Audrey Roe, Cayman Islands Monetary Authority

Claire Loebell, EY

Rupert Bell, Walkers Global

Sam Dawson, Carey Olsen

Q3 2016 – Quarterly Technical Session

29 September 2016

Recovery & Insolvency Specialists Association

Agenda Recent/Past Events

Q1 2016 Quarterly Technical Session 10 March 2016

“Derivatives For Dummies”

Mike Gasior

Q2 2016 12 May 2016

RISA/Chancery Bar association seminar

“Cayman Insolvency Clawback Claims”

Hugh Dickson, Stephen Atherton QC,

Peter McMaster QC, Matthew Morrison

Agenda (continued)Forthcoming Events

Local Events

Cayman Investment Forum (via the CFA Society) 13 October 2016 (Ritz Carlton)

Q4 Quarterly Technical Session BREXIT panel discussion

1 November 2016 (Cinema)

RISA/South Square conference 22 November 2016 (Ritz Carlton)

Christmas Luncheon 15 December 2016 (GTYC)

Agenda (continued)

Forthcoming Events (continued)

International Events

INSOL one day course BVI

17 November 2016

INSOL 2017 Congress

19 to 22 March 2017, Sydney

Agenda (continued)Today's presentation

Practical Considerations of Controllership Appointments

Sam Dawson, Carey Olsen

Claire Loebell, EY

Rupert Bell, Walkers

Audrey Roe, CIMA

Followed by networking at Abacus

Statutory Powers of Appointment Mutual Funds Law – s 30(1)(e) (mutual funds) and s 31(1)(e) (fund administrators)

“the Authority may ……appoint a person to assume control of the affairs of the [mutual fund] or [administrator relating to mutual fund administration].

Banks and Trust Companies Law – s 18(1)(v)

“the Authority may forthwith do any of the following-…at the expense of the licensee, appoint a person to assume control of the licensee’s affairs who shall, mutatis mutandi, have all the powers of a person appointed as a receiver or manager of a businessappointed under section 18 of the Bankruptcy Law (1997Revision);”

10

Statutory Powers of Appointment Securities Investment Business Law – s 17(2)(f)(viii)

“the Authority may…at the expense of the licensee, appoint a person who shall be known as the Authority’s appointed controller, to assume control of the licensee’s affairs who shall, subject to necessary modifications, have all the powers of a person appointed as a receiver or manager of a business appointed under section 18 of the Bankruptcy Law (1997 Revision);”

The Insurance Law – s 24(2)(h)

“the Authority may…at the expense of the licensee, appoint a receiver or person to assume controlof the licensee’s affairs who shall have all the powers necessary to administerthe affairs of the licensee including power to terminate the insurancebusiness of the licensee;”

11

Enforcement – What Powers? CIMA’s powers are broadly similar under all four statutes

CIMA can (in general terms):

suspend/revoke licence;

impose new/further conditions on licence;

require substitution/removal of any controlling officer, director, etc;

appoint a person to advise on proper conduct of affairs; or

appoint a person to assume control (a “controller”)

12

Controllership Statistics

13

Enforcement Manual

• Forms part of the Authority’s Regulatory Handbook

• Details the Authority’s approach in exercising its enforcement powers

• Ladder of Compliance

• Warning and Decision Notices

• No Notice Procedure

The Enforcement Process

14

The Authority may exercise actions without the notice procedure

Examples include when it is in the public interest to do so, and where it is necessary to use the Authority’s statutory powers immediately

Situations are likely to include one or more of the following characteristics:

Information indicating a significant loss, risk of loss, or other adverse effects for stakeholders;

Information indicating that a regulated entity’s conduct has put it at risk of being used for purposes of financial crime, or of being involved in such crime;

Evidence that the regulated entity has submitted inaccurate or misleading information to the Authority causing serious concerns regarding the regulated entity’s ability to meet its regulatory obligations;

Circumstances suggesting a serious problem within the licensee or its management that call into question the licensee’s ability to continue to meet its regulatory requirements.

Appointment of Controllers is an action taken without the notice procedure

Appointment of a Controller

15

Appointment of a Controller

• This enforcement action applies to all Licensees1

• The appointment of a person to assume control of the affairs of a regulated entity is used by the Authority to fulfil its regulatory objectives, protect stakeholders and reduce financial crime by, amongst other things, enabling it to:

• Stop regulated entities and unauthorised persons carrying on insolvent or unlawful business, and

• Protect the assets of the company.

• A Controller is appointed at the expense of the Licensee

1. Also applies to regulated mutual funds as defined in the Mutual Funds Law. 16

Factors considered before appointing a Controller

• Severity of the breach of the regulations and the steps required to correct the breach

• The extent of any loss, risk of loss or other adverse effect on stakeholders

• The extent to which the stakeholder’s assets appear to be at risk

• The financial resources of the regulated entity

• Management’s present and historical attitude to resolving regulatory

problems

• The availability and effectiveness of alternative solutions

17

When determining which person or persons to appoint as Controller

• Potential conflicts of interest

• Expertise in the respective industry

• Presence in any foreign jurisdictions where the licensee operates

• Available resources to perform the Controller function

Documents requested from potential appointees

• Conflicts of interest checks

• Willingness to act letter

• Proposed charge-out rates

Factors considered before appointing a Controller

18

Role of Insolvency Practitioners

Appointment of Controller and the Terms and Conditions documents

• Assume control of, collect and get all property or assets of the entity

• Safeguard interests of stakeholders

• Take possession of the books and records of the entity

• Assess whether any applications should be made to the Grand Court of the Cayman Islands

• Reporting requirements to the Authority

19

Appointment Conflict check Personal appointments Certificate of appointment – requirements of the Controller

Court applications Timing of reports Application under Section 18 of Bankruptcy Law

Notices Appointment Letter

Control assets and safeguard interests Asset and liability inventory Books and Records Controllers recommendations to CIMA Appoint agent (with CIMA approval) Discussions/negotiations Legal/supervisory nature issues

Advertisements

20

Extent of Control and Powers Which law has the controller been appointed under?

