On April 14 2023, the Cayman Islands Monetary Authority (“CIMA”) issued a new Rule on Corporate Governance for Regulated Entities (the “Rule”) and an updated Statement of Guidance on Corporate Governance for Mutual Funds and Private Funds (the “SOG”) which became effective immediately while the Rule comes into effect 6 months later. This update aims to enhance transparency, accountability, and investor protection within the Cayman Islands' financial industry. While the new guidelines do not deviate significantly from the 2013 SOG for Mutual Funds, the inclusion of Private Funds will have a significant impact on the Operators (board of directors, general partner, manager or trustees, as applicable) of Private Funds in the jurisdiction, requiring them to adapt their governance practices accordingly. Adding experienced, Cayman Islands based directors can be a vital piece to complying with these updated regulations.
CIMA's updated Statement of Guidance on Corporate Governance for Regulated Funds reinforces the need for Private Funds to establish and maintain robust governance frameworks. It emphasizes the importance of effective oversight, independence, risk management, and transparency. The statement of guidance can be found on CIMA’s website here - Statement of Guidance - Corporate Governance - Mutual Funds and Private Funds
Overall, the CIMA new Rule on Corporate Governance for Regulated Entities signifies a tightening of governance standards and increased regulatory oversight, impacting how these entities operate and manage their governance structures.
Enhanced Governance Standards: Private Funds operating in the Cayman Islands will need to adopt and adhere to higher corporate governance standards than they may have in the past. These standards encompass areas such as board composition, independence, expertise, risk management, and internal controls. Funds will be expected to demonstrate their commitment to these principles and evidence this through documented board minutes and policies and procedures.
Defined Duties of the Operators: The governing body for a Private Fund now has a clearly defined set of responsibilities that they are expected to adhere to. In addition, the updated guidance places increased emphasis on the selection and oversight of service providers. Private Funds will need to carefully evaluate the expertise, reputation, and independence of their service providers, such as administrators, custodians, and auditors. Regular monitoring and due diligence of service providers' activities will be required to ensure their continued suitability and compliance with regulatory requirements. Where authority to appoint service providers has been delegated to another service provider, the Operators still retain ultimate responsibility for overseeing all outsourced functions.
Penalties for Non-Compliance: Once the Rule comes into effect on October 14, 2023, CIMA will have the ability to assess penalties against Private Funds, and their operators, that do not comply with the requirements. CIMA will be able to identify if a Private Fund has had the minimum number of board meetings from the annual FAR filing and if AML officers have been appointed as required.
Having independent directors on the governing body of Private Funds operating in the Cayman Islands can play a vital role in achieving the desired level of governance and regulatory compliance. These directors bring impartiality, expertise, and local knowledge, providing valuable oversight and enhancing the fund's governance framework. Here's how independent directors can contribute:
Expertise and Experience: Independent directors possess a wealth of experience in finance, compliance, risk management, and the Cayman Islands' legal and regulatory landscape. Their diverse backgrounds enable them to contribute valuable insights during board discussions, ensuring sound and effective decision-making and adherence with regulatory requirements. Cayman Islands directors are well versed in the regulatory environment and can assist Private Funds in navigating these changes with the appropriate documentation expected by CIMA.
Objective Oversight: Independent directors act as a critical check and balance within a Private Fund's governance structure. Where appropriate, they can act as the intermediary between the Limited Partner Advisory Committee (LPAC) and the General Partner (GP) to provide unbiased and independent views on contentious matters. Conflicts of interest have also been noted by the SEC as an area of focus for enforcement on Private Funds and adding independent members to the governing body can help alleviate these concerns.
Local Knowledge and Connectivity: Cayman Islands-based independent directors have a deep understanding of local laws, regulations, and market dynamics. Their knowledge and connections within the jurisdiction help Private Funds navigate regulatory requirements more effectively and establish productive relationships with relevant stakeholders.
Regulatory Compliance: Independent directors can assist Private Funds in meeting the requirements outlined in CIMA's updated guidance. By working closely with fund management, they ensure that the fund's governance practices align with industry best practices and regulatory expectations and are documented appropriately.
Many Cayman Private Funds are formed as partnerships where the operator is a GP controlled by individuals associated with the investment manager. Given the requirements of the Rule and SOG, the GP may need to revise the way it has operated in the past to avoid penalties for noncompliance. Channel Capital Cayman has considerable experience providing governance to partnerships through governance committees that operate in a similar manner to a board of directors for a mutual fund structured as a company.
Established in 2021, Channel Capital Cayman provides fund governance and auxiliary services, such as AML and AEOI officers, to a range of fund vehicles. Channel Capital Cayman can provide experienced individuals to join the governing body of a Private Fund to alleviate potential conflicts of interest and share industry best practices while ensuring compliance with the Rule and SOG. All directors have decades of experience in the alternative funds industry and can complement the experience of the existing members of the Private Fund’s governing body.
Please contact us to discuss how the updated Rule and SOG may affect you and how we can assist.
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