Following the 2011 first instance decision of the Grand Court of the Cayman Islands in Weavering Macro Fixed Income Fund (In Liquidation) v Peterson and Ekstrom (2011) (Weavering), CIMA published a Statement of Guidance (SoG) in 2014 which applies to Regulated Funds. The SoG sets out best practices and establishes certain minimum corporate governance standards for governing bodies of Funds and whilst only applicable to Regulated Funds at this stage, it provides helpful guidance for all Funds.
The SoG does not impose a strict or all-encompassing code of conduct on governing bodies or operators of Regulated Funds but expects the oversight, direction and management of a Regulated Fund to be conducted in a fit and proper manner. At a concise eight pages, the SoG establishes an overall framework for good corporate governance within which Regulated Funds should operate.
The SoG does not contain specific restrictions on investments, risks or strategies, nor does it attempt to direct, prescribe or constrain the management or business activities of Regulated Funds.
The SoG includes the following:
Structure
Directors should make sure that the governance structure of the fund is appropriate and suitable for effective oversight of the fund, looking at the fund’s size, nature and complexity, including the level of assets under management, number of investors and nature of its investment strategy. Directors should make sure that the fund’s constitutional documents and Offering Document comply with Cayman Islands law.
Oversight and compliance function
The directors of a fund are ultimately responsible for overseeing and supervising the activities of the fund. They should regularly monitor and take steps to ensure that the fund and its service providers are conducting the affairs of the fund in compliance with the fund's defined investment criteria, investment strategy and restrictions as well as with all applicable laws, regulations and other rules.
Directors should receive regular reporting from the investment manager, administrator and other service providers to ensure they are able to make informed decisions and to adequately oversee and supervise the fund.
The directors should regularly ask for confirmation from the service providers that they are acting in accordance with the fund’s constitutional documents and Offering Document, including regularly monitoring whether the investment manager is acting in accordance with the fund’s investment criteria, strategy and restrictions. What constitutes ‘regular’ in this context will very much come down to the nature of the particular fund structure, strategy and service provider relationships and therefore must be looked at on a case by case basis.
As part of this function, directors should also be mindful of CIMA’s Outsourcing SoG. The directors should act in a transparent and honest manner with CIMA, always disclosing any matter which would materially and adversely affect the fund’s financial soundness and any non-compliance with applicable laws.
Conflicts of interest and risk
Directors of funds must ensure that the fund's Offering Document adequately and accurately discloses conflicts of interest and ensure that the fund has adequate measures in place to identify, disclose, monitor and manage any conflicts of interest. Directors should ensure that they provide suitable risk management oversight and that risks are appropriately managed and mitigated.
Board Meetings
The board of directors of a fund should meet at least twice a year, in person or by telephone or video conference call, and more often depending upon the circumstances or size, nature and complexity of the fund. In reality, the general practice is for investment funds to meet quarterly.
Service providers should also attend and provide reports to board meetings. Full, accurate and clear written records must be kept of such meetings and all resolutions passed at such meetings, including agenda items, circulated documents, a list of attendees and if they were present physically or by telephone or video conference, all matters considered and decisions made and information requested from and provided by service providers and advisors.
Duties Directors of funds:
are responsible for the appointment, removal, monitoring and supervision as well as the contractual terms of service providers including notifying investors and CIMA of any changes to the fund’s service providers and making appropriate updates to the fund’s Offering Document
should communicate adequate information to the fund's investors, including where enhanced disclosure to investors is appropriate, making relevant enquiries when issues are raised and be satisfied that appropriate action is being taken
must have sufficient capacity to apply their minds to overseeing and supervising each fund in accordance with relevant laws, regulations, rules, statements of principles and the provisions of the SoG and other relevant SoGs issued by CIMA. No specific limits are set on the number of directorships that can be accepted by an individual or corporate director, although under the Directors Registration and Licensing Act if the number of directorships exceeds 20 or more Covered Entities, then the professional director licensing requirement will apply.
should ensure that the Offering Document contains such information as is necessary to enable a prospective investor to make an informed investment decision, including clear descriptions of the investment strategy and conflicts of interest policy
should exercise independent judgment, act in the best interests of the fund, take into account the interests of investors as a whole, and should operate with due skill, care and diligence and act honestly and in good faith at all times, making sure they have sufficient and relevant knowledge and experience to carry out their duties
must exercise the care, skill and diligence of a reasonably diligent person with such general knowledge, skill and experience
should at all times be fully aware of the fund’s investment activities, performance and financial position and review and approve the fund’s financial statements
should also regularly monitor the fund’s net asset valuation policy and that the fund’s net asset value is being calculated in accordance with the policy at the relevant intervals.
Outsourcing arrangements
In terms of outsourcing arrangements to service providers, directors should also be mindful of CIMA’s policy in its Statement of Guidance on Outsourcing issued in 2015 (the Outsourcing SoG) that provides guidance to regulated entities on the establishment of outsourcing arrangements (including sub-outsourcing) and the outsourcing of material functions or activities.
The Outsourcing SoG is not intended to be prescriptive or exhaustive, rather it sets out CIMA’s minimum expectations on the outsourcing of material functions or activities and outsourcing arrangements. The Outsourcing SoG provides guidance to regulated entities (including sub-contractors where applicable) on the following matters:
appropriate due diligence of service providers
contents of outsourcing agreements
materiality assessments of outsourcing arrangements (ie impact of outsourcing arrangements on the entity and its finances, reputation and operations)
confidentiality and disclosure of information what boards of directors of regulated entities are expected to do with respect to the outsourcing of material functions or activities
termination and exit strategies
expectations with respect to a regulated entity’s relations with CIMA regarding the outsourcing of material functions or activities.
The Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing issued by CIMA also detail how funds may outsource / delegate AML compliance, provided the Fund has designated natural persons as their AML compliance officer, money laundering reporting officer and deputy money laundering reporting officer.
Directors registration and licensing
The Directors Registration and Licensing Act (DRL Act) imposes obligations on directors of Regulated Funds and certain securities investment businesses (Covered Entities) to register with CIMA prior to being appointed as a director of a Covered Entity. Directors of Private Funds are not subject to the DRL ACT.
The definition of “director” also includes managers of Covered Entities which are formed as limited liability companies in the Cayman Islands under the Limited Liability Companies Act. The registration fee is currently US$854 per director which is a natural person who acts as a director for less than 20 Covered Entities. Licences are required for ‘Professional Directors’, being natural persons appointed to the boards of 20 or more Covered Entities and for corporate directors of Covered Entities. Licence fees for Professional and corporate directors are currently US$3,658 and US$9,756, respectively. Annual fees of the same amount are also payable to CIMA by 15 January each calendar year to maintain registration / licensing.
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