How Cayman fund investors may redeem from entities with frozen assets Loop Cayman Islands

Black Immigrant Daily News

This month, the Cayman Islands’ financial services industry received some good news about Cayman-based investment funds whose assets were frozen under regulation 64 of the Russia (Sanctions) (EU Exit) Regulations 2019 (the “Russia Regulations”) as extended to the Cayman Islands (with modifications) (the “Modified Regulations”) by the Russia (Sanctions) (Overseas Territories) Order 2020.

This news, which came in the form of a licence issued by the Governor of the Cayman Islands on October 4, 2022 (the “Licence”), allows certain investors to redeem or withdraw their interests from these investment funds.

In addition, these investment funds may pay out disbursements to cover basic needs, including fees of service providers.

Limits on redemption or withdrawals

To facilitate the wishes of investors who wish to exit, the Licence states that the investment funds (or a person who is empowered to direct the business of the investment fund, or act on its behalf) may redeem, withdraw or otherwise deal with a share, trust unit, partnership interest or other right that carries an entitlement to participate in the profits or gains of the investment fund.

However, such redemptions or withdrawals or dealings cannot be made in respect of a person who is designated from time to time by the Secretary of State under the Russia Regulations (“Designated Person”) or in circumstances where it can be shown that there is control (directly or indirectly) by a Designated Person.

Further, no funds or economic resources shall be made available directly or indirectly to, or for the benefit of, a Designated Person or any person (including any individual, body of persons corporate or unincorporate, any organisation and any association or combination of persons) which is owned or controlled directly or indirectly by a Designated Person.

With respect to all of the foregoing, the relevant redemption, withdrawal or other dealing must be in accordance with the Licence and the investment fund’s constitutional and contractual documents.

Paying disbursements

In addition to these permitted redemptions or withdrawals, the Licence states that investment funds may pay the following expenses:

insurance premiums, audit fees, accounting fees, regulatory fees, corporate services and registered office fees, director fees, professional service provider fees (including legal fees) and any other reasonable routine expensesreasonable fees or reasonable service charges arising from the routine holding and maintenance of the investment fund’s frozen funds or economic resources

In connection with the foregoing, the investment fund or the fund manager must keep accurate, complete and readable records, on paper or electronically, of any activity purporting to have been permitted under the Licence for a minimum of six (6) years.

Notification Requirements

In relation to the redemption and fee payment permissions, the investment fund or the investment fund’s manager (defined as a person who is empowered to direct the business of the investment fund, or act on its behalf) must do the following:

report to the Governor (which may be provided by email to GovernorsOffice.CaymantBfcdo.oov.uk) as soon as practicable the first time this Licence is relied upon, and, subsequently, must report to the Governor on the 16th of every month setting out any activities carried out in the preceding month where the investment fund is regulated by the Cayman Islands Monetary Authority (“CIMA”), the investment fund or the fund manager must notify CIMA of its use of the Licence within three business days of such use

It should be noted, however, that any notification provided above does not constitute verification by the Governor that the activity purporting to be permitted under the Licence is permitted.

Consequences for breach

According to the Licence, failure to comply with any conditions attaching to the Licence may lead to prosecution under the Modified Regulations.

In addition, the permissions granted under the Licence do not authorize any act which the person carrying out the act knows, or has reasonable grounds for suspecting, will result in funds or economic resources, being dealt with or made available in breach of the Modified Regulations.

Licence expiration date and possible Licence amendments

Those having the benefit of the Licence should also be aware that, while the Licence takes effect from October 4, 2022, it expires on April 4, 2023 (the Licence, once issued, is also not transferable to any other party).

In addition, stakeholders should note that the Governor may vary, revoke or suspend the Licence at any time, which may prove to be beneficial to the financial services industry if the Governor decides to vary the Licence to allow investment funds to take certain actions in relation to sanctioned investors.

Such actions, if deemed prudent by the Governor, could include amendments to the wording of the Licence to include “permitted dealing,” which would allow the following (subject to the terms of the entity’s limited partnership agreement, trust deed, articles of association or other governing document):

permitting the relevant investment fund to effect a compulsory redemption of shares, interests or units held in the names of (or controlled by) sanctioned investors and placing those investors in a liquidating trust or other special purpose vehicle whose assets and activities would be frozen (regarding this, no persons connected to sanctioned investors or other sanctioned persons should be appointed as directors or trustees or general partners of the new vehicle)permitting directors or trustees or general partners (not connected to sanctioned investors or other sanctioned persons) to designate separate share classes, units or partnership interests. In this scenario, sanctioned investors would be redeemed out of existing share classes and placed in newly designated classes or side pockets. All dealings in these newly designated share classes and side pockets could then be prohibited (regarding this, the directors (or trustees or general partners) of the relevant investment fund may need to consider whether it is feasible to, or how to, attribute a portion of the assets, being frozen assets, to the side pockets)

These scenarios for future permitted dealing might make it easier for investment funds to continue rather than to simply collapse or experience permanent uncertainty just because of the existence of sanctioned investors.

(Note that none of the foregoing is legal advice and the Cayman Islands’ legal counsel for the relevant investment fund must be consulted in connection with the ability to deal with any share, interest or unit in the relevant Cayman fund subject to sanctions or otherwise.)

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