The Cayman Islands Monetary Authority (CIMA) recently issued a new Statement of Guidance for Mutual Funds and Private Funds (Corporate Governance Guidance) which:
- updates the current guidance applicable to funds registered under the Mutual Funds Act (the MF Act);
- expands the scope of CIMA’s Corporate Governance Guidance to cover funds registered under the Private Funds Act (the PF Act); and
- more generally, sets out CIMA’s expectations regarding the corporate governance frameworks of funds registered under the MF Act or the PF Act (together being Funds).
The Corporate Governance Guidance has taken immediate effect and, while many fund managers (Managers) may already be in compliance with its terms owing to existing modern governance structures, it is advisable that Managers now review the position of the Funds and structures they oversee to ensure compliance with the updated requirements set out in the Corporate Governance Guidance.
Global Background – A Modern Corporate Governance Framework
As a leading global fund domicile, the Cayman Islands continues to enhance its regulatory regime both to demonstrate to international bodies that Funds based in the jurisdiction are appropriately supervised and also to provide additional clarity and comfort to investors in Funds that Cayman continues to enhance its regulatory framework to fit modern standards.
The Corporate Governance Guidance reflects another building block in Cayman’s continued commitment to being ‘best in class’ in fund formation domiciles and additionally provides welcome clarity on CIMA’s position on the governance of funds registered under the PF Act.
Applicability – Cayman Mutual Funds and Cayman Private Funds Now in Scope
As noted above, while funds registered under the MF Act have previously been subject to such requirements, the Corporate Governance Guidance now covers all Funds, sweeping in those registered under the PF Act.
The Corporate Governance Guidance documents various obligations of a fund “Operator”, meaning the governing body of a Fund – the board of directors of a company; the general partner of a partnership; the manager (or equivalent) of a limited liability company; and the trustee where the Fund is a trust.
Action Points – Requirements of the Corporate Governance Guidance and Potential Solutions
The Corporate Governance Guidance does not attempt to be exhaustive or overly prescriptive in its terms, but instead provides discretion to Managers by stating that the governance structure of a Fund must be appropriate and suitable to enable effective oversight taking into account the size, complexity, structure, nature of business and risk profile of the Fund. It is a positive development that allows each Manager to take a proportionate and reasoned approach to the corporate governance framework for different Funds. The Corporate Governance Guidance provides that factors to consider would include assets under management, number of investors, complexity of the structure, nature of the investment strategy and operations.
There are seven principal areas on which the Corporate Governance Guidance is focused:
1. The oversight function of fund Operators.
Operators of Funds are responsible for a Fund’s activities. Operators’ boards of management should comprise members with an appropriate diversity of skills, experience and expertise to ensure overall competence of the Operator. The job of the Operator includes taking steps to ensure that the Fund is conducting its affairs in accordance with all applicable acts, regulations and regulatory measures of the Cayman Islands and of CIMA – this would include regular communication with any third party service providers as well as the investment manager.
- Managers may wish to review their board composition to identify whether the addition of board members with particularly relevant qualifications that would enhance competent oversight of a Fund’s affairs is advisable, considering the above. Conyers is happy to provide CVs and recommendations for suitably qualified professional directors.
- It may also be appropriate in some instances to revisit the information available to or provided to the Operators of the Fund by third party service providers and their ability to communicate with third party services providers, either through their attendance at board meetings or by ad hoc communication routes.
2. Conflicts of interest.
Operators should have a written conflicts of interest policy commensurate with the size, complexity, structure, nature of business and risk profile of the business operations of the Fund. The Operator will be expected to identify, disclose, monitor and manage all potential conflicts of interest. This would include the recording of all disclosed conflicts relevant to a meeting within the meeting minutes. Additionally, all conflicts of interest or the potential for same should be disclosed in writing by the Operator at least on an annual basis.
- CIMA has confirmed that a conflict of interest policy and disclosure in a Fund’s constitutional or marketing documents will suffice to meet this requirement but Funds may still wish to revisit their existing conflicts policy to ensure proportionality with the profile of a given Fund.
- Managers should add to their standard board agenda to reflect that all conflicts of interest should be disclosed in writing at least on an annual basis.
