reform 26
10% Capital Gains Tax on Indian Publicly Traded Shares 27
FATCA and CRS 28
U.S. Tax Reform 30
Virtual Currency & US taxation 33
Updated Partnership Audit Rules 34
Other
New Responsible Investment and ESG 36
Updated Brexit: Update and Temporary Permissions 38
Brexit: Contract Certainty 40
IFRS 9 – Financial Instruments 42
IFRS 15 and ASC 606 - Revenue from Contracts with Customers 43
Articles Discontinued from Previous Hot Topics 44
Disclaimer
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to
provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in
the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Any advice in this
communication is limited. Tax law, regulations, and the judicial and administrative interpretations thereof are subject to change or modifications, retroactively and/or
prospectively, and any such changes could affect the validity of this presentation.
© 2018 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
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This Document is CONFIDENTIAL and its circulation and use are RESTRICTED. © 2019 KPMG, a Cayman Islands partnership and a member
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All rights reserved.
Document Classification: KPMG ConfidentialGlobal Thought Leadership
Top 10 Trends in Asset Management for 2019
The start of 2019 is looking tough – markets are down, geopolitical risks are high but it’s also one in which we believe the
asset management industry can thrive. China holds considerable opportunity, notwithstanding trade disputes; the trend
toward sustainable investment has room to run, with better defined standards; and asset managers are creating value through
technology.
1. Competition for China heats up 3. Sustainability measurement gets more sophisticated
Over the last few years, Environmental, Social and
By all accounts, 2019 will be an exciting year for China’s asset
Governance (ESG) priorities finally took their place on the
management industry. On the domestic front, firms will
asset management agenda. This year, the real work
experience intense competition – and more innovation – as
continues as regulators start to more clearly define their
they fight to protect and capture market share. New rules
expectations for the industry.
related to the way Chinese banks manage client assets and
recent efforts to stimulate the stock market should also catalyse
significant activity.
4. Managers start looking for value in their technology
2. Private Equity (“PE”) continues strong run In 2019, we expect to see more asset managers connect their
technology dots in ways that unlock an entirely new level of
Last year, was another strong year for PE with buyout volumes agility, efficiency and value. For some, this will start with
in Americas and Europe both at record highs. Investor basic cloud enablement – a fundamental requirement for
confidence appears to remain very robust with another solid digital enablement to deliver on today’s customer
year of fundraising (albeit a little off the exceptional volumes of expectations.
2017) and hence the stock of dry powder to supporting ongoing
investment activity remain at record levels. The situation in Asia
Pacific is slightly different, deal volumes in recent years have 5. The regulatory scope widens
yet to grow in line with exceptionally strong fundraising resulting
All signs suggest that the asset management sector will
in dry powder growing substantially. While understanding the
continue to see increasing regulatory oversight, particularly
advantages of PE as a source of capital in the region has
related to systemic risk and investor protection, such as
increased considerably, leading managers will still need to
leverage and costs.
continue their efforts to broaden PE’s appeal as a capital
solution, particularly at the larger deal sizes. This will ensure
the market grows to absorb
© 2018 KPMG, athe committed
Cayman capital.
Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
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International”), a Swiss entity. All rights reserved.
This Document is CONFIDENTIAL and its circulation and use are RESTRICTED. © 2019 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Document Classification: KPMG ConfidentialGlobal Thought Leadership
Top 10 Trends in Asset Management for 2019….continued
6. The definition of infrastructure investment broadens 9. ETF players become more active
The ETF market continues to show strong signs of positive
Over the past few years, in order to deploy their increasing
growth and many asset managers are starting to recognize
capital into the largest possible universe of assets, we have
ETFs as an important part of the digital product offering. Yet,
seen a growing number of fund managers start to (1) invest
until today, the market has largely been dominated by big
directly, (2) explore non-core markets such as Eastern Europe
passive players.
and Asia, (3) expand the definition of what constitutes an
‘infrastructure’ asset to include, for example, care homes, data
centers and telecom assets and (4) compete with corporates in
10. Wealth managers embrace new models
the energy sector, offshore wind being a hot spot for larger
investors. The outlook for wealth management is strong, driven by rising
levels of private wealth and the threat of significantly
7. Real Estate investors get serious about data underfunded retirement savings. Yet, while it is clear that
demand for the industry’s core activities remains strong, our
This year, expect more focus on data and leveraging view suggests that – in the short-term – challenges related to
technology for analytics. Indeed, rather than just relying on current market uncertainty and volatility may start to dampen
experience and understanding of the markets and cycles, real investor sentiment this year.
estate investors are starting to place increasing value on data-
driven decision-making tools and processes.
