Seminar on Corporate Governance & Risk Management for Cayman Islands Directors: Key Takeaways

Dec 2024

The Financial Services Institute in collaboration with Conyers, Grant Thornton and the Cayman Islands Monetary Authority (CIMA) hosted a comprehensive and in-depth seminar on “Corporate Governance & Risk Management for Cayman Islands Directors” on 8 November 2024 at the Kimpton Seafire Resort & Spa.

This event was well-attended by a variety of industry experts including Conyers Partner and Head of Regulatory & Risk Advisory (Cayman) Róisín Liddy-Murphy who presented on managing legal risks for directors. It focused on the applicability of the Rule on Corporate Governance for Regulated Entities (April 2023) and the Rule and Statement of Guidance on Internal Controls for Regulated Entities (April 2023) (the “Rules”), both of which came into force in October 2023.

The seminar provided critical insights for regulated Cayman Islands entities and their directors, with the aim of equipping them to better understand the application of the Rules, strengthen governance frameworks and effectively manage the variety of risks associated with operating a regulated financial services business in the Cayman Islands.

 

What are the Rules?

By way of detailed update, please refer to our publication on the Cayman Islands’ Corporate Governance Rule and Internal Controls Guidance and Rule here.

At a high level, the Rules create binding obligations on all regulated entities in the Cayman Islands to ensure they have appropriate oversight and management arrangements in place, and are structured and operated to carry on business in an orderly and efficient manner.

The Rules effectively codify directors’ duties that previously existed as a matter of common law, providing CIMA with the remit to hold directors to account in respect of their duties. So whilst directors duties haven’t fundamentally changed, they are now subject to another avenue for enforcement, and all directors of regulated entities should keep their duties front of mind when carrying out their roles.

Key Takeaways from CIMA’s Presentation

1. The Rules apply to registered investments funds in Cayman and should be read in conjunction with CIMA’s Statement of Guidance on Corporate Governance – Mutual Funds and Private Funds (the “SoG”) in order to ensure an appropriate proportionality approach. As such, adherence to the SoG alone would not be sufficient to meet a relevant fund’s regulatory requirements.

This aligns with the position set out in CIMA’s FAQs for Investment Funds, which makes it clear that:

“The Rule on Corporate Governance for Regulated Entities [Rule] and the Statement of Guidance on Corporate Governance – Mutual Funds and Private Funds [Statement of Guidance] have different objectives. The Rule creates binding obligations on Mutual Funds and Private Funds, while the Statement of Guidance is intended to provide guidance to those entities in complying with relevant rules, acts, and regulations. Generally, a Statement of Guidance contains recommendations on how regulated entities should operate and represents a measure against which the Authority will assess compliance by regulated entities.”

2. CIMA will expect to see evidence of a comprehensive review of all regulated entities’ corporate governance and internal control measures against the Rules. This will typically involve a thorough gap analysis and documentation of remediation measures to address identified gaps, culminating in the governing body formally adopting all applicable policies and procedures in line with Cayman Islands regulatory measures.

It is clear that superficial discussion and confirmation at governing body meetings will not suffice as CIMA expects to see a clearly considered corporate governance and internal control framework that is implemented on an ongoing basis. CIMA considers corporate governance to form a core principle of regulation that supports the integrity of the financial services market as a whole.

3. CIMA undertook a thematic review of 19 regulated entities across various financial services sectors during the course of 2024¹. As part of this process, CIMA issued its Thematic Corporate Governance Review Report (November 2024) (the “Report”) which identifies the following overall best practices:

• Appropriate allocation of oversight and management responsibilities thoroughly documented within the corporate governance framework;
• Established policies and practices for declaring actual or potential conflicts of interest, along with written annual declarations, and where conflicts arise, adequate procedures are in place to manage actual or perceived conflicts of interest;
• Ongoing declarations of conflicts of interest both annually and in meetings, and where conflicts arose, such are noted in the minutes of the meeting to which the subject matter of the conflict relates;
• Implementation of well-established governance, oversight, and reporting structures by Directors;
• Governing Bodies evaluation of the work performed by senior management through review of management reports presented to Directors on a regular basis;
• All Directors having received approval from CIMA, and the register of Directors, along with board resolutions being maintained in compliance with regulatory requirements; and
• Board charters and corporate governance policies outlining detailed responsibilities of individual Directors, specifically under the sections on the role of the Board, and the responsibilities and functioning of the Board.

The Report highlighted deficiencies that all regulated entities should be acutely aware of when considering their business practices:

• The corporate governance framework not evidencing measures in place to ensure that the relevant regulator(s) is notified, within ten days of any substantive issues which could materially affect the regulated entity. It is essential that the framework explicitly outlines the steps and processes to be followed to comply with the requirement, demonstrating a clear commitment to regulatory compliance;
• Inadequate policies and mechanisms in place to ensure that non-executive Directors devote sufficient time to the role needed for effective and efficient execution of associated responsibilities;
• Failure to evidence the review and approval of key policies and procedures;
• Failure to identify potential successors for the members of Directors and senior management;
• The objectives and strategies were not readily documented and communicated to the senior management and staff of the selected Entities;
• Informal Board meetings and a lack of consistently prepared detailed minutes of all meetings with all decisions, discussions and action points being documented; and
• The conflicts of interest and code of conduct policies not addressing key conflict of interest management practices.

4. CIMA confirmed that the definition of “Governing Body” under the Rules was drafted by CIMA in a deliberately broad manner.

This is particularly relevant for non-corporate structures such as limited partnerships where the ‘governing body’ of its general partner is made up of corporate entities. In such instances, there is a clear need to look beyond the initial regulated structure to identify natural persons with control over the regulated entity.

Governing bodies are expected to establish and oversee the implementation of the regulated entity’s corporate culture and business objectives and strategies. This includes proper oversight of senior management and clear and objective criteria to assess senior management performance.

CIMA’s presentation demonstrates a continued focus on the importance of a healthy corporate governance framework and culture, with proactive and meaningful oversight of senior management designed to strengthen compliance and reduce risk for regulated entities.

Conyers is available to support you in meeting these requirements. Should you have any queries or require further information about anything covered in this Alert, please contact a member of Conyers’ Regulatory or Risk Advisory team who would be delighted to assist you.

For further information on the advisory services that the Regulatory & Risk Advisory team offer, please download our Service Offering factsheet below.

¹This thematic review covered Securities and Investment Businesses, Insurance Companies and Fund Administrators but omitted Investment Funds and Virtual Asset Service Providers. You can access CIMA’s Thematic Corporate Governance Review Report 2024 here.