Cayman Islands: Focus Turns To The Regulation Of Independent Directors

Last Updated: 18 December 2012

Previously published in Hedgeweek Cayman Special Report, December 2012.

Last year's Weavering case could have been a hammer blow for Cayman as the world's leading offshore fund domicile. But, if anything, it helped reinforce its image as a jurisdiction where fund governance is taken seriously, where directors are members of the Cayman Islands Directors Association (CIDA), and where the island's regulator, the Cayman Islands Monetary Authority (CIMA), is committed to evolving its fund regulation framework.

"While there may be a perception that independent directors have only recently focused on their roles, the genuine development – and key recent change – is the realisation by investors and managers of the significance of the role of independent directors and the increased priority which investors and managers are placing on their credentials," comments Andrew Morehouse (pictured, partner, Ogier (Cayman Islands). "Investors view the use of independent directors not as key to the fund, but certainly of great importance."

Looking at regulatory developments in 2012, the hot topic, according to Tim Buckley, partner at Walkers Global (Cayman), is the potential regulation of independent directors.

"How it ends up is not clear at the moment. Having said that, the industry itself is well ahead of the curve on this. Director services firms have known for a while that something's coming and they've been self-regulating very well."

There are several strands to this proposed regulation. First, is a consideration of the ability under Cayman law to disqualify directors. Currently, investors coming into Cayman funds have to do their own due diligence on the board of directors without really knowing whether a director is a bad egg or not. The ability to strike off errant directors from involvement with Cayman funds seems to have "garnered support" according to Matt Mulry, partner at Dillon Eustace (Cayman).

Second, is the potential introduction of a public register of directorships for each director. With the issue of "jumbo directorships" having made headlines last year, not all directors will feel comfortable with such a register.

"The problem with a limit being placed on the number of board positions which a director is permitted to hold is that there's a difference in the approach taken to the delivery of fund directorship services in the Cayman Islands. The "jumbo" directorship model is based on a structured system which escalates any issues arising through the organisation which is providing the directorship services and offers a streamlined efficient service. At the other end of the scale directors devote more time personally to their funds and give a more hands-on service in respect of the issues. Both approaches have their place," states Mulry.

Third, is a possible cap on the number of directorships: this could, however, be too ambiguous to enforce effectively. One director might hold multiple directorships across a range of similar funds being held in an umbrella structure, whereas another director might focus all of his efforts on a handful of diverse, complex fund strategies, meaning the number of directorships he holds will be less.

How, then, to decide on what is too high a number? "I expect that the approach taken by CIMA will be one that provides an appropriate level of regulation without impeding business in Cayman. My feeling is that CIMA is unlikely to set a hard and fast rule on the number of directorships which can be held by a single director," opines Mulry.

Buckley notes that Ireland introduced such a limit, which in the long run didn't work too well, and for Cayman would potentially cause more issues than it may seek to resolve: "Cayman has approximately 10,000 registered funds. If you were to limit the number of directorships you'd end up having to potentially find hundreds of new directors. You could well end up with the quality of those directors dropping, so a balance will need to be found."

Yolanda McCoy, Head of Investments & Securities at CIMA, clarifies: "We will soon be presenting a consultation paper as well as a corporate governance survey. The survey will touch on capping but CIMA does not have any affirmative position on any measures at this time. Consultation is key for us before any measure is adopted."

Further evidence that CIMA is enhancing the control and transparency of Cayman funds is the registration of master funds under the Mutual Funds (Amendment) Law, 2011.

"This is consistent with the policy position of the jurisdiction, which is to uphold and keep pace with global standards given the size and scope of our funds industry. It was not intended to be a marketing tool or be seen as a competitive advantage. The amendment is formalising something that was already happening," states Morehouse.

McCoy says that part of the reason behind amending the Mutual Funds Law to register master funds was over transparency concerns and the risk of unregulated funds in the international financial system. In particular the concerns of the September 2010 Global Forum on the Transparency & Exchange of Information for Tax Purposes Peer Review Report regarding the availability of investor information on unregulated Cayman funds: "By bringing master funds under CIMA's remit we closed that gap."

One important issue that needs to be resolved relates to FIN 48 regulation. Currently, there is a contradiction between the Foreign Judgment Law and the underlying Companies Law in Cayman in relation to tax liabilities.

"A literal reading of the law is that overseas tax authorities cannot enforce judgment, yet at the same time the FJL says certain recognized jurisdictions can but then creates it's own internal conflict within a rider to the provision. There is a conflict of law issue in Cayman that should be clarified," says Keiran Hutchison, restructuring partner at Ernst & Young.

This potential threat of future tax liabilities when a fund is being unwound might influence the way hedge funds trade; for example, rather than buying securities some managers might choose to trade synthetically with their prime broker using equity swaps.

Adds Jeff Short, AM partner at Ernst & Young: "Many of our clients are working with their tax director to develop a process so that their traders are aware of what they should and shouldn't be trading. If the system red flags a trade the manager will evaluate whether it's still worth pursuing the trade, or examine other ways of avoiding the liability issue."

Perhaps the most important piece of global regulation that Cayman is having to respond to is the AIFM Directive in Europe.

When the Directive is introduced in 2013 it will be necessary for offshore jurisdictions to have the relevant tax agreements in place with European member states to allow offshore managers to continue with the private placement process. When asked whether CIMA was doing enough to evolve, Buckley responds: "Yes, they are. I've been on one of the committees advising CIMA on the AIFMD and the need to get in place exchange and other agreements. CIMA is well down the path on that and in the next couple of months they'll be making some positive announcements."