The complete article can be viewed on Tom Brown’s
8. Institutional investors start to tell their story (Global and UK Head of Asset Management) linkedin
page:
Against a backdrop of increased protectionism and nationalism,
https://www.linkedin.com/pulse/top-10-trends-asset-
many institutional investors are finding some foreign investment
management-2019-tom-brown/
markets to be increasingly challenging (particularly when it
comes to foreign investments into core infrastructure assets).).
© 2018 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
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This Document is CONFIDENTIAL and its circulation and use are RESTRICTED. © 2019 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Document Classification: KPMG ConfidentialOverview Cayman EU & US Tax Other
Regulatory Regulatory
Cayman Islands Economic Substance Bil
What is it?
The International Tax Co-Operation (Economic Substance) Law, 2018 (the
“Law”) is the latest in a series of steps by the Cayman Islands to meet its
commitment as an Inclusive Framework member under the OECD’s global
BEPS initiative. It also reflects Cayman’s commitment to meet new EU
requirements modelled after BEPS Action 5.
The Law was passed into law on December 21, 2018 with an effective date of
January 1, 2019 for newly-formed entities in 2019, and a 6-month transitional
period for pre-existing entities (effective July 1, 2019).
Does your Relevant Entity have Relevant
Version 1.0 of Guidance Notes was issued on Feb 22, 2019. Industry
expects Version 2.0 of Guidance Notes, with industry specific comments, Activities? If so, you need Substance – the Relevant
to be issued in April 2019. Cayman’s law is subject to EU approval, thus Entity is required to:
there may be changes. The final EU approval is expected on March 12,
2019. o Conduct core-income generating activities in
Key Concept: Every Cayman Islands entity needs to consider if it Cayman
is a relevant entity conducting relevant activities. o Be directed and managed in an appropriate
manner from Cayman
o In connection with the entity’s relevant activities,
Relevant Entities: Includes Cayman companies, limited liability the entity must have adequate operating
companies (LLC) and limited liability partners (LLP). Limited partnerships expenditure, premises and full-time employees
are not relevant entities under the Law. with appropriate qualifications, in Cayman
Cayman entities which are tax resident outside of Cayman are not
relevant entities.
Investment funds are also not relevant entities.
Relevant Activities: There are nine relevant activities, including fund
management business, insurance business and holding company
business.
© 2018 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
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This Document is CONFIDENTIAL and its circulation and use are RESTRICTED. © 2019 KPMG, a Cayman Islands partnership and a member
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All rights reserved.
Document Classification: KPMG ConfidentialOverview Cayman EU & US Tax Other
Regulatory Regulatory
Cayman Islands Economic Substance Bil …continued
Key Definitions What is the Economic Substance Test (ES Test)?
Fund management business is the business of managing securities as set out in All three factors must be met.
paragraph 3 of Schedule 2 to the Securities Investment Business Law, 2015
(“SIBL”), carried on by a relevant entity licensed under that Law for an investment 1. Conducts Cayman Islands core-income generating activities (CIGA):
fund.
• Activities that are of central importance to a relevant entity in terms of generating
income and that are being carried out in Cayman. In respect of fund management
Holding company business means the business of a pure equity holding
business CIGA entails:
company, which is further defined as a company that only holds equity
• Taking decisions on holding and selling of investments
participations in other entities and only earns dividends and capital gains. A
• Calculating risk and reserves
reduced economic substance test may apply if certain requirements are met.
• Taking decisions on currency or interest fluctuations and hedging positions
• It has complied with all applicable filing requirements under the
• Preparing reports or returns, or both, to investors or CIMA, or both
Companies Law; and
• It has adequate human resources and premises in Cayman for 2. Is directed and managed in an appropriate manner from Cayman:
holding and managing equity participations in other entities.
• The board of directors, as a whole, has the appropriate knowledge and
Investment fund means an entity whose principal business is the issuing of expertise in line with its role;
investment interests to raise funds or pool investor funds with the aim of enabling • Board meetings are held in Cayman at adequate frequencies, given the level of
a holder of such an investment interest to benefit from the profits or gains from decision making required;
the entity’s acquisition, holding, management or disposal of investments and • A quorum of directors must be present in Cayman during board meetings;
includes any entity through which an investment fund directly or indirectly invests • The minutes of the board meetings must record the making of strategic decisions
or operates, but does not include a person licensed under the Banks and Trust of the relevant entity at the meeting; and
Companies Law (2018) or the Insurance Law (2010), Building Societies Law • The minutes of all board meetings, along with appropriate records of the relevant
(2014) or Friendly Societies Law (1998). entity, must be maintained in Cayman.
