By Rohan Small – Recent developments are likely to be seen in retrospect as a turning point for fund governance in the Cayman Islands, because they dramatically demonstrate the risks involved where directors fail to carry out their duties properly and fail to provide true governance to a fund.
The Cayman Islands Monetary AuthorityA), the industry regulator, had been considering the utility of a regime for fund directors for several years since the Beacon Hill and Bear Stearns cases highlighted failings in funds’ corporate governance.
Ernst & Young has been in the forefront of the debate on governance both in Cayman and across the wider global hedge fund sector. For example, we have conducted a global hedge funds survey and have had a number of discussions in different forums on the future of fund governance in Cayman.
We have received feedback on what investors and regulators are telling us and what we envision the future of fund governance to look like here in Cayman. There was consensus on a need for greater regulation of Cayman fund governance going forward.
Key issues that would need to be addressed by the enhanced fund governance framework include the role and responsibilities of directors, qualifications and experience, constitution of the board, conflicts and independence, the number of directorships, transparency, indemnity and insurance, and the regulation of non-resident directors.
Investors are looking for the industry to take action in areas that will address the weaknesses highlighted by recent developments, where for example it was cited in one case in particular that directors never actually met, nor did they discuss the funds.
The new focus on fund governance is not confined to Cayman. Last month the Irish authorities finalised a code of conduct for its sector; something that might offer a useful reference for Cayman as it defines proper standards, best practices, and a code of conduct of its own.
In addition, the US seems to address the greater need for governance under the Dodd-Frank Act. The act will extend the SEC’s oversight of investment managers that will fall within the scope of the legislation and their fund products. It will require these managers and funds to put in place adequate and effective operational infrastructure, including systems for managing information and record-keeping, and have the capacity to supervise external service providers.
The need for more effective corporate governance has been addressed in Cayman by firms offering professional directorship services. Their resources and infrastructure enable them in some cases to hold 100 or more directorships, but these providers too need oversight in the view of many investors and regulators. How this sector should be monitored is one of the issues on which CIMA is expected to deliberate in the coming months.
There will always be a place for individuals with extensive financial industry experience who may hold two or three directorships, and it is perfectly proper that the investment manager should be represented on the board, but the lesson is the need for professionals with both the independence and access to infrastructure required to carry out their duties effectively. Amid global concerns about fund governance, Cayman is preparing to take action.
Rohan Small is a partner in the financial services office of Ernst & Young in the Cayman Islands and a member of the firm’s hedge funds practice management committee. The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young Ltd, Cayman Islands
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