Morehouse expands: "By July 2013 there are three things that Cayman has to do to allow Cayman funds to have access to European investors. First, CIMA has to put into place a co-operation agreement with ESMA and we're in the final stages of negotiation. Second, to ensure that Cayman is not on the FATF blacklist (which it isn't). Third, Cayman has entered into tax agreements with various EU member states and strong progress is being made on this front as well."

McCoy confirms that CIMA has been diligent in "trying to expand on potential bilateral co-operation agreements with key regulators in Europe as well as discussing the draft model with ESMA. We concluded a formal working group in early August, during which we looked at the Directive comprehensively. We are doing everything possible to ensure the funds industry in Cayman is safeguarded."

Aside from Europe, the Cayman government also has to consider US regulation; in particular FATCA and the US government's drive to ensure US investors pay their taxes.

"There's been a memorandum of understanding entered into between CIMA and the SEC this year which reflects a wider international regulatory co-operation in the Cayman Islands. The implementation of FATCA and the AIFMD is likely to lead to more regular and structured co-operation and a convergence of regulation between the Cayman Islands and the US and between the Cayman Islands and Europe," says Mulry.

One of the concerns relating to the AIFM Directive was the potential threat that Cayman would face from onshore fund jurisdictions like Ireland and Luxembourg. The catalyst behind this was a shift among investors, post-08, for more transparent regulated funds such as UCITS and QIF/SIFs. However, the wholesale re-domiciliation of funds simply hasn't manifested.

"We have been watching the onshore European market space very closely but we have had less than 10 funds over the last two years transfer to Europe," confirms McCoy.

Fund numbers in Cayman remain strong, and a recent report by Appleby shows that the number of company registrations there has grown 13 per cent over the past six months. Farrah Ballands, Appleby Partner & Global Head of Fiduciary & Administration Services, comments: "Cayman has a reputation for harnessing an environment that has contractual flexibility and legal certainty for companies incorporated in the Cayman Islands.

"Cayman is seeing an increase in the use of Cayman Companies to hold investments in North America in view of increasing regulation in these markets. We expect this trend of fast growth to continue well into 2013 and beyond."

On the redomiciliation issue, managers are starting to look at the bigger picture, understand who their investors are and develop fund structures that meet those needs. That might mean developing an onshore UCITS fund for European retail investors in parallel with an existing offshore Cayman feeder fund for US non-taxpayers and Asian investors, a Delaware-incorporated feeder fund for US taxpayers, and perhaps even a QIF for European institutions.

Says Bryan Hunter, managing partner of Appleby's Cayman office: "In our experience, there has been limited evidence of a loss of funds re-domiciling to Ireland or Luxembourg. In some specific cases it has proved appropriate to change to a European domicile and to utilise structures available in Europe. However there remains a growth trend in Cayman fund formation which would indicate that what Cayman has to offer is still much in demand."

Buckley is more emphatic, stating: "I can tell you with absolute certainty that from what we've seen it's no more prevalent now than it ever was. Sure we get asked the question, although not as much as we used to because it is prohibitively expensive. I know there are certain jurisdictions that are saying clients are moving their funds to them from Cayman in significant numbers but if that were correct, we'd be seeing that here...and we're simply not."

Giorgio Subiotto, partner and global head of investment funds at Ogier, agrees on the cost issue, noting that managers have to consider whether the additional capital raised in Europe would outweigh high set-up costs and on-going costs that, combined with greater investment restrictions, would eat into performance.

Moreover, the US is the biggest capital raising market right now. "You see far more UK managers looking to market into the US than the other way round. Really the move is for parallel structures to be set up. We haven't seen any moves away from Cayman because right now Europe isn't the main market for fund raising.

"Our recent experience indicates that currently the United States is where the real capital raising is taking place and the Cayman fund is naturally the vehicle of choice for that capital raising. We are seeing more European managers establishing Cayman funds to tap into the United States market than the other way around," confirms Subiotto.

One of the great advantages of Cayman is its flexibility as a fund jurisdiction. To that end, Subiotto notes that Ogier is seeing managers incorporate features of QIFs and SIFs into their Cayman funds so as to meet their "exact transparency, governance, and liquidity and reporting requirements".

This helps provide for the enhanced level of corporate governance that some investors may desire, but leaves the enforcement between the parties as a matter of contract rather opening the fund up to potential regulatory heavy handedness, says Subiotto, adding: "It has always been a strong advantage of Cayman funds that they can be established in a framework that allows the potential investors and promoters to tailor the terms of the fund to their respective needs."

Certainly, there's now a growing trend of more regulated Cayman funds launching with independent directors. According to survey data provided by Walkers, for the period January through October 2012, 72 per cent of regulated funds had some form of independent director: up from 64 per cent on last year's survey.

Of those funds which had independent directors, 49 per cent had majority independent boards, 37 per cent had fully independent boards, and only 4 per cent had a minority of independent directors on their boards.

Buckley points out that managers aren't just selecting two or three directors from a service provider, they are also, at times, cherry picking directors to bring different and complementary skills to the board.

"Increasingly, managers accept the fact that they've got to have independent directors, and like any good manager they want to get value out of them. Maybe they are looking to complement the board with a legal background, a compliance, trading, administration or regulatory background: whatever it is, we're seeing an increase."

Despite the deluge of global regulation, one advantage working in Cayman's favour is CIMA's willingness to engage in dialogue with the island's service providers.

"We have a straight line to CIMA, they listen to us and are proactive so we're fortunate in that regard," states Buckley.

Concludes McCoy: "Service providers in Cayman are working hard to ensure that their clients are kept up to speed, that their systems are able to meet any international standard. So we'll continue to collaborate with industry participants and move forward in 2013. We will be ready."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Maples and Calder
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Maples and Calder
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions