Hedge funds, and offshore funds in particular, often require secrecy to protect their trading strategies, market positions and sensitive information about their investors. However, at the same time as investor demands are driving managers to provide more information on their investments, so the demands of regulators, both onshore and offshore, are obliging funds and their managers to disclose more information.

There is a prevailing myth that all business conducted in the Cayman Islands is veiled in an impenetrable cloak of secrecy. Not so. Although the legitimate right to privacy is respected in the Cayman Islands, it is arguable that, in comparison, onshore jurisdictions such as the UK, Germany and the US currently have more regimented regimes of privacy and data protection. Indeed, there are a number of circumstances in the Cayman Islands where confidential information must or can be disclosed, subject to appropriate safeguards.

As a British overseas territory, Cayman law on confidentiality is predominantly based on principles of English common law. In the Cayman Islands, a duty of confidence may be owed to a person under statute, namely the Confidential Relationships (Preservation) Law (1995 Revision) (Confidentiality Law), as well as under common law. Criminal penalties may be imposed for statutory breach, whereas breach of a common law duty can give rise to civil remedies (such as an injunction) and a claim for damages.

'Confidential information' is defined under the Confidentiality Law as including "information concerning any property which the recipient thereof is not, otherwise than in the normal course of business, authorised by the principal to divulge". The information must also relate to "business of a professional nature", predicating a relationship between the principal and a professional person, which may include each of an offshore hedge fund, a manager, an administrator and an investor depending on the context. The application of the Confidentiality Law is limited to information which arises in or is brought into the Islands, but extends to "all persons coming into possession of such information at any time thereafter" whether they are in the Cayman Islands or not. As such, fund information may not be subject to the Confidentiality Law if it emanated from or is maintained outside of the jurisdiction. However, if the information originates in or is transmitted to the Cayman Islands, the Confidentiality Law will have extraterritorial effect on those who subsequently come into possession of such information outside the Cayman Islands.

In relation to common law principles, the Cayman Islands have followed the landmark English decision in Tournier v National Provincial and Union Bank of England [1924], which held that, if not expressed, an implied duty of confidentiality would exist in certain circumstances. The case also provided that confidential information could only be disclosed where: the principal gives express or implied consent; the interests of the bank require disclosure (which may not be directly applicable to funds); there is compulsion of law; or there is a public duty to disclose.

These qualifications are also found within the Confidentiality Law and supplemented by the exceptions provided by the narrow definition of confidential information. A duty will ordinarily not attach to disclosures made in the normal course of business, which is defined as "the ordinary and necessary routine involved in the efficient carrying out of the instructions of a principal, including compliance with such laws and legal process as arise out of and in connection therewith and the routine exchange of information between licensees". Although this term has yet to be interpreted by the Cayman courts, a 'routine' would likely be defined as a custom exercised on an industry basis, rather than a subjective basis. Nevertheless, this qualification still provides a fairly broad option to service providers.

The Confidentiality Law further develops the compulsion of law exception. The statutory duty of confidentiality may be avoided if the disclosure is compliant with permitted exceptions under Cayman Islands law, with the directions of the Grand Court or where the information disclosed is made to an appropriate authority in relation to a suspicion or belief of an offence of money laundering, dealings with terrorism or terrorist property or any other indictable offence in the Cayman Islands. The Confidentiality Law also yields to enquiries into criminal matters under the Mutual Legal Assistance Law (1999 Revision). In the light of these exceptions, it is simply wrong to describe Cayman as providing any degree of secrecy in the event of criminal or regulatory violations.

In today's markets, it is completely understandable that an investor may want to know more, not only about the value of their holding, but the value and strength of the fund itself. Whether the custodian of that information has a duty to protect it or may divulge it depends on the nature of the information and the question of what disclosure is authorised by the constitutional documents.

As a matter of common law, however, parties are free to waive duties of confidence or vary them as they think expedient. In the fund context, the application of a duty of confidentiality may be varied under the terms of the subscription agreements and the Offering or Private Placement Memorandum.

In relation to 'fund information', a duty may generally be owed by the fund to an investor, a director to the fund and by a manager or administrator to the fund (by contract) or possibly to an investor (by tort).

Although there is no simple definition of 'fund information', it is likely that the term will include any information generated or maintained by the fund, or an agent on its behalf, in relation to the fund's dealings. This may include, at one end of the spectrum, the personal details of an investor provided at subscription, or at the other end it may include any pertinent financial information, including NAVs (which are ordinarily available to investors).

The majority in number of the 6,000 or so Cayman-based hedge funds are exempted companies, although exempted limited partnerships and to a lesser extent unit trusts have been adopted. Under Cayman Islands law, companies, partnerships and trusts are treated differently for the purposes of protecting proprietary information.

Under the Companies Law (2004 Revision), the register of members for exempted companies can either be kept at the registered office (in the Cayman Islands) or elsewhere. The register of members of an exempt company is confidential, but the register of members of an ordinary company will be open for inspection at the registered office by any member free of charge or for a payment of KYD$10 (£6.80) by any third party. The register of mortgages and charges of either an exempted or ordinary company will also be open for inspection by any member or creditor at the registered office.

Under the Articles of Association, directors will normally be entitled to access all company information. Directors may also be given the discretion to provide access to whomever they deem necessary. They may also be provided with the power to take legal recourse against an investor for unauthorised disclosure of fund information, if it would be in the best interests of the fund.

In terms of accessing information, it is also arguable that a shareholder or beneficial owner who either owns all the share capital or controls the voting rights over the shares may be treated in the same manner as a director. Similarly, an account signatory may be entitled to information regarding the relevant account, but not necessarily to information regarding the affairs of the account holder. Each case must be decided in the context of the circumstances and subject to the intentions of the parties.

The regime is slightly different under the Exempted Limited Partnership Law (2003 Revision). The general partner is statutorily obliged to maintain a register of limited partners, together with their limited partnership interests, as well as a register of mortgages over those interests. The information on both registers is open to inspection and a matter of public record. Accordingly, a limited partner or the fund itself would not need to waive or vary any duty or provide consent to the general partner to divulge the information.

In addition, a limited partner may demand 'full' financial information in relation to the fund (subject to the terms of the partnership agreement). Although this is an extensive exception to the fundamental principles of confidentiality, we know of very few instances where requests for fund or investor information have been made of Exempted Limited Part-nership funds.

A trustee will obviously be entitled to all information relating to the trust and its affairs. It will be extremely rare for any information to be made available as a matter of public record. The law relating to a beneficiary's rights to access, or conversely a trustee's obligation to disclose, trust information is in a state of development. The recent Privy Council decision in Schmidt v Rosewood Trust Ltd [2003], which would be persuasive in the Cayman Islands, held that no beneficiary has an absolute entitlement or proprietary right to disclosure of trust documents or information. If there are issues of confidentiality, the competing interests of the beneficiaries, trustees and third parties must be balanced. Ordinarily, disclosure to beneficiaries will depend on the provisions of the trust document (whether a deed or declaration) and the constitutional documents of the fund.

In addition, there are a number of formal gateways for regulators and enforcement agencies, both local and foreign, to access confidential information in the Cayman Islands. Some of the principal means currently include:

. Cayman Islands Monetary Authority (CIMA) requests, of their own volition or on behalf of foreign regulators, of Cayman licensees;

. Cayman Islands Police or Financial Reporting Authority requests;

. Mutual Legal Assistance requests relating to a foreign criminal offence or Tax Information Exchange requests relating to a foreign tax offence, via an applicable treaty; and

. Requests or directions under both local and foreign (where recognised and enforceable in Cayman) court proceedings.

The Cayman Islands have established these measures in order to maintain and manifest their commitment to transparency of information, particularly in the case of criminal or regulatory violations, while protecting the fundamental right to privacy in legitimate transactions. The Cayman Islands will participate in the sharing of information where it may relate to the prevention or detection of a crime. However, a direct request of a Cayman entity will not typically be entertained, where a foreign federal or state agency is conducting a "fishing expedition" (a preliminary search for information to gather evidence of improper behaviour) and chooses to ignore the appropriate channels for information disclosure mentioned above.

Martin Livingston is a lawyer in the regulatory financial services team of Maples and Calder in the Cayman Islands.