Cayman Islands defends itself in note to AIFM rapporteur

The Cayman Islands has intervened in the debate over the EU's alternative investment fund managers (AIFM) directive, in an attempt to press the jurisdiction's case for a European passport.

Cayman Finance chairman Anthony Travers wrote to the EU parliament's rapporteur on the directive, Jean-Paul Gauzès, laying out the ways in which the Cayman Islands already meets or exceeds regulatory and transparency requirements for hedge funds jurisdictions.

Travers said he had the impression "there may exist a misunderstanding about the nature of the transparency which exists in relation to the Cayman Islands hedge funds industry and the manner in which Cayman Islands hedge funds operate."

He told Gauzès: "The Cayman Islands financial services industry operates to access and pool funds from the international capital markets and directs those funds into investment opportunities in G20 jurisdictions.

"Whilst in terms of AUM [assets under management] the favoured locations for investment managers of Cayman funds are the United States and Asia, the Cayman Islands industry would welcome any opportunity to establish with you a regime that would enable European Union based fund managers to continue to benefit from investment by Cayman Islands investment vehicles."

In the letter Travers laid out ways in which Cayman is likely to meet any equivalency criteria stipulated by the directive. He said Cayman had full membership of the International Organisation of Securities Commissions (Iosco) and expected "all Cayman Islands regulated funds to operate on the basis of full transparency".

He added that unlike a number of EU jurisdictions the Cayman Islands opted for full pro-active tax reporting for all EU residents when it signed the EU Savings Directive in 2003 and has fulfilled criteria to meet EU equivalency on the directive.

The jurisdiction also signed or was negotiating a number of tax information exchange agreements with EU member states. Cayman has already signed 16 tax information exchange agreements (TIEAs), over and above the OECD critera for inclusion on the 'white list' of compliant countries.

Travers also noted Cayman's anti-money laundering legislation was found to be superior to most EU jurisdictions under International Monetary Fund and Financial Action Task Force evaluations.

He said there was no objection to EU institutions establishing operations and trading from the Cayman Islands.

Speaking to Hedge Funds Review, Travers acknowledged the letter came very late in the legislative process. He said he felt that statements made recently by Gauzès suggesting that Cayman would not meet equivalency criteria misrepresented the jurisdiction.

Travers said Cayman was aware it had no role in the EU process and was until now sitting back and waiting to see how the directive developed before adopting a position on behalf of the funds industry. However, he felt it was important to correct any misunderstandings about how Cayman was perceived.

"I'm not so naive as to believe that the Cayman Islands has any influence in what is a political process," he added.

He said the directive still had a considerable number of flaws that would impact negatively on EU investors, while managers based outside the EU would still use Cayman as a funds domicile.

The intervention comes just days before the EU parliament's committee on economic and monetary affairs, on which Gauzès sits, is due to vote through an amended version of the directive. The delayed vote was scheduled for Monday, May 10, but was postponed by a week in order for Gauzès to incorporate amendments proposed by the parliament's legal affairs committee.

The EU council is also due to vote on its version of the legislation on May 18.

Throughout the lengthy negotiation process over the directive the hedge fund industry has warned that the proposals risk creating a fortress Europe and would prevent investors within the EU from allocating capital to hedge funds domiciled outside member states.

US Treasury Secretary Tim Geithner has also intervened twice, sending letters to EU internal markets commissioner Michel Barnier recommending a more open approach. He feared the EU directive could be interpreted as protectionist and put US-based hedge fund managers at a disadvantage compared with their EU counterparts.