CIMA publishes new governance guidance for operators of Cayman Islands Mutual and Private Funds
The Cayman Islands Monetary Authority (CIMA) recently issued a new Statement of Guidance for the governance of regulated mutual funds and private funds that is in immediate effect. This guidance outlines minimum expectations for fund governance and aims to ensure sound and prudent operations of Cayman Islands funds.
Despite the fact that this only applies to funds that are CIMA registered, we recommend that clients operating all types of Cayman vehicle which are not registered (eg single investor funds) or are vehicles which are connected with funds (eg trading subsidiaries or unregulated funds) should take note.
What types of fund does this apply to?
The guidance applies to all Cayman Islands mutual and private funds that are registered with or licensed by CIMA under the Mutual Funds Act and the Private Funds Act. The previous guidance only applied to mutual funds.
Who is the operator of a fund?
For a company, the operator is the board of directors (individual directors are operators) or managers for LLCs. For a partnership, the operator is the general partner, and for a unit trust, the operator is the trustee. The governance structure of a regulated fund must be appropriate and suitable to enable effective oversight. The size, complexity, structure, nature of business, and risk profile of the fund are all factors that determine the adequacy and suitability of its governance framework.
What are the key takeaways?
- Operators hold ultimate responsibility for effectively overseeing and supervising the fund's activities and affairs. Despite the fact that certain key functions (eg AML, investment management and administration) may be outsourced operators retain ultimate responsibility.
- Operators must ensure the fund conducts its affairs in accordance with all applicable statutes, regulations, and regulatory measures of the Cayman Islands and other jurisdictions where the fund may operate (eg USA and any requirement to comply with SEC rules).
- Operators should have a written conflicts of interest policy and should suitably identify, disclose, monitor, and manage all its conflicts of interest. This could be included in a fund’s offering document or could be a separate internal document.
- Operators should meet at least annually, but more frequently if required by the fund's size, complexity, structure, and risk profile. Typically we would expect most fund operators to meet twice a year. The meeting in the first half of the year (for most funds) is going to be related to completing the audit process and the second half of the year is simply good practice to ensure that the meetings aren’t too far apart.
- Operators must constitute an appropriate number of individuals with expertise and skill to be competent to operate the fund. An annual self-assessment of the operator board with this in mind is highly recommended.
- Operators must exercise independent judgement, act in the best interests of the fund for which they are responsible, and make relevant inquiries when issues arise within their scope of responsibility. CIMA fully recognises that operators of funds are often going to be drawn from members of businesses associated with the fund (eg law firm affiliates, investment manager representatives), but this doesn’t negate this requirement.
- Operators are responsible for approving the appointment and removal of the fund’s service providers and for overseeing any outsourced functions. For some funds a decision may have been made to delegate some appointment functions to, say, the investment manager. This is a reminder that those delegated authorities require supervision and monitoring.
- Operators must regularly monitor whether the investment manager is performing in accordance with the defined investment criteria, strategy, and restrictions established in a fund’s offering or constitutional documents, and should review and approve the fund’s financial results and audited financial statements.
- Operators must ensure that full, accurate, and clear written records are kept of their meetings and determinations. For example, minutes of all actual meetings and records of any written decisions.
- Operators are expected to conduct the fund’s affairs with the Authority in a transparent and honest manner, disclosing any matters that could materially and adversely affect the financial soundness of the fund or any non-compliance with applicable acts, regulations, and measures. One key area where this becomes relevant is in relation to crisis situations, such as a suspension of redemptions or a materially damaging situation occurring in relation to a portfolio company of a fund.
- Operators are expected to provide suitable oversight of the fund’s risk management, ensuring risks are always appropriately managed and mitigated.
What do I need to do?
For most clients the recommendations in the statement of guidance are simply reminders of what good practice currently is. For some this may be a timely reminder of what good practice is. Harneys’ fund professionals are here to help with regard to advice on specific requirements relating to meetings such as setting agendas or reviewing reports or to provide operator support services or operators to funds.
The Statement of Guidance for the governance of regulated mutual funds and private funds can be found here.
The Rule on Corporate Governance for Regulated Entities published in April 2023, should be read in conjunction with the relevant regulatory instruments issued by CIMA from time to time. Regulated Mutual Funds and Private Funds should read this Rule in conjunction with the Statement of Guidance on Corporate Governance for Mutual Funds and Private Funds and can be accessed here.