New corporate governance framework for Cayman managers and funds

By Tom Katsaros; Toh Wei Xun, Carey Olsen Singapore LLP

Published: 18 September 2023

Sponsors working with multi-jurisdictional fund structures are well-acquainted with the use of Cayman entities acting as its investment manager/advisor and/or investment fund vehicle. This typically involves (i) the manager/advisor performing investment business activities being registered with the Cayman Islands Monetary Authority (CIMA) under the Securities Investment Business Act (as amended) of the Cayman Islands as a registered person (registered person), or (ii) the fund being registered with CIMA as a mutual fund or private fund (Registered Fund and collectively with registered persons, regulated fund entities).

In April 2023, CIMA published the following new/updated rules and statements of guidance (the New CG Framework) relating to the governance of, among others, regulated fund entities:

  • CIMA rule – corporate governance for regulated entities
  • CIMA rule and statement of guidance – Internal controls for regulated entities
  • CIMA statement of guidance – Corporate governance for mutual funds and private funds
  • CIMA statement of guidance – Nature, accessibility and retention of records
  • CIMA statement of guidance – Outsourcing regulated entities (Note: This only applies to registered persons and not registered funds)

The majority of the New CG Framework took effect on 14 April 2023, with the rule on corporate governance for regulated entities and the rule and statement of guidance on internal controls for regulated entities recently taking effect on 14 October 2023.

CIMA’s Rules impose binding obligations on regulated fund entities and violations may result in administrative fines or regulatory actions. Statements of guidance aid regulated fund entities in meeting regulatory requirements and serve as a basis for CIMA’s evaluation of compliance. 

The New CG Framework extends to CIMA-regulated entities such as virtual asset service providers, banks and insurers, but this article focuses on its applicability to regulated fund entities – in particular, the rule on corporate governance for regulated entities and the statement of guidance on corporate governance for mutual Funds and private funds. 

Summary of New CG Framework

The New CG Framework maintains continuity with the previous corporate governance framework of the Cayman Islands but aims to establish a consistent and enforceable governance regime for all Regulated Fund Entities while simultaneously eliminating gaps in the previous regime. 

Notably, it now applies to registered private funds which were not previously covered. Additionally, CIMA updated its measures to align with international best practices and ensure sufficient supervisory and enforcement powers.

To this end, CIMA requires the governing body/operator (i.e., the board of directors for companies and general partners for limited partnerships) of a Registered Fund Entity to implement a framework addressing the following essential points (this list is non-exhaustive):
 

1. Objectives and strategies

Governing body must:

a)    establish/oversee implementation of corporate culture, business objectives and strategies for achieving such objectives (including ongoing monitoring and evaluation);
b)    document objectives and strategies of entity and communicate it to senior management/staff of entity;
c)    ensure entity adopts management structure commensurate with size, complexity, structure, nature of business and risk profile of operations.
2. Structure and governance

a)    Governing body must have:

i.    appropriate number of individuals with diversity of skills, background, experience and expertise to ensure adequate level of competence in governing body;
ii.    documented internal governance practices and procedures to promote efficient, objective and independent judgment/decision making by governing body;
iii.    policies on conflict of interest, code of conduct, private transactions, self-dealing and preferential treatment of favoured internal/external entities;
iv.    requirement for directors/senior management to declare actual/potential conflicts of interests;
v.    appropriate succession plan for directors/senior management;
vi.    nomination, appointment, resignation, disqualification and termination procedures for directors/senior management; and
vii.    documented responsibilities of sub-committees to ensure no single person has unfettered control of business.

b)    Governance structure of registered fund entities must be appropriate/suitable for effective oversight. Factors such as size, complexity, business nature, and risk profile are crucial in determining the adequacy of governance framework.
3. Appropriate allocation of oversight and management responsibilities Define and document roles/responsibilities allocated to governing body, senior management and persons in control functions (i.e., authorised functions serving control or checks/balances function from governance standpoint and carrying out activities including strategy setting, risk management, compliance, actuarial matters, internal audit and similar functions) to promote appropriate separation of oversight function from management responsibilities.
4. Independence and objectivity Governing body must establish and document clear/objective independence criteria met by members/employees to promote objectivity in decision making.
5. Collective duties

Governing body must:

a)    notify CIMA within 10 days of substantive issues which could materially affect regulated fund entity;
b)    enquire into affairs of regulated fund entity and request information from management/service providers (service providers);
c)    ensure that business of regulated fund entity is conducted in compliance with applicable acts, rules, regulations and regulatory measures in Cayman Islands and applicable jurisdictions; and
i.    Operators of registered funds must be satisfied that service providers are monitoring compliance similarly by, among others, requesting appropriate information/regular reporting from service providers and providing directions to rectify any non-compliance by service providers.

d)    at least once per year:
i.    review strategic objectives/policies of regulated fund entity;
ii.    evaluate progress made towards achieving strategic objectives;
iii.    review composition of governing body to ensure sufficient knowledge, skills, experience, commitment and independence to oversee regulated fund entity effectively and effectively manage any outsourced operations;
iv.    undertake self-assessments of performance of governing body and individual members;
v.    review implementation of risk assessment/management systems;
vi.    review implementation of internal controls; and
vii.    review remuneration policy for senior management.