Reporting and Penalties 3. Having regard to the level of relevant income derived from the relevant
Cayman entities that are within the scope of the Law must submit an annual activity carried out in Cayman:
report beginning in 2020, within 12 months after the end of each fiscal year (e.g.
• Adequate amount of operating expense incurred from within Cayman;
FYE 12/31/2019, reporting due FYE 12/31/2020). In addition to the annual report,
• Adequate physical presence in Cayman (e.g. office space; maintaining plant and
there is a separate annual notification requirement. Guidance Notes are expected
equipment); and
to provide detail on these information requirements. The annual notification and
• Has an adequate number of full-time employees or other personnel with
report filings are expected to be filed with the Cayman Islands Tax Information
appropriate qualifications in Cayman.
Authority.
Under certain circumstances, the ES Test may be met for Cayman Islands CIGA
Willful neglect of compliance of the Law may result in fines ranging from through outsourcing. Guidance Notes are expected to clarify the circumstances for
$10,000 (year 1) to $100,000 (year 2), plus possible court-ordered strike off. outsourcing.
© 2018 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
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This Document is CONFIDENTIAL and its circulation and use are RESTRICTED. © 2019 KPMG, a Cayman Islands partnership and a member
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All rights reserved.
Document Classification: KPMG ConfidentialOverview Cayman EU & US Tax Other
Regulatory Regulatory
Cayman Master Feeder Redemptions – Impact of Ardon
Maroon Court Case
What is it?
A 2018 judgment in the Grand Court of the Cayman Islands has
had ramifications for industry participants relating to master feeder
structure subscriptions and redemptions.
The facts Key Points
In the liquidation of the Ardon Maroon Asia Master Fund Limited o Cayman Grand Court upheld separate
(the “Master Fund”) and the Ardon Maroon Asia Dragon Feeder legal identity of feeder funds.
Fund (the “Feeder Fund”), the Master Fund liquidators rejected a o Reliance on industry practice of “back-
proof of debt filed on behalf of the Feeder Fund for redemptions.
to-back” subscriptions and
This on the basis that (amongst other points) the Feeder Fund had
not correctly completed the redemption process, as required by redemptions between master funds
the articles of association of the Master Fund, as it had not and feeder funds questioned.
submitted a written redemption notice. o Review of feeder constitutional
The Feeder Fund appealed this rejection of the proof of debt,
documents and offering documents
arguing in summary that: required to determine validity of
current process followed for
1. A valid redemption had occurred as it was standard industry
subscriptions and redemptions in
practice for a ‘back-to-back’ redemption to automatically take
place between the Feeder Fund and Master Fund and that master feeder structures.
this could be understood from the Feeder Fund’s PPM; and
2. As the directors of both the Feeder Fund and Master Fund
were the same, and acted on the basis that a ‘back-to-back’
automatic redemption process was followed, that the actions
of the directors were sufficient to be a determination of the
directors to process the redemption or that any such written
notice requirements had been waived by the directors.
The Feeder Fund was unsuccessful in its appeal in all respects.
© 2018 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
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This Document is CONFIDENTIAL and its circulation and use are RESTRICTED. © 2019 KPMG, a Cayman Islands partnership and a member
Hot Topics: March 2019 firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
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Document Classification: KPMG ConfidentialOverview Cayman EU & US Tax Other
Regulatory Regulatory
Cayman Master Feeder Redemptions – Impact of Ardon
Maroon Court Case….continued
Actions for Managers
Main themes
It is recommended managers of Cayman master feeder structures
• Unless the relevant constitutional and offering documents of take the following actions:
Cayman master and feeder funds are written in such a way that a
formal process is not required between a feeder fund and a a) Discuss with their administrator and board of directors what the
master fund to effect a subscription/redemption (i.e. written current process is followed between the master/feeder funds on
subscriptions/redemption documents completed), then the a subscription/redemption and whether written notices are being
process as set out in the constitutional documents must be sent;
followed for a valid subscription or redemption to take place.
b) Review the fund(s) constitutional documents and determine
• Industry practice is not an appropriate reason for the terms of the whether they are following the terms of the fund documents
relevant fund documents not to be followed and, while it is correctly; and
operationally helpful for the directors of a master and feeder fund
to be the same, sufficient and clear corporate records should c) changing the process or, if required, the fund documents so that
always be maintained by separate legal entities documenting any the redemption process and documents for the feeder and
actions and resolutions of the directors. master meet with what they wish to occur in practice.
