CIMA considers role of fund directors
By Paul Harris –A new regulatory regime to address corporate governance and the way directors fulfil their fiduciary duties in the Cayman Islands is reported to be under consideration by the Cayman Islands Monetary Authority. This follows recent discussions in the press and at international conferences on the number of directorships held by individuals and investor demands for transparency, both issues that CIMA is expected to address in the near future.
However, these issues do not appear to have caused any recent problems involving Cayman hedge funds. Problem cases have in any event been few with regard to the 9,444 funds registered in Cayman at the end of September 2011.
Nevertheless, investors still focus on numbers of directorships and transparency rather than the things that do actually go wrong. In the Weavering judgment, for example, although the funds involved were Cayman-registered, the press mostly failed to note that the directors were not Cayman-based, but were in fact Swedish nationals who had been approved by the Irish Stock Exchange. The directors had few if any other appointments and transparency was not an issue.
The case does, however, highlight a problem for CIMA to consider – how to bring non-resident fund directors into the regulatory net. It is one thing to regulate local directors, most of whom are already quasi-regulated because they work for or are associated with Cayman-licensed entities regulated by CIMA, but it is another to regulate non-Cayman-resident directors who may live on the other side of the world and are not subject to regulation at home.
CIMA already licenses several firms under the Mutual Funds Law to provide operators (directors) to mutual funds. The organisation, support teams and internal controls inherent in this business model often enable directors concerned to take on more board roles than would otherwise be possible, and offer an efficient and cost-effective method of providing corporate governance to the proper standard indicated in the Weavering judgement, but which the Weavering directors failed to provide.
Even stand-alone directors offering director services in the Cayman Islands are usually professionally qualified individuals who have retired from senior positions in CIMA-licensed and approved companies.
Cayman corporate governance models can be grouped into three categories. First is stand-alone directors that are usually professionally qualified and have held senior positions in CIMA-licensed companies, and who either work from home or share offices.
Second is medium to large CIMA-licensed entities that supply professionally qualified and experienced people to serve as independent directors with support and logistical support teams, but most of the work and reviews are done by the directors themselves. There are also large licensed entities whose directors take on large numbers of directorships but delegate most corporate governance duties to support teams.
The two latter models follow those used by institutional trustees to provide governance to unit trusts. However, the fact that fund directorships are normally held by individuals rather than institutions makes the number of directorships per individual appear high.
Governance models have evolved over many years to service the unique demands of the fund industry in Cayman, where most functions are delegated to licensed and approved service providers. These models for providing appropriate corporate governance reflect the high concentration of funds in the jurisdiction. It remains to be seen whether these business models, whether stand-alone or institutional, will need to adjust to new regulatory developments.
Paul Harris is president of the Cayman Islands Directors Association and chairman of International Management Services
Please click here to download a copy of the Hedgeweek Special Report: Cayman Islands Hedge Fund Services 2012
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