The recent Cayman Islands' Securities Investment Business Law will see the licensing of anyone who conducts securities investment business and harsh penalties for those committing market offenses
The recently introduced Cayman Islands Securities Investment Business Law requires the licensing of anyone conducting securities investment business except where an exemption is available. The licensing requirement applies only to entities incorporated, formed or registered in the Cayman Islands or to any entity that has established a place of business in the Cayman Islands through which securities investment business is carried out.
Both securities and securities investment business are very broadly defined. Securities include shares, limited partnership interests, unit trust interests, debentures and bonds and other instruments that evidence indebtedness, warrants, certificates representing certain securities, options, futures and contracts for difference.
Securities investment business includes dealing in securities, arranging deals in securities, managing securities and advising on securities, but certain activities are excluded from the definition. Excluded activities include:
• Securities that evidence indebtedness.
• An entity dealing with its own securities.
• Certain risk management transactions.
• Dealing with securities in the disposal of goods or supply of services.
• Transactions in the course of a business which is not securities investment business where there is no separate remuneration for the securities transaction.
• Employee schemes.
• Where the transaction involves the application of the persons own proprietary assets.
• Arranging one's own deals as principal or agent.
• Enabling parties to communicate.
• Arrangements for the provision of finance on securities transactions.
• Certain specified introductions to excluded persons (see below).
• General advice in publications in the media.
• Activities which are part of the legal, accounting or other profession.
A licence is not required where a transaction is with excluded persons, subject to a requirement to file an annual declaration with the Monetary Authority and pay an annual fee of CI$1,000 (US$1,220) if certain exemptions are claimed. The definition of excluded persons includes:
• Inter-group transactions where the person carrying on the transaction has a registered office in the islands.
• Transactions for a joint venture where the person is a participant in the joint venture.
• The Cayman Islands Stock Exchange, the Monetary Authority or the Cayman Islands Government and its agencies.
• Transactions carried out for sophisticated persons where the person carrying out the business has a registered office in the Islands or is regulated by a recognised overseas regulatory authority. Sophisticated persons are defined as a person regulated by the Monetary Authority, a person regulated by a recognised overseas regulatory authority, a person whose securities are listed on a recognised securities exchange or a person who, by virtue of knowledge and experience in financial and business matters, is capable of evaluating the merits of a proposed transaction and participates in a transaction with monetary amounts of at least CI$80,000 (US$97,600) in the case of each single transaction.
• Transactions carried out for high net worth persons where the person carrying out the business has a registered office in the Islands or is regulated by a recognised overseas regulatory authority. High net worth persons are defined as an individual whose net worth is at least CI$800,000 (US$975,610), or any person that has total assets of not less than CI$4,000,000 (US$4,878,100);
• Transactions carried out for a company, partnership or trust where the shareholders, unit holders or limited partners are sophisticated persons or high net worth persons.
• Transactions carried out by persons who are involved in securities investment business only as directors, partners, liquidators, trustees in bankruptcy, receivers, executors, or trustees provided that such person is not separately remunerated and does not hold itself out as carrying out securities investment business or is acting on behalf of an entity that is otherwise licensed or exempted from licensing under the law.
If an exemption is claimed because the transactions are inter-group activities, or because the transaction is carried out with sophisticated persons or high net worth persons, then the person claiming the exemption has to file an annual report with the Monetary Authority and pay an annual fee of CI$1,000 (US$1,220).
It is interesting to note that there is no exemption from licensing for entities licensed under other legislation in the Cayman Islands. Therefore banks, trust companies, mutual fund managers and other licensed entities will have to apply for a licence under the law if they engage in securities investment business other than with exempted persons.
The regulations to the law, once passed, will include a description of the requirements for a licence. In general, a licence will not be granted unless the applicant has satisfied the Monetary Authority that the applicant will be able to comply with the law and the regulations, the applicant will be able to comply with Cayman Islands anti-money laundering laws, it is not against the public interest for the application to be approved, the applicant has personnel with the necessary skills, knowledge and experience and appropriate facilities and books and records, and the senior officers and managers of the applicant are fit and proper persons.
In granting a licence, the Monetary Authority can impose conditions limiting the nature and scope of the business, specifying whether or not the licensee may hold clientsš assets, and requiring the licensee or one of its senior officers or managers to maintain membership in a recognised securities exchange or a recognised securities organisation.
A person who carries on securities investment business without a licence is liable to a fine of CI $100,000 (US$122,000) and/or imprisonment for a term of one year, plus a fine of $10,000 for each day the offence continues. Senior officers of a company which commits this offence are similarly liable.
Regulations will also be passed dealing with conduct of business by licensees and financial requirements and guidance notes will also be issued by the Monetary Authority.
misleading market offenses
The law also creates offences for creating or attempting to create a false or misleading market or being involved in insider dealing.
The false and misleading market offence is committed if a person creates or does anything which is calculated to create a false or misleading appearance of active trading in any listed securities or a false or misleading appearance with respect to the market for, or the price of, any such securities. The offence is punishable on summary conviction to a fine of CI$4000 (US$4900) and/or imprisonment for a term of one year and on conviction by indictment to a fine of CI$10,000 (US$12,200) and/or imprisonment for a term of seven years. Senior officers of a company that commits this offence are similarly liable.
The insider dealing offence is committed by an individual who has information as an insider if they deal in listed securities that are price-affected in relation to the information, they encourage another person to do so, or if they disclose the information other than in performance of their employment, office or profession. The offence is punishable on summary conviction to a fine of CI$4000 (US$4900) and/or imprisonment for a term of one year and on conviction by indictment to a fine of CI$10,000 (US$12,200) and/or imprisonment for a term of seven years.
It is a defence to a charge of insider dealing to show that no profit was expected attributable to the use of the price-sensitive information, to show the belief that the information had been widely disclosed so that no one would be prejudiced by not having the information, or to show that the transaction would have been completed even without the information.
It is also a defence to the charge of disclosing insider information to show that you did not expect any person to deal in listed securities because of the disclosure or that you did not expect any such dealing to result in a profit attributable to the information. Further defences are available to market makers, persons dealing in market information where it was reasonable for a person in such a position to act as they did, and actions in connection with an acquisition or disposal which was under consideration or the subject of negotiation or in the course of a series of such acquisitions or disposals.
An individual is only guilty of the offence of encouraging another person to use insider information or disclosing insider information if they were within the Cayman Islands at the time of the offence or the alleged recipient of the insider information was within the Islands at the time they are alleged to have received the information or encouragement. The offence of dealing with insider information is not subject to this limitation.
Certain activities are excluded from the securities investment business definition including certain risk management transactions.
There is no exemption from licensing for entities licensed under other legislation in the Cayman Islands.
The law also creates offenses for creating or attempting to create a false or misleading market or being involved in insider dealing.
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