By Tim Buckley (pictured) and Ed Pearson, Walkers – After spending much of the year in consultation with the industry, CIMA’s near-term regulatory approach is becoming clearer.
In early December, CIMA released its Statement of Guidance for regulated mutual funds, which sets out the Authority’s minimum expectations for sound and prudent governance. Accompanying the guidance was a summary of feedback the authority had received from industry participants in the course of its consultation.
Overall, the guidance reinforces the themes that have emerged following the financial crisis: transparency, information exchange and good corporate governance. In addition, it reflects the principles and issues discussed in the Weavering case, which was one of the factors prompting the authority’s renewed focus on matters of fiduciary duties and corporate governance.
The guidance offers broad pointers for how fund “operators” (directors, general partners, and trustees of unit trusts) should conduct themselves. It also includes a handful of practical suggestions, such as holding board meetings at least twice a year and circulating agendas beforehand. There is little in the guidance that well managed funds will not already be doing, particularly post-Weavering.
Some of the early proposals from CIMA attracted significant attention in the Cayman Islands fund industry, both within the service provider community and among funds themselves. In particular, much of the commentary has focused on what CIMA proposes in relation to directors. Earlier in the process, CIMA commissioned an anonymous online survey that included reference to whether there should be limits on the number of appointments a director could accept. The subsequent consultation considered whether directors sitting on the boards of six or more regulated funds should be subject to additional regulation.
CIMA’s guidance suggests that the authority currently considers the issue to be one best dealt with by way of adequate disclosure. A public register of such directors is proposed. A respondent to the consultation asked whether additional guidance would be forthcoming regarding CIMA’s expectations of disclosure in this regard. In response, the authority noted it would first observe the effect the register has on providing pertinent and appropriate information to the industry. The guidance notes that the authority will review its approach two years after the introduction of the register.
Walkers conducted its own review of the funds established by our clients in 2013. The results of this survey suggest that, in many areas, Cayman Islands hedge funds are already exceeding what CIMA considers the minimum requirements for sound and prudent governance. For example, the trend among Cayman hedge funds towards independent directors has continued in 2013, with over three-quarters of new funds having at least one independent director, and over a quarter having a fully independent board.
That Cayman Islands funds are already exceeding the regulatory minimums suggests that the trend towards stronger governance is primarily investor-led rather than driven by regulatory pressures.
Walkers’ survey suggests that new funds are not only being established by existing fund managers: start-up managers have been active too, despite being disproportionately affected by higher compliance costs.
It is still the case that investors are taking longer to commit their capital and are conducting more thorough due diligence, particularly for new start-up funds. For now, CIMA seems content that investor pressure will be sufficient to guide funds in the right direction. So far, the trends support this view.