© 2018 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
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This Document is CONFIDENTIAL and its circulation and use are RESTRICTED. © 2019 KPMG, a Cayman Islands partnership and a member
Hot Topics: March 2019 firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
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Document Classification: KPMG ConfidentialOverview Cayman EU & US Tax Other
Regulatory Regulatory
Alternative Investment Fund Managers Directive (“AIFMD”) - Mutual Funds Law (2019
Revision) and Securities Investment Business Law (2019 Revision)
Background
In August 2015, the Cayman Islands, through the Legislative
Assembly, enacted legislative changes and passed the Mutual Funds
(Amendment) Law, 2015 and the Securities Investment Business
(Amendment) Law, 2015 (collectively, the “Amendment Laws”). This
facilitated the creation of a frame work for Cayman Islands Managers
Key Points
and Funds to voluntarily “opt-in” via a passport regime to the
European Union’s (“EU”) AIFMD system in order to manage or o Election to apply for licence or to be
market funds to investors domiciled in the EU. registered as an EU Connected Fund
and/or EU Connected Manager.
In December 2016, the Cabinet approved the AIFMD Regulations i.e.
the Mutual Funds (EU Connected Fund (Alternative Investment Fund
o Notification requirements to the
Managers Directive)) Regulations, 2016 and the Securities Cayman Islands Monetary Authority
Investment Business (EU Connected Fund (Alternative Investment (the “Authority”) if marketing in a
Fund Managers Directive)) Regulations, 2016 setting out the details country or territory within the
of the Amendment Laws. European Economic Area (“EEA”),
Further to a Commencement Order approved in December 2018, the using prescribed forms.
Amendment Laws and the AIFMD Regulations came into force o Special audit requirements for
on January 1, 2019. regulated EU Connected Funds and
On February 19, 2019 and February 21, 2019, the Mutual Funds Law annual report requirements for
(2019 Revision) (the “MFL”) and the Securities Investment Business Cayman Islands AIFMs for each EU
Law (2019 Revision) (the “SIBL”), respectively, came into effect. Connected Fund.
o Penalties for non-compliance with the
relevant Amendment Laws.
Who does the MFL and SIBL apply to?
o EU Connected Funds
Hot Topics: March 2019
o EU Connected Managers
o Licensed (regulated) or registered mutual funds
© 2018 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
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This Document is CONFIDENTIAL and its circulation and use are RESTRICTED. © 2019 KPMG, a Cayman Islands partnership and a member
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Document Classification: KPMG ConfidentialOverview Cayman EU & US Tax Other
Regulatory Regulatory
AIFMD - MFL (2019 Revision), SIBL (2019 Revision)….continued
Notifications and Attestation Requests
EU Connected Funds EU Connected Managers
a) Within three months of the commencement date of the AIFMD a) An EU Connected Manager that is an existing licensee making a notification
Regulations, an EU Connected Fund that is marketing in a country or pursuant to section 5(2)(A) of the SIBL, shall notify the Authority within three
territory within the EEA, shall notify the Authority that the EU months of the commencement date of the AIFMD Regulations.
Connected Fund is marketing in a country or territory within the EEA.
b) An EU Connected Manager that has elected to be licensed pursuant to section
b) An EU Connected Fund that commences marketing in a country or 5(2) of the SIBL, shall notify the Authority within twenty one days of the EU
territory within the EEA after the commencement date, shall within Connected Manager receiving its licence.
twenty one days of the commencement of marketing in a country or
territory within the EEA, notify the Authority that the EU Connected c) A licensee shall inform the Authority in writing of a change in any of the
Fund is marketing in a country or territory within the EEA. information provided to the Authority within stipulated timelines (ranging from
immediate to 21 days). A licensee shall also inform the Authority in writing
c) An EU Connected Fund shall notify the Authority within twenty one within seven days of ceasing to be a Cayman Islands AIFM.
days of the date upon which marketing ceased in all Member States
and of any changes made to information provided to the Authority, Particulars to be submitted to the Authority, as applicable, include the name of
within twenty one days of the date of the change. each fund and the jurisdiction of establishment of each fund managed or marketed
by the EU Connected Manager; name of each Member State in which the
Particulars submitted to the Authority, as applicable, include the date on securities investment business is being carried on; date on which the person
which such marketing commenced/is expected to commence; the name of commenced or will commence carrying on the securities investment business;
the competent authority(ies) in the Member State in which the marketing capital sufficiency evidence; a declaration of compliance with the AIFMD
takes place/is expected to take place; the name and contact details of the requirements applicable where authorized as an AIFM in a particular Member
EU Connected Fund’s manager and country of authorization; a declaration State; prescribed information regarding the AIFM’s remuneration policies and
that the EU Connected Fund is marketed in each of the Member States in practices and delegation/sub delegation arrangements with third parties of key
accordance with the laws in force in that Member State etc. relevant functions; policy regarding use of leverage etc.
