The Cayman Islands Monetary Authority's recently-published statement of guidance on matters of fund governance has taken effect and applies to all funds regulated under the terms of the Mutual Funds Law.

The
Cayman Islands Monetary Authority's recently-published
statement of guidance on matters of fund governance has taken effect
and applies to all funds regulated under the terms of the Mutual
Funds Law. Neal Lomax of Mourant Ozannes tell us how.

The
statement establishes
key principles of good governance which must be observed by funds
which CIMA regulates. Many funds will not be phased by the
requirements of the statement for their governance models will exceed
the standards which the statement demands, though others may find the
statement challenging and should seek to improve their governance
standards accordingly. 

The
statement is neither rigid nor prescriptive (and not exhaustive
either). Instead, it sets out key principles to be interpreted and
applied in the specific context of each fund, taking into account
factors such as the fund's structure, complexity and size. It aims
its requirements at the 'governing body' of a fund (I.e. its
governing mind and will and the body responsible for overseeing and
supervising the activities and affairs of the fund) as well as at its
'operators' (i.e. the members who, together, comprise the fund's
governing body).

Beyond
fiduciary duties: a regulatory overlay 

It
is clear from the statement that CIMA seeks to ensure that fund
governance not only becomes a focus beyond common law fiduciary
duties but also that it is contextually relevant. CIMA also wishes to
reaffirm who bears responsibility for governance and concedes that
its supervisory glare falls upon a broad community (hence the
different treatment in the statement of the fund's operators from its
governing body) which must have regard to broader principles than
those established as rules of common law or guidelines established in Weavering
Macro Fixed Income Fund Limited (in liquidation) v Stefan Peterson
and Hans Ekstrom (2011).

The
oversight principle.
The requirement of the statement for effective supervision and
oversight of a fund's activities and affairs by its governing body is
entirely consistent with the general requirements of supervision
imposed by common law (and highlighted in the Weavering judgment as
being absent in the case of the Weavering fund). In many ways this is
at the heart of the statement and underpins the other principles
which it establishes, and includes a requirement that the governing
body of a fund should meet at least twice per year or more frequently
if the circumstances of the fund require it to do so in order to
fulfill its responsibilities effectively.

The
documents principle.
The statement highlights the need for funds to ensure that they
provide investors with accurate and sufficient disclosure of matters
such as the fund's investment strategy, relevant conflicts of
interests and descriptions of the equity interests being offered to
investors. In large measure these replicate the requirements of the Mutual
Funds Law,
though the statement goes further in requiring that internal
documents are maintained which record fully, accurately and clearly
the proceedings at meetings of the fund's governing body.

The
communication principle.
The statement notes that communication between the operators of a
fund and its service-providers (as well as between funds and CIMA)
should contain reports about compliance with the rules of the fund as
well as with applicable law and regulation and should also allow
investors to see this information whenever disclosure to them is
appropriate.

The
risk management principle.
the statement requires a fund's risks to be appropriately managed and
mitigated and discussed at the (at least) biannual meetings of the
fund's governing body.

The
enforcement dilemma

The
statement may be a double-edged sword for CIMA; much as it encourages
good governance among fund operators and governing bodies, investors
are bound to expect that compliance with it will be policed and
shortcomings dealt with. Whether CIMA will in fact do this remains to
be seen; for the time being, it lacks a specific statutory right of
enforcement in the event of failure by fund operators and governing
bodies to adhere to the terms of the statement. However, any
conclusions which CIMA reaches about bad behaviour will colour the
way it exercise its of its statutory power of substitution where fund
operators fall short of what CIMA considers to be fit and proper.

Action this day! 

We
encourage fund operators to review the detail of the statement and to
ascertain where, if at all, they fall short in their current
practices, whether individually or collectively as governing bodies.
The statement is not a panacea and compliance may not be enough in
certain instances, but at least CIMA is sticking up for the interests
of high-net-worth investors. 

Good
practice always entails rigorous communication between funds and
their service providers and that includes the manner in which
meetings of each fund's governing body are arranged, conducted and
recorded. Furthermore, fund operators should consider the state of
their funds' documents to ensure that they comply with the
requirements of the statement.

*Neal
Lomax is the managing partner in Mourant Ozannes' Cayman office. He
can be reached on +1 345 814 9131 or at neal.lomax@mourantozannes.com