According to the statistics published in a recent newsletter of the Cayman Islands Monetary Authority (“CIMA”), over 9,000 investment funds are registered with CIMA. The boards of directors of these funds often include one or more resident Cayman Islands directors, along with a representative of the fund’s investment manager or other service provider. The purpose of this discussion is to highlight the value-added by appointing a competent resident Cayman Islands director to a Cayman Islands fund.
Familiarity With Cayman Islands Law
Having served on boards of Cayman Islands funds for many years or having been a professional in the financial services industry, some resident Cayman Islands directors have an intimate understanding of applicable legislation and regulations affecting Cayman Islands funds. This can reduce the time spent to launch a fund.
Time spent is reduced because resident Cayman Islands directors can provide quick answers to issues raised from a Cayman Islands perspective. This includes questions on available fund registration exemptions, criteria for closed-ended funds versus open-ended funds and statutory filing requirements.
Where a resident Cayman Islands director is also qualified as a Cayman attorney, such a director will be able to quickly spot material issues and bring them to the attention of the fund’s legal advisor. This is a big win for a fund as there are effectively two sets of legal eyes- one in the form of a dually qualified director sitting on the fund’s board all year long and the other person being the officially appointed legal advisor.
Relationship with regulator
On the topic of legal compliance, it is worthwhile for a director to have a good rapport with a fund’s regulators. Some resident Cayman Islands directors understand the significance of this relationship very well.
Benefits of this connection include:
• developing a one-on-one relationship with the professionals working for the regulatory body
• being informed of regulatory issues as soon as they arise
• resolving regulatory queries quickly on behalf of clients
• providing ongoing assurance to the regulator that matters are being handled in the best interests of the relevant fund
Good contacts are also important for the operation of other aspects of a Cayman Islands fund. Notwithstanding this, a resident Cayman Islands director must never impair his independence in order to maintain any relationship. For example, it is widely accepted that a resident Cayman Islands director may have been sought out by an investment manager or other stakeholder in connection with a new fund launch. However, it must also be acknowledged that, while service providers may influence whether or not a particular Cayman Islands director is appointed to a hedge fund board, the Cayman Islands director must properly carry out his duties and not simply subordinate himself to the will of the service provider.
The above is not to suggest that a Cayman Islands director should become confrontational with an investment manager or be difficult when it comes to decision making. Instead, a Cayman Islands director must act in the best interests of investors, consider each matter based on its specific set of circumstances and correctly apply his mind to each issue. In the writer’s view, this approach will raise a fund’s corporate governance standards and will provide investors with security.
In the end, it is for the relevant stakeholder to effect the appointment of a director to a Cayman Islands fund. For the reasons expressed, a good, value-added appointment would be the engagement of a resident Cayman Islands director.
Some of the factors that stakeholders should take into account include:
• number of hedge fund boards on which the resident Cayman Islands director currently sits
• any existing conflicts of interest
• corporate governance model practiced by the resident Cayman Islands director (i.e. whether he will properly apply his mind to each matter, provide oversight and monitor the fund’s service providers and discharge his duties effectively with no misconceptions regarding delegable tasks)
Such diligence in the selection process can only lead to long-term returns for a fund.
About the author:
Alric Lindsay is an independent fund director and provides independent directorship services to Cayman Islands based investment funds. His bio can be found on www.lindsay.ky. He can be contacted at alric@lindsay.