Executive Summary
After an industry consultation and feedback process in 2022, the Cayman Islands Monetary Authority (CIMA) has updated the following regulatory measures which are applicable to regulated investment funds (meaning both mutual funds and private funds) in the Cayman Islands:
- Rule - Corporate Governance for Regulated Entities (effective 14 October 2023);
- Statement of Guidance - Corporate Governance for Mutual Funds and Private Funds (effective 14 April 2023);
- Rule and Statement of Guidance - Internal Controls for Regulated Entities (effective 14 October 2023); and
- Statement of Guidance - Nature, Accessibility and Retention of Records (effective 14 April 2023).
These regulatory measures (summarised below) are primarily updated and streamlined versions of existing regulatory measures which applied to mutual funds. However, they include certain new provisions and changes to scope of which all regulated funds, including for the first time private funds, in the Cayman Islands should be aware.
In particular, there is a recurring emphasis throughout on proportionate application, providing flexibility for regulated funds, and CIMA expressly recognises that each fund's corporate governance framework and internal controls should reflect its size, complexity, structure, nature of business and risk profile. CIMA also acknowledges that funds may rely on their service providers or group-wide frameworks for their corporate governance frameworks and internal controls, assuming that these demonstrably enable the fund to meet its regulatory requirements.
Rule on Corporate Governance for Regulated Entities and Statement of Guidance on Corporate Governance for Mutual Funds and Private Funds
This rule covers the ground one would expect, dealing with, for example, the corporate governance framework, independence and objectivity and risk management and conflicts. Where a fund is of the view that a particular rule is not applicable to it based on the size, complexity, structure, nature of business and risk profile of its operations, it is the responsibility of the fund to ensure this is comprehensively demonstrated to CIMA, if required.
The Rule on Corporate Governance for Regulated Entities should, in the context of regulated funds, be read in conjunction with the Statement of Guidance on Corporate Governance for Mutual Funds and Private Funds, which represents existing industry best practice covering the oversight function, conflicts, meetings, duties, documentation, relations with CIMA and risk management.
Rule and Statement of Guidance - Internal Controls for Regulated Entities
This rule sets out the general rules and guidelines for regulated funds covering each of the five components of internal control, namely the control environment, risk identification and assessment, control activities and segregation of duties, information and communication, monitoring activities and correcting deficiencies.
Statement of Guidance - Nature, Accessibility and Retention of Records
This Statement of Guidance sets out CIMA's minimum expectations with regards to the record keeping arrangements of regulated funds. It is not anticipated that the recent update to this Statement of Guidance will have a significant impact on regulated funds, and existing record keeping requirements will continue to apply. In summary, a regulated fund is required to implement a record management system to maintain records for a minimum period of five years after a transaction date (which is consistent with a regulated fund's obligations under the Cayman Islands AML regime and general statutory requirements). In addition, regulated funds are required to keep records of books of accounts and other financial affairs, as well as other documentation to enable CIMA to monitor the regulated fund's compliance with its regulatory obligations. Records need to be accessible so they can be provided to CIMA within a reasonably short timeframe.
Questions on these matters should be directed to Nick Pernas who will connect you with an expert from AIMA's Cayman Islands national group.
Practical Implications
CIMA has provided practical guidance for mutual funds and private funds in relation to various aspects of the measures.
Structure: It is recognised that funds are structured and resourced differently from other regulated entities in that they typically have no staff of their own and rely on their investment manager and other service providers to help them comply with their regulatory responsibilities. In particular, a number of requirements which relate to a regulated entity's "Senior Management" (defined to include the most senior staff of the regulated entity, including heads of divisions, and any person who fulfils the functions of a senior manager) will not be relevant to a fund. CIMA acknowledges that mutual funds and private funds are unlikely to have "Senior Management" but will instead rely on their Governing Body, which may in turn rely on the fund's investment manager and other service providers to facilitate compliance with the fund's regulatory responsibilities.
Governance: A mutual fund's or private fund's Operators are considered to be its Governing Body. The Operators refers to the board of directors where the fund is a company, the general partner where the fund is a partnership, the managers (or equivalent) where the fund is a limited liability company and the trustee where the fund is a trust. The Operators of a regulated fund hold ultimate responsibility for effectively overseeing and supervising the activities and affairs of the regulated fund and protecting the interests of key stakeholders. The Governing Body must comprise sufficient appropriately qualified individuals - in practice, for regulated funds CIMA has long operated a 'four eyes' principle requiring at least two individuals to be ultimately in control of the entity, with their details disclosed in any offering document or marketing materials. It is the responsibility of the Governing Body to self-assess as to its members' qualifications and suitability.
