By Colin MacKay, Ogier Fund Services – At its recent annual general meeting, the Cayman Islands Directors Association reported that new member applications in 2013 grew by over 15 per cent; further evidence, if it were needed, that the provision of corporate governance to alternative funds is one of the fastest growing sectors of the Cayman financial services industry. The debate on how best to prescribe and regulate the provision of effective corporate governance remains one of the most important to the industry, both at home and abroad.
The challenge facing service providers and the Cayman Islands Monetary Authority (CIMA), in particular, is the degree to which a regulatory framework to the provision of director services is a required outcome which benefits and assists the broader alternatives industry or a potentially damaging ‘first move’ which will place Cayman and Cayman based service providers at a competitive disadvantage without affording investors any additional protections.
The August 2011 judgement in Weavering did not create new law, but many commentators have cited it as establishing a prescriptive framework of obligations and duties for directors of alternative funds. A group of asset allocators and institutional investors subsequently argued the need for a code of conduct or minimum standards, while conceding that prescriptive regulation would be unhelpful in trying to codify fairly nuanced and fact specific principles of common law. The net effect, after consultation and a survey by CIMA, is what appears to be a staged introduction of a regulatory regime going forward.
Stage 1 is the recent publication of the Statement of Guidance on Corporate Governance of Mutual Funds which articulates CIMA’s considered view of acceptable practice, largely based on the Weavering judgement. The Statement of Guidance has been well received locally and among key industry players as balancing the risk of establishing minimum standards which could drive service delivery to a common bottom whilst retaining the fact and circumstance elements of common law which dictate what is reasonable and bona fide in each instance.
Stage 2 is the proposed introduction in 2014 of a registration regime whereby certain factual information will be required of each and every director of a CIMA regulated or registered entity. Although CIMA already receives this information via the Mutual Funds Law and Securities Investment Business Law registration forms, a registration requirement is potentially welcome as affording each individual a degree of responsibility for and control over the accuracy of the information held by CIMA.
Stages 3 and 4 are less certain but appear to involve the opening of the director registration database to public access and, ultimately, the introduction of a director disqualification regime. Depending on your perspective, the former offers either complete transparency or limited availability of information which prejudices Cayman providers while affording investors no additional protection in respect of non-Cayman directors. A disqualification regime would be a sensible and overdue addition to Cayman law.
What cannot be overlooked is that corporate governance relies more on effective and proactive interaction among a fund’s operators, managers, administrators and other service providers than it does on a regulatory framework which is, by definition, reactive. Ultimately, it is not the regulatory regime which provides investors with comfort and assurance, it is the professional approach of suitably qualified and experienced directors who are fully aware of and familiar with their fiduciary duties and obligations.