An EU Connected Fund that is not a regulated mutual fund shall submit, REEF Forms for the Notification and Attestation Requests of EU Connected
among other particulars, the type of fund, setting out why the EU Fund Managers and EU Connected Mutual Funds pursuant to the AIFMD
Connected Fund is not required to be regulated. Regulations are available within the Regulatory Enhanced Electronic Forms
Hot Topics: March 2019 Submissions (REEFS) portal.
Please get in touch if you would like to discuss how we can help your fund or
firm with these new requirements.
© 2018 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
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Document Classification: KPMG ConfidentialOverview Cayman EU & US Tax Other
Regulatory Regulatory
Cayman AML requirements
Regulatory changes
• The Cayman Islands’ Proceeds of Crime Law (“POCL”) has
been updated to widen the list of activities classified as
Relevant Financial Business (“RFB”).
• RFB is now defined to include entities “otherwise
investing, administering or managing funds or money on
behalf of other persons”.
• Therefore, unregistered Cayman Islands based investment Key Points
entities, such as private equity or closed-ended funds, are o The deadline for designation and
now required to be compliant with the AML requirements. notification to CIMA was the 31 May
2018 for newly established Cayman
Islands domiciled funds.
What must Financial Service Providers do?
• Financial service providers must appoint a natural person in o The deadline was extended to 30
the Cayman Islands as Money Laundering Reporting Officer September 2018 for existing funds.
(“MLRO”), Deputy Money Laundering Reporting Officer
(“DMLRO”) and Anti-Money Laundering Compliance
Officer (“AMLCO”).
• They must notify the Cayman Islands Monetary Authority
(“CIMA”) of the designation immediately for newly
established funds and by 30 September 2018 for existing
funds.
© 2018 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
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Document Classification: KPMG ConfidentialOverview Cayman EU & US Tax Other
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Cayman AML requirements…continued
AMLCO MLRO
The AMLCO must have sufficient skills, expertise and The MLRO must have sufficient skills, expertise and be at senior
resources to take this appointment. They must also be management level to take this appointment. They must also be
independent and have access to the books and records of the independent and have access to the books and records of the RFB.
RFB. The following are some of the tasks which they are required to
The following are some of the tasks which they are required to undertake:
undertake: • The MLRO is responsible for receiving and investigating internal
suspicious activity reports (“SAR”).
• Liaise with CIMA on any requests for information.
• They are responsible for making the determination to file a SAR
• Establish the RFB’s AML policies and procedures and
with the Financial Reporting Authority (“FRA”).
oversee the testing and maintenance of same.
• The MLRO is responsible for the submission of the SAR on
• Ensure the Know-Your-Customer checks are conducted on behalf of the entity.
new investors and new employees.
• Ensure staff are aware of the reporting obligations and
channels of reporting for suspicious activity. DMLRO
• Conduct or organize employee AML training on a regular The DMLRO must discharge the duties of the MLRO in their
basis. absence.
• Report on a regular basis to those tasked with governance.
The AMLCO may hold the role of either MLRO or DMLRO but
not both.
© 2018 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
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Document Classification: KPMG ConfidentialOverview Cayman EU & US Tax Other
Regulatory Regulatory
Cayman Data Protection Law
As of September 2019, The Data Protection Law, 2017 (“DPL”) will
come into force in the Cayman Islands. It will be applicable to all
organisations (including funds) which are established in the Cayman Islands
or processing data there. It introduces a set of data protection principles
for content, consent and duty to comply in relation to the processing of
personal data.
Key Requirements of the DPL
To protect personal data against risks, such as the Key Points
loss or unauthorised access, or unauthorised o At the request of industry, the
destruction, use, modification or disclosure of Cayman Islands Data Protection
personal data or other misuses. Law coming into force date has
been postponed until September
To notify the Ombudsman “without undue delay”,
2019.
within 5 days in the case of a security breach leading
o The ombudsman has confirmed
to the accidental loss or unlawful destruction or
unauthorised disclosure of or access to personal
that funds do not need to appoint
data which is likely to adversely affect an individual. a data protection officer.
o All Cayman entities have to
To ensure that personal data is used fairly and lawfully; comply.
in accordance with the rights of individuals; for limited o Must report breaches likely to
specified purposes; is adequate, relevant and not affect individuals privacy to the
excessive; is accurate and kept up-to-date and is not Ombudsman and the individual(s)
kept for longer than is necessary for that purpose or affected.
those purposes. o Must assess data protection
To formally assess the level of protection provided by third parties conducted by third parties.
for personal data, that it remains responsible for, to “reasonably
believe” that the level of protection provided by the third party is
equivalent to that stated under DPL prior to any potential transfer.
