The Cayman Islands’ new fund governance system
The fourth quarter issue of the AIMA Journal buries rather deeply a fascinating article by Peter Cockhill, a partner at Ogier Cayman. The article, “Cayman’s proposed new fund governance regime,” is a perceptive and concise explanation of where the Cayman Islands seem to be headed on fund governance.
Background
This summer the relevant regulatory body, the Cayman Islands Monetary Authority, issued a consultation paper on governance issues, with an August 16th deadline for the submission of comments.
The CP made reference to recommendations from the International Organization of Securities Commissions in September 2011, holding that “regulatory standards should ensure that hedge funds and/or hedge funds’ managers/advisors are subject to appropriate oversight,” in connection with organizational and operational standards as well as disclosure issues. IOSCO
Cockhill was in turn referencing that CP when he said that stakeholders in the AI funds industry in the Caymans have waited for the outcome of this consultation “with some trepidation and amid much misinformation.”
As Cockhill points out in his AIMA piece, the key issues that concern CIMA include: the experience, knowledge, and independence of directors; how much time directors have to supervise each fund [related to this, whether to impose a limit on the number of fund directorships an individual should hold]; and due diligence inquiries from investors and the completeness of directors’ answers.
The Statement of Guidance
The new regulatory framework under consideration will involve three distinct elements: a Statement of Guidance that CIMA will undergird with a “comply or explain” requirement; a new dual registration and licensing regime; and the creation of a managed database that will assist due diligence by investors.
Cockhill finds that the “trepidation” has been largely unwarranted, He calls the SoG “sensible and balanced.” For example, in contrast to certain other jurisdictions key to the AI world (ahem, Ireland and Luxembourg) CIMA “will continue to allow funds to determine the domicile of their functionaries so there are no requirements for Cayman resident directors.”
The SoG covers not only directors but “operators” of Cayman funds in general, a category that includes the trustee in a unit trust and the general partner in an LP. Key points of guidance for all operators are as follows:
Operators can of course delegate many matters to service providers, but they remain responsible and are expected to question and review those service providers;
A board, or its analog in other structures, should meet at least twice a year and should be properly minuted;
Operators must exercise their judgment in the best interests of the fund, taking into consideration the interests of investors as a whole (as well as, in certain circumstances defined by law, the interests of the creditors);
They must communicate openly with investors;
They are responsible for ensuring that documents properly describe the offering and that the fund operates consistent with its documents in terms of strategy, restrictions, and so forth.
They are also responsible for the management of conflicts of interest.
Dual Registration/Licensing Regime
The CIMA plans to address the issue of whether certain directors are spreading themselves too thin by creating two distinct classes of directors, those who serve on more than a threshold number of boards and those who serve on fewer. The threshold number has not been made public; Cockhill speculates that it will be 25/26.
Those directors who serve on the threshold number of boards or fewer (perhaps 25 and downward) will be Registered Directors, and will be less intrusively regulated than those who serve on more (perhaps 26 and up). The latter group will be known as Licensed Regulator and will be required to provide the CIMA with more information than will their colleagues.
Transparency
The CIMA intends to establish a new digital database during 2014, with “core information on each registered fund.” It isn’t clear yet whether this database will be searchable by the public – as easily as are, say, the ADV filings of the US SEC. It might involve a more limited, fee-paying model. Either way, though, it will address one of the concerns CIMA has identified in its study of governance issues: the ease with which investors can perform their due diligence.
Cockhill sees these moves as positive, although he observes that they come with a cost. The costs will not “take any fund by surprise,” and the benefits are such as investors should welcome, the “pincer of data transparency and the trend toward experienced and credible directors.”
For more on this story go to:
http://allaboutalpha.com/blog/2013/12/12/the-cayman-islands-new-fund-governance-system/