3. Operator meetings.
Operators should convene a meeting at least once per annum. However, the size, complexity structure and risk profile of the Fund may dictate that the Operator meets more frequently. To the extent necessary, the Operator may also request the attendance of any third party service providers.
- Where minutes are not currently recorded by attorneys to the Fund or a professional corporate service provider, it may now be appropriate to seek the assistance of such personnel. Conyers has dedicated board support services that can be engaged in this regard.
- If it is not already part of the Fund’s governance model, consideration should be given to requiring the attendance of a representative from the administrator, investment manager/advisor, AML officers and other third party service providers at meetings of the Operator on at least an annual basis (if not more frequently depending on the nature of the Fund).
4. Duties of Operators.
The Corporate Governance Guidance imposes a number of duties on the Operators of Funds. The following are examples of some of these duties:
- Operators should exercise independent judgement whilst always acting in the best interests of the Fund.
- Operators should act honestly and in good faith.
- Operators should consider capacity issues before taking on additional responsibilities with other Funds.
- Operators are responsible for appointing, removing, monitoring, reviewing and ensuring the continued capability of any third party service providers.
- Operators need to regularly confirm that the investment manager is operating within their investment strategy, criteria and restrictions.
- Operators need to keep abreast of the financial position, net asset value and calculation thereof.
- Operators should, on a periodic basis, consider the requirements of the Corporate Governance Guidance particularly in respect of capacity issues and the number of Funds to which they provide services.
- Operators should be mindful of recording in board minutes the consideration that has been given by Operators to topics such as those listed above.
5. The Operator.
Responsible for ensuring that an accurate written record is kept of all meetings and determinations with respect to the Fund. These records will include at a minimum: (i) the agenda items, circulated documents and list of attendees; (ii) matters considered and decisions made; and (iii) information reported from service providers; and (iv) a conflicts of interest disclosure.
- As noted above, where minutes are not currently recorded by attorneys to the Fund or a professional corporate service provider, it may now be appropriate to seek the assistance of such personnel. Conyers has dedicated board support services that can be engaged in this regard.
6. Relations with CIMA.
The Operator should conduct the affairs of the Fund with CIMA in a transparent and honest manner. This would include disclosure of any matters which could materially and adversely affect the financial soundness of the Fund as well as any non-compliance with applicable acts, regulations and regulatory measures.
- Where compliance or financial soundness issues arise, Operators should be aware of this duty to act in a transparent and honest manner with CIMA and decisions to disclose matters to CIMA (or conversely to not disclose issues to CIMA if they are not deemed to be sufficiently material) should be documented in the Fund’s records.
7. Risk Management.
The Operator should ensure that it provides oversight of the risk management of the Fund to ensure that any risks are managed and mitigated with material risks being discussed at the Operators meeting and the Operators taking appropriate action where necessary.
- Managers should consider whether the overall risk management program of a Fund meets its complexity.
- Appropriate minutes should be taken documenting discussion at meetings of the Operator on risk management considerations and decisions.
Conclusion – Corporate Governance Review Services
The introduction of the Corporate Governance Guidance does not significantly change the position of Funds registered under the MF Act, although it does serve as a timely reminder for many Managers that a review and, if appropriate, enhancement of procedures to ensure compliance may be in the best interests of the Funds they oversee.
For Funds registered under the PF Act, the Corporate Governance Guidance is a new requirement – many (if not most) of such Funds will already be in compliance with the guidance by virtue of existing sophisticated governance programs but it is of course advisable that the position of each such Funds is still reviewed to ensure compliance.
How Conyers Can Assist
Conyers can assist in ensuring that Funds are conducting their affairs in accordance with all relevant Cayman Islands laws, regulations, rules and statements of guidance. In addition, we also offer various additional practical services to assist Funds with their compliance with the Corporate Governance SoG, including:
- Independent Directors: we provide independent directors resident in the Cayman Islands. Our directors have appropriate experience in all types of investment funds, structured finance vehicles and corporate entities.
- Board Support Services: our team can assist in coordinating and scheduling attendance of all participants to board meetings, prepare and distribute agendas, board packs, minutes and action items to relevant parties.
Please do not hesitate to reach out to your usual Conyers contact for further discussion about the potential impacts of this guidance on your fund.