© 2018 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
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This Document is CONFIDENTIAL and its circulation and use are RESTRICTED. © 2019 KPMG, a Cayman Islands partnership and a member
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Document Classification: KPMG ConfidentialOverview Cayman EU & US Tax Other
Regulatory Regulatory
Cayman Data Protection Law…continued
What does this mean for you?
Cayman based fund managers need to do the following to make sure they are in compliance with the law:
• Understand what personal data your organization is holding with regards to investors;
• Understand how this data is processed and stored;
• Update both internal and external policies to inform investors and employees about information held on them;
• Prepare for the processing of data requests such as: Assessing what data is held, corrections of data and removal of personal data;
• Prepare a strategy for reporting any data breaches to the Ombudsman and the individuals affected, as this must be done within 5 days;
• Review your company’s IT security strategy;
• Consider any third party providers that hold your data and what security measures they have in place to secure the data;
• Consider completing a privacy impact assessment.
Conclusion
Cayman fund managers have to take stock of all personal data they may be holding. Considering all personal data flows, in all media, legacy
systems, cloud computing, third parties and email.
After the number of large breaches in recent years regulators are taking data and IT security much more seriously and backing it up with
significant fines.
Fines for non-compliance with the DPL range up to $100,000 or imprisonment for a term of five years, or both.
Further information on DPL can be found here:
http://ombudsman.ky/data-protection
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Regulatory Regulatory
AIFMD & UCITS rules for Depositaries & Sub-Custodians
Commission’s draft rules for fund assets
Both the AIFMD and the UCITS Directive include requirements on
depositaries and sub-custodians regarding the safe-keeping of
fund assets. The current requirements are largely similar, but the
co-legislators decided to apply an additional provision for UCITS
relating to sub-custodians in third countries and applicable
insolvency law, given that UCITS are marketed to retail investors.
Both sets of current requirements include a provision requiring Key Points
multiple omnibus accounts to be held at each level down the o The European Commission has
custody chain.
published draft regulations amending
In the light of The European Securities and Markets Authority’s the AIFMD and UCITS rules for
(ESMA) work on the different approaches by national regulators, depositaries and sub-custodians of
the Commission believes it necessary to amend both the AIF and
fund assets, including prime brokers
UCITS rules. The Commission's intent seems to be to respond to
the points highlighted by ESMA's work, but the drafting in various that provide such services.
places is causing significant concerns for various industry players. o The amendments could have
Also, applying the UCITS rules relating to insolvency law also to significant implications for depositaries
AIF assets is not in line with the co-legislators' original intent and and sub-custodians, and therefore for
could restrict EU professional investors' access to investments in fund management companies and
certain jurisdictions.
investor choice.
© 2018 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
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Regulatory Regulatory
AIFMD & UCITS rules for Depositaries & Sub-Custodians…continued
Commission’s draft rules for fund assets continued
The current AIFMD Level 2 Regulation created an additional cost • Various new sub-paragraphs relate to information needing to be
by requiring multiple omnibus accounts to be held at each level of passed by the sub-custodian to the depositary, so that “…on the
the custody chain. The requirements were subsequently basis of which the depositary can at any time establish the precise
incorporated into UCITS V. The Commission now proposes that nature, location and ownership of those assets”.
this requirement be removed, which will be welcomed by many
market participants. The Commission is proposing several other A new section is added for AIFs (which already exists for UCITS)
amendments: requiring the depositary to receive independent legal advice confirming
that applicable insolvency law recognises various points and that the
• A new section for both UCITS and AIFs relates to the contract
sub-custodian complies with any necessary conditions. This was not
between the depositary and sub-custodian. It is drafted in such
included in AIFMD precisely because it will cause significant issues in
a way that it can be read as requiring the complete segregation
relation to investment into certain jurisdictions and in relation to the use
of assets right down the custody chain, with separate
of US brokers (which operate under a different legal framework).
accounts for each depositary and for each type of fund needed
at each level of the custody chain.
Timeline
• A small textural change requiring sub-custodians to comply To allow depositaries time to adapt to the new requirements, the
with Art 89(1)(a)-(e) (rather than only (b)-(e)) can be read as Commission proposes that the new rules should be deferred until six
requiring the depositary to maintain duplicate records to the months after publication of the Regulations in the EU's Official Journal.
sub-custodian.
