Cayman Islands: Caymn Fund Sector Rises To Regulatory Challenges

Last Updated: 22 February 2016
Article by David Roberts

With a demonstrable commitment towards transparency, alongside new legislation, which has left the jurisdiction advantageously positioned for the implementation of global regulatory reform, recent events in the Cayman Islands have served to underscore its attractiveness as an international fund domicile.

Modern and forward-thinking, Cayman's regulatory framework constantly evolves to meet the ever-changing needs of investors. Recently named the best Hedge Fund Services Jurisdiction in the Hedgeweek Annual Global Awards 2015, the Cayman Islands continues to be recognised as the market leader. All sectors of the industry work together, including service providers, professionals, industry associations and the regulator, to ensure that Cayman's fund product sets the highest standards. Investors and stakeholders appreciate Cayman's robust legal system and its political and economic stability, as much as the high calibre of its professional advisors. Investor protection is paramount and, while CIMA regulates the industry effectively, it is still able to maintain a strong relationship with local professionals and service providers which is built on consultation and mutual trust and respect.

The international regulatory picture is constantly changing and, as fund managers have been considering the likely impact of FATCA and the Alternative Investment Fund Managers Directive on their operations, the Cayman Islands has responded positively to recent international initiatives. CIMA has shown a strong desire to cooperate with all global regulatory requirements, understanding that the reputation of the jurisdiction would only be enhanced by following this course of action. The CIMA has taken a proactive approach in respect of AIFMD and signed a Memorandum of Understanding with European regulators to enable the continued marketing of Cayman Islands hedge funds throughout the European Union.

FATCA has, of course, presented a considerable challenge to service providers, but the industry as a whole has stepped up with all sectors working together to ensure that entities subject to the regulation are fully compliant. The full impact of FATCA – and that of similar legislation in the UK – is only really starting to be felt now, as the first reporting deadlines are reached. Fund managers can then begin to focus on the next significant initiative looming on the horizon, the full effect of which can only be imagined, with the implementation of the Common Reporting Standard (CRS) for automatic exchange of information. Sometimes referred to as "Global FATCA", CRS poses significant difficulties for fund managers in jurisdictions that have adopted the standards. Significantly, funds will need to identify financial accounts held directly or indirectly by residents in a large number of partner jurisdictions, which will be a huge undertaking. The Cayman Islands was among the first group of jurisdictions to sign up to CRS and is expected to adopt the necessary legal framework in a timely fashion in order to effect reporting in 2017. It is suggested that those institutions that adopted a flexible approach to FATCA compliance will be best prepared for the more extensive and broader scope of CRS. Either way, there will certainly be more volume in terms of information to be reported.

Locally, there have also been some important developments regarding corporate governance, as the industry digested the introduction of a Statement of Guidance on governance standards from the regulator, as well as the repercussions of the "Weavering Case" (which may yet be subject to a further appeal). Clearly, many diverse matters have impacted the funds industry over the past year. However, the sector remains strong.

Regulation in balance

Predominant in the international hedge fund industry, it has been no surprise that the Cayman Islands has played an important part in the global debate on corporate governance for hedge funds and, in particular, the role of directors. The Directors Registration Law of 2014 was enacted by the Cayman Islands government in order to ensure that directors will be subject to regulation and inspection by CIMA and will be expected to undertake their roles in an appropriate manner and in accordance with sound corporate governance practices. It is intended that, in due course, directors will be required to consider their personal capacity before taking on new director appointments. Adherence to the Statement of Guidance on Corporate Governance for Mutual Funds is not onerous and should be appreciated as a safeguard to proper performance by those entrusted with the control and direction of fund activities. When compared to other fund domiciles, the current regulatory framework in the Cayman Islands achieves a perfect balance, in helping to preserve our reputation as a global leader in the funds industry while contributing to the ultimate protection of the investor and his/her money.

The global initiatives have had a seismic impact on the funds industry which has had to adapt to the new regulatory order. From our discussions with managers, there is not just a greater understanding of the benefits of independent directors on the board, but an appreciation of the particular attributes that the right board of directors can provide to a fund. The independent directors of today need to have a flexible approach backed by a wealth of experience. Funds should be looking for breadth of skills and a responsible attitude in selection of their directors. Importantly, funds should understand that this is not a "nominee" appointment and a director should be expected to engage fully with the investment manager and the administrator of the Fund, as well as other service providers, usually through the medium of regular board meetings. Attendance at regular meetings should be expected, to discuss and determine the complex issues affecting current day funds, whilst ensuring the maintenance of high standards of corporate governance. Whilst the delegation of certain specialist responsibilities is to be expected, independent directors must not forget their ultimate responsibility to the investors. There is a wealth of experience in the Cayman Islands offered by the many long established professionals who have worked in the industry since its inception in the 1990's. There are some that believe that, in the future, it will become more and more important that funds operate with at least one Cayman based independent director. Fortunately, such services are available through a spectrum of service providers, ranging from large, multi-national firms to niche Cayman based offices.

Going Forward

With the improved global economic picture, financial commentators seem to be in broad agreement that the funds industry worldwide is set to continue to show consistent growth, as investors persist in their search for alternatives to traditional equity and fixed income markets. As Cayman's industry professionals and service providers continue to demonstrate excellent service and sound products, as well as face the challenges of the ever increasing regulatory climate, there is no reason to suggest that the Cayman fund industry should not continue to benefit from this trend and continue its growth and market leadership. Industry stakeholders are well aware that business will only continue to flourish while Cayman maintains the confidence of investors through a robust regulatory framework. Meeting the international initiatives "head on" has been a successful model for Cayman in the past and the real challenge ahead will be to maintain its position as the domicile of choice through the provision of quality, timely and cost effective services, with high levels of corporate governance, in a progressive but balanced regulatory environment.

About the Author

David Roberts is the Managing Director of Cayman Management Ltd., a licensed Companies Management firm providing a broad range of corporate and Funds services in the Cayman Islands for over 40 years. David is a Fellow of the Institute of Chartered Secretaries and Administrators, a long standing Director of Cayman Finance and sits on a number of specialist finance sector boards and committees.

Originally published in Cayman Finance Magazine, 2015-2016, Issue 2

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.

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