Regulated entities operating within the jurisdiction of the Cayman Islands are now subject to newly implemented rules by the Cayman Islands Monetary Authority (CIMA) concerning internal controls. These rules, which took effect on October 14, 2023, aim to enhance the operational integrity of businesses, protect client assets, maintain precise record-keeping, and ensure the generation of credible financial, operational, and regulatory reports.
The regulation delineates five essential components that regulated entities must adhere to in order to meet the internal control requirements. Entities must address business continuity, client asset safeguarding, record-keeping, reporting, and proportionality. Business continuity measures ensure uninterrupted operations during unforeseen events. Robust controls are required to protect client assets, and accurate record-keeping is crucial for regulatory compliance. Reliable financial, operational, and regulatory reports must accurately reflect the entity’s performance and compliance with laws. The application of these rules considers the unique characteristics and risk profiles of each entity. Due to the varying size, complexity, structure, nature and risk profile of the regulated entity, the implementation is subject to proportionality assessment that takes into consideration all these factors. The application is likely to differ significantly among different entity classes and even among entities within the same class.
In the Cayman Islands investment funds landscape, the internal control rules apply to the Master Fund within a Master-Feeder structure. Furthermore, if a Delaware LLC is acting as a general partner for such a fund, it bears the responsibility of ensuring compliance with these rules. Engaging a Cayman-based service provider for governance purposes could prove beneficial, as they possess a deep understanding of the Cayman corporate governance regime.
CIMA Registered Funds Internal Audit Regulations
CIMA has also implemented specific rules regarding internal audits for registered funds, in addition to the general internal control requirements. One provision state that registered funds must arrange for their accounts to be audited annually by an auditor approved by CIMA. These audited accounts, along with the Fund Annual Return (FAR), must be submitted to CIMA within six months after the financial year-end.
Operators of the fund or assigned service providers have the option to request audit waivers or extensions for registered funds, subject to approval from CIMA. It’s important to note that the presence of outstanding fees or audited accounts does not hinder the fund’s ability to file its audited accounts for the current year.
CIMA emphasizes the significance of regular internal audits for entities operating registered funds. In a fund structure that includes Limited Partners (LP) and General Partners (GP), the responsibility for internal audit typically lies with the management team and the board of directors. The main purpose of this audit is to help the management assess the strength of their controls and infrastructure, taking into account the nature and scale of their operations.
Internal audit reports for funds in the Cayman Islands generally follow a standardized structure. They typically consist of an introduction that provides an overview of the audit objectives, scope, and methodology. The executive summary summarizes the key findings, recommendations, and significant observations. The detailed findings and recommendations section presents a comprehensive analysis of the audit findings, including identified control weaknesses and suggested improvements. The report concludes with a concise summary of the audit outcomes and any required follow-up actions. Appendices are included, containing additional supporting documentation such as audit testing procedures, sample checklists, and relevant regulatory guidelines.
Remarks:
Please note that the information provided in this article is based on the latest accessible data and is subject to potential changes. To obtain more detailed and up-to-date information, it is strongly recommended to refer to the official CIMA guidelines or seek advice from a legal expert. By adhering to the internal control and audit requirements set forth by CIMA, regulated entities in the Cayman Islands can enhance their operational resilience, protect client interests, and maintain compliance with regulatory standards.
