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Avoiding sledgehammers to crack nuts

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During the crisis in 2008, investors started to appreciate how important corporate governance was but it wasn't until 2013 that Cayman introduced the Statement of Guidance to provide a clear framework for best practices. This was followed by the Directors Registration and Licensing Law, 2014, which applies to all directors of Cayman registered mutual funds and requires them to be registered with or licensed by the Cayman Islands Monetary Authority. 

"CIMA now has a pretty detailed database of Cayman directors who are regulated and under the purview of CIMA," says Giorgio Subiotto pictured), Partner at Ogier. He says that when the DRLL was introduced, CIMA immediately used it to its advantage. 

"Within the first 12 months CIMA sent an email out to directors enquiring about late filings of financial statements. Audited financial statements are a key tool that CIMA uses to regulate funds. Historically, however, this has been a real issue for CIMA to try and enforce late filings because Cayman doesn't have an obligational requirement for directors to be located here.

"Sending those emails made a big change to CIMA's power of enforcement and the fact that they were able to collect detailed data on directors allowed it to determine how serious they were taking their roles and responsibilities," remarks Subiotto.

Now, CIMA has even greater ability to enforce the Statement of Guidance and uphold a global standard of corporate governance. This is thanks to the Monetary Authority (Amendment) Law 2016, which sets the basis for CIMA to grade the fines and impose financial penalties. 

"For me that is absolutely key," emphasises Subiotto. "Previously, the two options were to take a sledgehammer to crack a nut or to do nothing at all. CIMA didn't want to take the first approach to avoid negatively impacting the industry, which would have been the case had there been too many large non-proportionate fines. 

"Now that CIMA will be able to grade the fines more specifically and more proportionately to the breach, I think we will see more fines being issued by CIMA. It will further increase the quality of fund directors and fund structures without making it any more difficult to do business in the Cayman Islands."

This should give CIMA the tools to regulate effectively Cayman structures but it doesn't change the obligation of Cayman directors or the basic procedures they need to follow. Nor does it change the ongoing regulatory obligations of funds on whose boards directors sit on. Rather, it means that CIMA can increase its focus on corporate governance and ensure that directors are meeting their obligations and duties in managing funds and that the audited financial statements are filed in good time and not ignored. 

"It places a renewed focus on directors to implement procedures, make sure they meet on a regular basis, are fully aware of key dates for funds throughout the year, and that funds are meeting their obligations at the regulatory and corporate level. All players, lawyers as well as directors, will need to be on top of all necessary deadlines and filing requirements," says Subiotto.

This could be a prescient move by CIMA given that Cayman is in the process of trying to get approval by ESMA for third country passporting rights. That the Monetary Authority (Amendment) Law has been passed will do its chances no harm at all, demonstrating its commitment to transparency.

"It improves the general outlook and projects CIMA as a more effective regulator. I think it is a great move because previously one of the weaknesses was that CIMA didn't really have a realistic way of enforcing breaches; now it will," concludes Subiotto.

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