From Solomon Harris

The Directors Registration and Licensing Bill 2014

The Cayman Islands Government (‘CIG’) is set to introduce new legislation on licensing and registration for directors of Cayman Islands (‘Cayman’) corporate regulated funds. A draft Bill is out for industry consultation, which may change the detail of some of the current proposals. The legislation is likely to be enacted soon and possibly as soon as in early April of this year. Here we look at the background to the Bill, the proposals in the current draft, and who it will affect.

Why is this necessary?

To keep Cayman’s fund industry competitive the CIG and the Cayman Islands Monetary Authority (‘CIMA’) need to bring Cayman regulations in line with international expectations on transparency and on standards of corporate governance. This means they have to abide by international treaties and the requirements of membership of international bodies such as the International Organization of Securities Commissions (IOSCO).

Who wants this to happen?

This is not driven by international bodies and governments alone. The quality and conduct of fund directors is also a key issue for investors, as was confirmed by CIMA’s financial services industry survey in January 2013, and other surveys conducted with investors and funds industry professionals. The CIG and CIMA acted to address those concerns and introduced the Statement of Guidance for directors of Mutual Funds (‘SOG-MF’), which will be bolstered by the CIG’s new system of licences and registration of directors.

When is it likely to happen and what are the timing implications?

The new law may be passed in early April. Further, the initial draft Bill allows only a short transitional period of three months from when it comes into force by the end of which existing directors of corporate funds must be in compliance with the new law.

Who is affected?

All directors (‘Directors’) of Cayman corporate regulated hedge funds and directors of Securities Investment Business Law (‘SIBL’) Excluded Person investment managers (‘Covered Entities’) will be required to be registered with or licensed by CIMA – wherever those directors are located in the world and whether they are Individual Directors (‘ID’s) or companies which act as corporate directors (‘CD’s). At present the draft law only applies to directors of Cayman companies, and not to directors of General Partners (‘GP’s) of Cayman ELPs or directors of Cayman companies which act as trustees of unit trusts where the ELP or unit trust is a regulated hedge fund.

How do you register or apply for a licence?

No one knows at the moment what form the application process will take and what information will be required to register to become a ‘Registered Director’ or to obtain a licence. The relevant forms are still being drafted. Once a Director applies for registration or a licence, he/she can continue to act until registered or licensed. Registration and licence fees will be payable on first registration and then each January thereafter (although the amounts have not been fixed). Once registered or licensed, Directors will need to complete and update their forms annually, and Directors will need to notify CIMA of any changes in information (within 21 days of any change).

‘Professional Directors’ Licences IDs who have 20 or more directorships of Covered Entities will need to apply for a ‘Professional director’ (‘PD’) Licence. CIMA will be given discretion to refuse to issue a licence to a PD where it considers that the Director does not have sufficient capacity to carry out the duties of a PD, or because CIMA considers that the PD is not a ‘fit and proper person’ (based on a test which would evaluate the PD’s honesty, integrity reputation, competence and capability and financial soundness). At the moment it is not clear how CIMA will satisfy itself on these points, nor what data it will need to carry out such an evaluation. A PD will also have to maintain insurance with an authorized provider against civil liability for its work as a PD, of CI $1m for each and every claim and submit details of their insurance to CIMA.

Licence Exemptions

Where an ID is employed by, or is a director, officer or shareholder of a Cayman-based PD firm which has either a Companies Management Licence or a Mutual Fund Administrators Licence then that ID will be exempt from the requirement to hold a licence, although the ID will still need to be a Registered Director. Fund manager personnel who serve on the board of a Covered Entity will need to register with CIMA, but will be exempt from having to apply for a licence, provided that their fund is regulated by CIMA under the Mutual Funds Law and the fund manager is registered or licensed with an overseas regulatory authority listed in the Bill.

Corporate Director Licences

CDs of Cayman corporate hedge funds will need to apply for a Corporate Director Licence (‘CDL’), and will be subject to similar evaluation as PDs. A CDL will only be issued to a CD which is a Cayman company or a foreign company registered in Cayman (or will take steps to be so within six months) and which has two licensed IDs on its board. There are exclusions, but as the proposals stand it seems likely that it will no longer possible for a non-Cayman company to sit as a Director on the board of a Covered Entity unless it registers as a foreign company. Many funds have a non-Cayman CD on their board which usually represents the fund manager. These funds will need to take advice on what action to take, for example whether they should replace the CD with a licensed or registered ID.

Registration

CIMA will maintain a register of Directors who are registered with them and/or licensed by them. At this stage, it is not clear who will have access to this information.

New Powers for CIMA

CIMA will be given the power to:

-refuse registration in certain exceptional circumstances (for example, the director has been convicted of criminal offence of fraud or dishonesty)

-undertake site inspections to examine affairs or business of any registered of licensed director for compliance with this new law

-to require information from

a) any person CIMA thinks is acting as a director and who should be registered or licensed but is not

b) a registered or licensed director and

c) any person who CIMA reasonably believes has relevant information relating to a) and b)

-suspend or cancel the registration

-suspend or revoke a licence (there is a right of appeal to the Cayman Grand Court)

-impose conditions on directors

-require directors to reduce the number of appointments they have (after examining their capacity levels)

Act now

CIMA is taking this issue seriously and sanctions for failure to comply with the registration and licensing requirements include substantial fines, or even imprisonment. If these new rules are likely to affect your directorships, then you need to act now and take legal advice as soon as possible. If you would like advice relating to the new regime, then the investment fund attorneys at Solomon Harris would be please to assist.

We invite you to visit our website for more information about our firm. www.SolomonHarris.com

Please also visit our Hedge Funds information website at  www.CaymanHedgeFundsWorld.com