You’ve appointed your independent directors. They seem like good people, came highly recommended, have great resumes and seem interested and enthusiastic about your strategy. Now that you have them on board though, do you know what they should actually be doing?
Since the 2008 financial crisis, directors of investment funds have faced more and more scrutiny of their actions and decisions. Recent court cases have confirmed the rules on directors’ duties and in December 2013 the Cayman Islands Monetary Authority (CIMA) issued a statement of guidance on corporate governance (the Guidance) which it expects regulated funds to follow as a minimum. Although the BVI does not have an equivalent to the Guidance, the principles under BVI law are the same and a BVI fund director would be well advised to take direction from the Cayman Guidance.
So what should the directors of a regulated fund in Cayman or the BVI actually be doing?
Before Launch – before the fund launches directors should be reviewing and signing-off the fund’s documents, in particular the offering document, eg. to confirm the investment strategy and restrictions, to make sure that statements can be verified, risk factors are appropriate and conflicts of interest are fully disclosed. Launch board resolutions should also include approval of delegation of agreed functions to the various service providers, among other launch matters.
After Launch – CIMA expects the oversight, direction and management of a regulated fund to be conducted in a fit and proper manner. Many of the principles in the Guidance reflect general directors’ duties and are already good practice for well-run funds. It is also clear that CIMA drew on comments made in the first instance decision of the Cayman Islands Grand Court decision in Weavering Macro Fixed Income Fund Limited (in liquidation).
The Guidance applies to the governing body and operators of the regulated fund, ie directors of a corporate fund, general partner of a limited partnership and trustee of the unit trust.
All of the principles set out in the Guidance are equally applicable to the directors of a regulated fund in the BVI and should be considered to reflect the expectations of the FSC in relation to the management of BVI regulated funds.
Key principles for the governing body include:
- Making sure that the governance structure is appropriate and suitable for effective oversight of the fund, looking at the fund’s size, nature and complexity, including the level of assets under management, number of investors and nature of investment strategy.
- The governing body has ultimate responsibility for effectively overseeing and supervising the fund and should monitor and regularly take steps to satisfy itself that the fund is operating in accordance with applicable laws and regulations and its service providers are monitoring compliance.
- Requiring regular reporting from the fund’s investment manager and other service providers.
- Identifying, disclosing, monitoring, managing and documenting all conflicts of interest.
- Meeting at least twice a year in person or by telephone or video conference call, more frequently if the size, nature and complexity of the fund requires it. Where necessary, service providers should be asked to attend governing body meetings.
- Full, accurate and clear written records should be kept of governing body meetings including agenda items, circulated documents, a list of attendees and if they were present physically or by telephone or video conference, all matters considered and decisions made and information requested from and provided by service providers and advisors.
- Exercise independent judgment, acting in the best interests of the fund, taking into account the interests of investors as a whole.
- Operate with due skill, care and diligence and act honestly and in good faith at all times, making sure they have sufficient and relevant knowledge and experience to carry out their duties.
- They must exercise the care, skill and diligence of a reasonably diligent person with such general knowledge, skill and experience.
- Make relevant enquiries when issues are raised and be satisfied that appropriate action is being taken and communicate adequate information to the fund’s investors when it can.
- Make sure it has sufficient capacity to apply its mind to overseeing and supervising each regulated fund it’s appointed to. No specific limits are set however on the number of directorships that can be accepted by an individual or corporate director.
- Making sure that the fund’s constitutional and offering documents comply with Cayman law, including that the investment strategy and conflicts of interest policy are clearly described in the offering document.
- Being responsible for approving the appointment and removal of the fund’s service providers, monitoring and supervising the functions and notifying investors of any changes. The operators have ultimate responsibility for functions which are delegated and should regularly ask for confirmation from the service providers that they are acting in accordance with the fund’s constitutional and offering documents, including regularly monitoring whether the investment manager is acting in accordance with the fund’s investment criteria, strategy and restrictions.
- Inform itself of the fund’s investment activities, performance and financial position and review and approve the fund’s financial statements.
- Regularly monitor the fund’s net asset valuation policy and that NAV is being calculated in accordance with the policy.
- Act in a transparent and honest manner with CIMA, always disclosing any matter which would materially and adversely affect the fund’s financial soundness and any non-compliance with applicable laws.
- Ensure it provides suitable risk management oversight and that risks are appropriately managed and mitigated.
In Cayman, all directors of regulated funds also have to be registered or licensed with CIMA under the Directors Registration and Licensing Law before they are appointed as a director (see our earlier blog on Cayman Islands Director Registrations - Funds for more details). CIMA won’t register a fund which is applying to be regulated with them if the directors aren’t registered or licensed, so directors simply have to comply with this one. On this Cayman and the BVI differ and there is no similar requirement in the BVI. Fund directors also need to act in accordance with their usual directors duties under general Cayman or BVI corporate law (see our earlier blog on Directors' Duties for Cayman Islands and BVI Funds for more details).
Many of the principles in the Guidance will be second nature to experienced independent directors but it does at least provide a helpful checklist of minimum expectations for all regulated funds to follow.