e)    for registered funds:
i.    regularly monitor investment manager’s performance in accordance with investment criteria/strategy/restrictions;
ii.    at all material times be apprised of investment activities, performance and financial position;
iii.    review/approve financial results and audited financial statements; and
iv.    regularly monitor NAV policy and whether calculation of NAV is in accordance with policy.
6. Duties of individual directors a)    Governing body must indicate minimum time commitment expected from non-executive directors in letters of appointment and confirm on-going minimum time commitment expected on annual basis at beginning of each year.
b)    CIMA has reiterated standard fiduciary duties expected of directors to (i) act in good faith, honestly and reasonably, (ii) exercise due care and diligence, and (iii) act in best interests of regulated fund entity and its stakeholders.
c)    Each director must maintain knowledge and understanding of regulated fund entity’s business and update his/her knowledge periodically.
d)    Each director must make enquiries where issues/complaints are raised and satisfy him/herself that such concern is addressed appropriately/timely. Such issues/complaints and corrective actions must be properly documented.
e)    Each director must not be subject to undue influence from senior management and have access to all relevant information about regulated fund entity.
f)    Directors of operators of registered funds should ensure that they are able to perform duties responsibly and effectively before taking on any additional funds.
7.  Appointments and delegation of functions and responsibilities a)    Sub-committees established to carry out delegated powers of governing body should not relieve governing body of responsibilities and must have charter of terms of reference setting out mandate, scope, accountability, reporting obligations and working procedures. Appropriate records of deliberations and decisions of sub-committees must be maintained.
b)    Compliance committee or person reporting directly to governing body on compliance matters must be appointed. For registered funds, AML compliance officer providing a report at least annually suffices.
8. Risk management and internal control systems a)    Governing body must provide oversight on design/implementation of sound risk management and internal control systems/functions.
b)    Operators of registered funds should ensure material risks are discussed at meetings and appropriate action taken where necessary.
9. Conflicts of interest and code of conduct a)    Directors/senior management must declare actual/potential conflicts of interest.
b)    Governing body must establish written ‘conflicts of interest’ policy for members which includes (i) member’s duty to avoid activities that could create/appear to be a conflict, (ii) review/approval process before members engage in certain activities to ensure no conflict, (iii) duty to disclose any matter that may/has resulted in a conflict, (iv) subject to being permitted under constitutional documents, responsibility to abstain from voting on any matter where member may have conflict, (v) procedures for transactions with related parties on arm’s length basis, and (vi) manner of dealing with non-compliance with policy.
c)    Directors/senior management must confirm conflicts declared throughout the year in annual written declaration.
d)    For registered funds, CIMA has clarified that policy and conflicts may be documented in constitutional documents, offering documents or marketing materials.
10. Remuneration policy and practices

Governing body must implement written remuneration policy applying to, among others, directors, senior management and employees in control functions. 

This may not be applicable to registered funds if no senior management is hired or remuneration paid to directors of operators. 
11. Reliable and transparent financial reporting Governing body must establish audit committee responsible for financial reporting process.
12. Transparency and communications A meeting of governing body must be held at least annually (and more frequently if necessary).
13. Senior management duties

Governing body must ensure that senior management:

a)    is sufficiently accountable to governing body;
b)    carries out operations of entity effectively;
c)    provides governing body adequate and timely information to enable governing body to carry out duties/functions; and
d)    maintains adequate/orderly/easily accessible records of internal organisation.

The vast majority of registered funds will be unstaffed, so some rules/requirements may not be relevant in every case. As a result, the role of the operator will largely involve assessing and monitoring the registered fund’s service providers. 

Where a registered fund Entity’s functions are outsourced, it may rely on the internal controls of service providers, provided the governing body/operator is satisfied with their compliance with the rules.

Conclusion

The Cayman Islands is taking significant final steps towards its removal from the Financial Action Task Force (FATF) grey list by diligently enforcing sanctions and penalties against obligated entities and ensuring timely remediation of violations. Consequently, CIMA has been actively monitoring and auditing Regulated Fund Entities to ensure compliance with requirements.

Having fulfilled the FATF’s action plan for removal from the grey list on 23 June 2023, the Cayman Islands remains committed to upholding its reputation as a leading hub for international financial services and continue their momentum in implementing robust measures to combat money laundering, terrorist financing, and the proliferation of weapons of mass destruction.

Accordingly, while the New CG Framework does not impose drastically different obligations on regulated fund entities, it is advisable to identify any potential gaps in internal controls and policies to avoid issues during CIMA inspections or audits related to the New CG Framework.

This will further strengthen the existing standards and maintain the Cayman Islands’ competitive edge as a jurisdiction of choice for regulated fund entities.

We advise regulated fund entities to acquaint themselves with the relevant regulatory measures, and to contact your regular Carey Olsen advisers to discuss further.