• The wording relating to the frequency of reconciliation has
been eased by the change from “regular” to “as often as
necessary” [or, in the UCITS amendment, to “as frequently as
necessary”]. However, there is new text on the factors
determining the appropriate frequency of reconciliations, which
are drafted in terms of trading activity - including trading for
other clients - rather than settlement activity (which is what
the sub-custodians see).
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Regulatory Regulatory
Senior Managers & Certification Regime (“SMCR”)
What is it?
On the 4 July 2018, the Financial Conduct Authority (“FCA”)
published near final rules on how they plan to extend the Senior
Managers & Certification Regime (“SMCR”) to all financial services
firms regulated by FCA operating under the Financial Services and
Markets Act (“FSMA”). The goal of SMCR is to “reduce harm to
Key Points
consumers and strengthen market integrity by making individuals
more accountable for their conduct and competence”. It also o Approval of Senior Managers by
impacts individuals outside the UK that have contact with UK clients FCA.
and incoming branches of non-UK firms that have permission to o Annual assessment of Senior
carry out activities regulated by the FCA. Managers and individuals with
The regulations are to be enforced from the 9th December 2019. Certification Functions.
o Conduct Rules required for all
There are three main challenges in implementing the new
regulations:
employees.
o SMCR rules impact both individuals
• Impact assessment - Understanding the impact of SMCR on based in the UK, overseas
operating models and group structures, in particular the
employees who deal with the UK
challenges to implementation posed by complicated matrix
management arrangements. and incoming of non-UK firms that
have permission to carry out
• Regulatory expectations - Obtaining sufficient clarity in terms of
activities regulated by the FCA.
the regulatory requirements, especially around the proposed
duty of responsibility. o Enforcement to commence from the
9th December 2019.
• Maintaining compliance - Putting the right technology in place to
manage and maintain compliance, whether that’s via an existing
technology platform or purchasing an external solution from a
provider. Either way, the answer lies in agile solutions that are fit
for purpose.
© 2018 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
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Senior Managers & Certification Regime…continued
The KPMG view Six key steps for asset managers
It’s understandable that many in the asset management industry
• Be proactive - make sure your CEO, Board and Executive
are concerned about what SMCR means and how best to
Committee are fully engaged in the process and that a senior
respond. There’s still a lack of clarity about elements of the new
level steering group is driving the implementation of the
regime and a great deal of work to be done, particularly in
regime.
formalising the internal policies and procedures to enable the
regime to operate properly. • Assess whether you have the right people in the correct
approved functions before the conversion of approved
KPMG has already worked with numerous financial services firms individuals takes place.
on the implementation of SMCR over the past four years. We
• If you’re part of a group, consider the practicalities of running
have a solid understanding of what asset managers should be
different regimes for different entities or ‘opting up’ core
doing and when, plus how the new regime can be a catalyst for
entities to meet the more onerous enhanced arrangements.
clarifying opaque responsibility allocations, simplifying complex
matrix management structures and optimising management time. • Examine the processes you already have in place and how
you can embed SMCR into your existing governance
In the run-up to the implementation of the SMCR for banking firms structure. That includes the ability to manage and maintain a
we saw that unsurprisingly the most proactive and early-engaging clear view of your workforce at all times, including, crucially,
firms were better equipped for the go-live date and better when senior managers leave the company.
informed to address any subsequent regulatory scrutiny. This is
one of the most valuable lessons we can learn as an industry • Create an effective communications plan for both internal
when implementing SMCR. and external audiences, including the regulators and parent
companies or branches of the firm.
• Engage early with the regulator to be clear on what they will
Further information can be found at the FCA’s website: expect and engage with future industry consultation.
\www.fca.org.uk/firms/senior-managers-certification-regime KPMG have a dedicated team in the UK assisting clients
with the implementation of SMCR. Please get in touch if
you would like to discuss how we can help your firm with
the implementation of SMCR.
© 2018 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
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Regulatory Regulatory
SEC: 2018 Investigations
Investigations and findings
SEC suspends trading company for making false
cryptocurrency-related claims about being SEC regulated
The SEC had to obtain an emergency court order to halt a planned
initial coin offering (ICO), which backers falsely claimed was
approved by the SEC. The SEC also had to suspend trading in the Key Points
securities of a company amid questions surrounding its statements o SEC investigations and findings
about partnering with a claimed SEC-qualified custodian for use researched were from October
with cryptocurrency transactions.
2018 to December 2018.
Charges against company operating an unregistered exchange o Main themes from the
The SEC settled charges against a company which was the founder investigations were the emerging
of a digital "token" trading platform. This was the SEC's first issues surrounding the rise of
enforcement action based on findings that such a platform operated
as an unregistered national securities exchange.
crypto currencies and digital
assets.