Banks and Trust Companies Law

Securities Investments Business Law

Insurance Law

Mutual Funds Law

Inconsistency of drafting across legislation

21

Extent of Control and Powers (cont’d) What is consistent?

appointment of person to assume control (note SIBL – “Authority’s … controller”)

at the expense of the licensee

What is inconsistent? use of “forthwith” (BTCL)

powers of a person appointed as a receiver or manager under section 18 of the Bankruptcy Law (SIBL and BTCL) vs. powers necessary to administer the licensee (MFL and IL)

recovery of expenses incurred by the Authority from the licensee (MFL)

“to the exclusion of any operator” (MFL – mutual fund)

“to the exclusion of any other person (other than a liquidator or receiver)” (MFL – mutual fund administrator)

22

Extent of Control and Powers (cont’d) Mutual Funds Law – s 30(1)(e) (mutual funds) and s 31(1)(e) (fund administrators)

“the Authority may … … appoint a person to assume control of the affairs of the mutual fund.”

Mutual Funds Law – s 30(6) (mutual funds) and s 31(5)(fund administrators)

“the [controller] is appointed at the expense of the relevant [mutual fund/administrator], and any expenses incurred by the Authority … [are] payable by the [mutual fund/administrator]

Banks and Trust Companies Law – s 18(1)(v)

“the Authority may forthwith do any of the following …at the expense of the licensee, appoint a person to assume control of the licensee’s affairs who shall, mutatis mutandi, have all the powers of a person appointed as a receiver or manager of a business appointed undersection 18 of the Bankruptcy Law (1997 Revision);”

23

Extent of Control and Powers (cont’d) Securities Investment Business Law – s 17(2)(f)(viii)

“the Authority may…at the expense of the licensee, appoint a person who shall be known as the Authority’s appointed controller, to assume control of the licensee’s affairs who shall, subject to necessary modifications, have all the powers of a person appointed as a receiver or manager of a business appointed under section 18 of the Bankruptcy Law (1997 Revision);”

The Insurance Law – s 24(2)(h)

“the Authority may…at the expense of the licensee, appoint a receiver or person to assume control of the licensee’s affairs who shall have all the powers necessary toadminister the affairs of the licensee including power to terminate theinsurance business of the licensee;”

24

Extent of Control and Powers (cont’d) Mutual Funds Law

s 30(7) (mutual fund)

A person appointed under subsection (3)(e) has all the powers necessary, to the exclusion of any operator, to administer the affairs of the mutual fund in the best interests of the investors and creditors of the mutual fund.

s 31(6) (mutual fund administrator)

A person appointed under subsection (3)(e) has all the powers necessary, to the exclusion of any other person (other than a liquidator or receiver),to administer the affairs of the administrator relating to mutual fund administrator in the best interest of investors in the funds administered by the administrator and its creditors and creditors of any such funds.

25

Extent of Control and Powers (cont’d) Does a controller take immediate control of licensee to the exclusion

of others? Yes – BTCL

Likely – SIBL, IL – note absence of “forthwith”

MFL – express recognition “to the exclusion of any operator” but note definition of “operator” but note the position with respect to mutual fund administrator which excludes “liquidator or receiver”

Where are powers derived from and requirement for confirmation of powers? Guidance from the Authority

Court due to section 18 of the Bankruptcy Law (SIBL andBTCL)

Direct from legislation (MFL and IL)

26

Extent of Control and Powers (cont’d) Timing of when controller can exercise powers

as against licensee

as against third parties

SIBL/BTCL - delay in being able to exercise powers as against third parties until powers confirmed?

MFL/IL

27

Initial investigations Books and records

Details off key stakeholders

Discussions with Manager, Directors, stakeholders, CIMA, service providers etc.

Information held by CIMA

Cooperation issues Overseas regulators

Records held overseas

Recognition

28

Control of Assets Identification

No Moratorium

Location

Recognition?

29

Fees To be drawn from the estate of Company

Approved by CIMA

Format of fee approval request

30

Exit from controllership Options

Timing of exit

Recommendation in report

CIMA may apply to court to apply for the company to be wound up

Purpose of a winding up is to facilitate an orderly realization and distribution of the company assets

Moratorium

Adjudication of creditor claims

Recognition

Litigation

Alternative to liquidation

31

Regulatory and Enforcement Notices

Regulatory and Enforcement Notices posted on the Enforcement page of the Authority’s Website (www.cimoney.com.ky)

Includes:

• Decision Notices

• Warning Notices issued pursuant to the Lost Contact Procedure

• Notice of Termination of Struck or Dissolved Entities

• Public notices of enforcement actions

32

These are located under the Enforcement tab on the Authority’s Website

Publication of Enforcement Notices

33

Networking – Abacus