Meetings: The Operators of a regulated fund should convene at least once a year (rather than at least twice a year for mutual funds under the pre-existing Statement of Guidance on Corporate Governance for Mutual Funds). While the new Statement of Guidance on Corporate Governance for Mutual Funds and Private Funds has reduced this requirement for mutual funds it is a new requirement for private funds, notwithstanding their significant existing internal focus on corporate governance matters including by way of Governing Body, limited partner advisory committee and investor meetings.
Most mutual fund boards meet on (at least) a quarterly or semi-annual basis, so we do not expect boards to meet less frequently than they currently do. The primary purpose of these meetings is the review of the fund's activities and strategy and to engage with the service providers as part of the Governing Body's oversight function.
Typically the fund's financial statements will be considered and approved by the Governing Body in a meeting each year, which provide an opportune time to undertake a broader review although there is no mandated time at which the Governing Body must hold a meeting.
All of these meetings must be appropriately documented with agendas and minutes of decisions reached. Meetings need not be in person and there is no requirement for professional corporate secretarial support, although support can be obtained if required. In practice, we would anticipate Governing Bodies of mutual funds to continue their existing practices, and Governing Bodies of private funds to meet at least once a year to consider, at a minimum, a standard agenda including consideration of annual financial statements, review of conflicts matters and verification of the performance by service providers of their functions on behalf of the fund.
Independence: There is no requirement for investment funds to appoint directors (or equivalent) that are independent of the investment manager but the Operators must exercise independent judgement, acting in the best interests of the regulated fund (other than where lawfully permitted or required to consider other interests) and taking into consideration the interests of its investors as a whole. CIMA recognises that the Governing Body may consist of members from the investment manager or advisor or an affiliate of such mutual fund or private fund.
Nothing in the new measures seeks to vary the various provisions in Cayman Islands law that have long been the settled position on fiduciary duties in a funds context, such as those provisions in the Exempted Limited Partnership Act that allows the general partner (to the extent permitted by the limited partnership agreement) to take into account external interests, including its own interests.
Conflict management: The Operators are required to consider their position with respect to conflicts or potential conflicts of interest, and this may be especially likely to arise for those individuals who are connected with a fund's management. The Rule on Corporate Governance for Regulated Entities and Statement of Guidance on Corporate Governance for Mutual Funds and Private Funds emphasise the management of conflicts of interest, and funds must have appropriate policies for this purpose
Most funds will, at the very least, contain provisions in their constitutional or offering documents that deal with the key questions, such as whether disclosure of the conflict is sufficient or whether the affected individual(s) must recuse themselves. Regular consideration of conflicts has been a recurring agenda item on many board meetings for several years and we expect this trend to continue.
Internal controls: The Operators are responsible for maintaining internal controls appropriate to the fund's business. At its core, these requirements relate to risk assessment, monitoring and management of the entity's business. In an investment funds context, these obligations are primarily discharged by the Operators proactively engaging with service providers to the fund to ensure adequate oversight and to be in a position to receive any communications of risks identified by those providers, and then provide appropriate directions to rectify non- compliance where necessary. This is a routine part of the service provider reporting function, and a discussion and evaluation of key risks to the fund and compliance, in the broadest sense, is one of the primary functions of the meeting.
Proportionate documentation: CIMA recognises that various documentary requirements may be satisfied via typical fund documents. For example, while the Operators of a regulated entity should have a written conflicts of interest policy, this may be documented in a fund's constitutional documents, offering documents or marketing materials, as applicable. They may adopt provisions of a policy maintained by the fund's investment manager, if they are appropriate to the fund. In the context of board meetings and as is current best practice, in addition to an agenda, clear written records of all meetings, including conflicts, the matters considered and decisions made, and the information requested from, and provided by, service providers should also be maintained.
Operators of regulated funds should continue to comply with the record keeping requirements set out in CIMA's Statement of Guidance on Nature, Accessibility and Retention of Records. All documentation demonstrating the fund's compliance with its regulatory obligations should be readily available to provide to CIMA in the English language. CIMA expects most records should be provided to CIMA within 1-3 business days of a request. Records may be in electronic form and may kept by a group entity or a third party, inside or outside of the Cayman Islands, provided the appropriate arrangements are in place to ensure the security of the data, and that the records can be provided to CIMA within a reasonably short timeframe.
Timeline
AIMA has categorized this proposal as High Priority/Low Impact and it is therefore represented in light pink in the AIMA Regulatory Horizon Scan gantt chart.
Effective Date for CIMA's Rule on Corporate Governance for Regulated Entities | 14 October 2023 |
Effective Date for CIMA's combined Rule and Statement of Guidance on Internal Controls for Regulated Entities | 14 October 2023 |
Effective Date for CIMA's Statement of Guidance - Corporate Governance for Mutual Funds and Private Funds | 14 April 2023 |
Effective Date for CIMA's Statement of Guidance - Nature, Accessibility and Retention of Records |
14 April 2023 |