Two ICO issuers settle SEC registration charges and agree to
register tokens as securities
o In 2018 the SEC brought 821
enforcement actions, up from 754
The SEC settled charges against two companies that sold digital
tokens in initial coin offerings (ICOs). These are the Commission’s
in 2017.
first cases imposing civil penalties solely for ICO securities offering
registration violations. Both companies agreed to return funds to
harmed investors, register the tokens as securities, file periodic
reports with the SEC and pay penalties.
© 2018 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
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Regulatory Regulatory
SEC: 2018 Investigations…continued
Recent developments
The SEC’s focus for World Investor Week was on empowering the The Division was pursuing keeping pace with technological change, mainly
Main Street investors, which took place in October 2018. SEC staff through a Cyber Unit, which became fully operational in fiscal year 2018.
emphasized both the basics of investing and savings as well as In conjunction with the Department of Justice, the Cyber Unit investigates
important emerging issues like the rise of initial coin offerings and and prosecutes cyber-related misconduct. The Division has pursued
digital assets, distributed ledger technology, and other innovations. registration violations, false regulatory filings used for price manipulation,
misuse of the dark web, and misconduct surrounding initial coin offerings
In November, 2018, the SEC Enforcement Division (“Division”)
(“ICOs”), which have boomed over the past year, among other violations.
released its Annual Report summarizing the past year’s
enforcement activity. The report also highlights several significant
actions and initiatives that took place in FY 2018 and presents the
activities of the Division from both a qualitative and quantitative
perspective.
The core principles of the Division – focus on the Main Street
investor, focus on individual accountability, keep pace with
technological change, impose remedies that most effectively further
enforcement goals, and constantly assess the allocation of
resources. The Division’s adherence to these principles resulted in
meaningful results, including the return of almost $800 million to
harmed investors, holding individuals – including many at the
highest level – accountable, barring bad actors from the securities
markets, and sending strong messages of deterrence. The impact
of these actions has unquestionably protected investors of all types,
particularly retail investors. In the 2018 fiscal year, the SEC brought
821 enforcement actions, up from 754 in fiscal year 2017.
© 2018 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
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Regulatory Regulatory
NFA: Cybersecurity Interpretive Notice Amendment
NFA Amends Interpretive Notice Regarding Information Systems
Security Programs—Cybersecurity
The National Futures Association has issued an amendment to their
Information Systems Security Programs (ISSP) Interpretive Notice
which came into effect in March 2016. The amendment which will
come into effect on April 1, 2019 seeks to clarify common questions
relating to training obligations, program approval and sets forth the
requirement for the reporting of certain cybersecurity incidents.
What has changed?
Specifically, the amendment addresses the following:
Members must provide cybersecurity training to new employees Key Points
as part of their onboarding, and on a continuing basis at least once Updated requirements from the NFA on:
per year. o Cybersecurity Training
Previously the approval of the ISSP could be provided by an o ISSP Approval
executive level official. This has now been changed to specify a o Incident Reporting
senior level officer with primary responsibility for information
system security, such as a Chief Technology Officer or a Chief
Information Security Officer.
Although the existence of a Cybersecurity Incident Response Plan
was previously a requirement of the ISSP Interpretive Notice, it did
not require notifying NFA of any incidents. The amendment will
now require that Members report to the NFA any cybersecurity
incidents that result in a loss of customer funds or Member’s
capital. It will also now require that the NFA be notified of any
cybersecurity incident whereby a Member would be required by
federal or state law to notify it’s customers or counterparties.
© 2018 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
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Regulatory Regulatory
NFA: Cybersecurity Interpretive Notice Amendment…continued
Key considerations for our clients How can KPMG assist?
1. Does your current ISSP include an appropriate level of employee Related Services:
training?
Cyber Maturity Assessment
2. Has your organization clearly assigned the responsibility of IT Controls Assessment
information systems security to a senior level officer? Vulnerability Scanning
IT Security Awareness Training
3. Do you have the people, processes and tools in place to know
Simulated Phishing Attacks
whether you have suffered a cybersecurity breach?
Compromise Assessment
4. Does your organization have a plan for dealing with cybersecurity Privacy Assessment
incidents? Cyber Response Plan Development
Cyber Response Services
5. Do you understand your notification obligations towards your
employees, customers, counterparts and regulators in the event of
a cybersecurity breach? Benefits:
6. Do you have a communications plan in place in the event of a
Increase the cyber resilience of your organization
cybersecurity breach?
Enhance the level of cybersecurity awareness of your
employees
Have a clear plan for dealing with cyber breaches
Understand Privacy regulations and laws that impact your
organization
Hot Topics: Q1 2018
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