Cayman Islands: Maintaining An Island Of Excellence In A Sea Of Change

The Cayman Islands remains the offshore jurisdiction of choice for the formation of international investment funds. A cornerstone of the success of the Cayman Islands' financial services sector is its strong legal and regulatory system, which has proved beneficial to both managers and investors.

Despite a dramatically changing regulatory landscape, Cayman structures have retained their popularity. This has largely been due to efforts by the Cayman Islands government to implement and refine the rules regulating Cayman funds and managers to ensure funds are structured and operate in a manner that meets international standards.

Furthermore, the strong partnership between the Cayman Islands government and the private sector has fostered a thriving service provider industry with many of the large banks, auditors, administrators and other financial and fiduciary service providers recognising the opportunities regulatory developments present.

Trends in fund structuring and formations

The number of hedge funds regulated in the Cayman Islands remains healthy, with 10,940 funds as of December 31, 2015 according to the Cayman Islands Monetary Authority. Anecdotal evidence suggests both managed account and closed-ended fund activity has increased in recent years although this is more difficult to quantify as the structures generally fall outside the regulatory regime in the Cayman Islands. The most useful indicator of closed-ended fund (typically private equity funds) activity is the level of registrations of new Cayman Islands exempted limited partnerships (ELPs) which were at an all-time high of 3,370 in 2015 compared with 2,893 in 2014, resulting in a total of almost 18,000 ELPs. With Maples and Calder advising on a significant proportion of Cayman Islands hedge fund and private equity funds, the firm has unrivalled insight into developments in the alternative investment community.

Exempted companies remain the most commonly used vehicle for open-ended feeders into Cayman hedge funds largely due to investors' comfort with the share as a form of security and the welldeveloped reporting of fluctuating investment values on a net asset value per share basis. However, recent figures indicate that ELPs now constitute a majority of new master funds. This is due, in large part, to the ease with which an incentive allocation or carried interest can be built into the limited partnership agreement.

The vast majority of closed-ended private equity funds established in the Cayman Islands are structured as ELPs, which replicate to a significant degree the Delaware equivalent. While exempted companies are extremely flexible in the extent to which voting and economic rights can be mixed among different classes of shares, companies, by their very nature, have certain limitations that do not apply to ELPs.

Additionally, in response to requests from the investment funds industry for an alternate structuring solution, the Cayman Islands is expected to introduce legislation which will allow for the formation a Cayman Islands limited liability company (LLC). The LLC takes its inspiration, in part, from the Delaware limited liability company and the flexible nature of the vehicle will allow for a broad range of applications.

The evolution of corporate governance

In the wake of the financial crisis, a number of solutions and possible ways to help mitigate the risks surrounding its causal factors have been proposed. While regulation of the financial markets appears to have been the overarching result, one of the areas that was identified and sharply focused upon following the crisis has been the role of the board of directors.

Whereas previously, independent directors were not regarded as significant to the overall structuring of a fund, today a robust board can be critical to the fund's success and significant decisions in crisis situations (such as gating and suspending redemptions) can rest with the board. In recent years there has been a notable increase in the use of independent directors who are charged with exercising care, skill and diligence in the performance of their duties and applying independent judgement to consider the collective interests of shareholders in the decisions they make.

As of July 31, 2015, 76 percent of Cayman funds used two or more independent directors, an all-time high and an increase from 70 percent as of December 31, 2014.

Beyond an uptick in the use of independent directors, there has been a significant shift in the manner in which directors engage with the fund, its service providers and investors. The institutionalisation of the industry and the impact of new regulatory initiatives aimed at protecting investors has led to a much greater degree of scrutiny on corporate governance, resulting in more proactive and engaged directors than ever before.

Investors have also begun to take a more active role in shaping governance structures with input on considerations such as board composition and the use of other mechanisms for independent oversight.

The increase in ELPs serving as master funds in hedge fund structures has been accompanied by an increasing number of launches with independent advisory boards to ELPs, as well as independent directors to the general partner. There has also been growing discussion around the perceived governance gap in a typical master/feeder structure where there is independent oversight at the feeder level but not at the master level which is controlled by the investment manager and where the investment and the majority of other crucial decisions will be made.

As a result, investors have specifically stated that they want an advisory board in place. While not yet commonplace, it does indicate recognition by investors and managers of the existence of asymmetry between onshore and offshore fund structures and a desire to rebalance it. It will be of great interest to see whether the advent of the forthcoming Cayman LLC structure will result in an increase in the establishment of advisory committees.

In an effort to further mitigate conflicts and increase the independence of boards, there has been a strong preference from some investors for split boards comprised of individual directors from different fiduciary service providers. While the risk of groupthink is present, each of the directors on a fund board is well aware of his or her fiduciary duty and the requirement on each of them individually to apply themselves to the issues at hand. Thus it is more important to seek to establish a well-balanced board of directors with varying and complementary skillsets who can provide appropriate guidance and oversight into the operational functions of the fund's business and affairs.

The institutionalisation of the industry post-financial crisis has driven demand for enhanced due diligence on boards. This has led to the prevalence of more detailed due diligence questionnaires and on-site visits to understand who is responsible for governance of the fund. It also ensures that all stakeholders have a clear understanding of what investors expect from the board and how they can work with the fund manager and service providers to best meet their needs.

Similarly, directors are seeking to gain a better understanding of a fund's infrastructure and processes to enhance their level of oversight. In response, Maples Fiduciary established a dedicated operational due diligence function to provide the board with an objective evaluation of a fund manager, key service providers and the fund's overall operations to assist the firm's individual directors in fulfilling their duties. Not only does this help mitigate risk at the director level but also provides a value-added, no-fee service to promote and distil best practices and sets a new standard for the industry.

Adapting to regulatory change

The spate of new regulations in recent years has, unsurprisingly, had a significant impact on the way investment funds operate. As a result, managers and institutions have demonstrated a strong preference for outsourced solutions. In turn, service providers have morphed from solely offering specific services to seeking to understand and assess their clients' needs and to provide bespoke solutions for them.

The Maples group now offers comprehensive regulatory and compliance solutions to the European Alternative Investment Fund Managers Directive, the US Foreign Account Tax Compliance Act, Volker Rule, commodity pool operator and anti-money laundering requirements, among others. Maples and Calder has been at the forefront of advising on regulatory developments and is one of the only offshore law firms to have a dedicated regulatory financial services group. In addition to providing general governance solutions, Maples Fiduciary has taken an active role in establishing best practice policies and procedures around structuring and entity setup and working with managers and institutions on implementation to ensure they are meeting their obligations and complying with all relevant regulatory requirements. For example, many boards of funds now require much more secretarial support in organising board meetings with proper materials to demonstrate good governance practices and oversight.

While regulation has certainly prompted action in the industry, it is yet to be determined what the overall impact will be and the Maples group remains well placed to assist its clients in meeting the ongoing challenges the evolving regulatory environment presents. Providing a one-stop shop solution ensures that managers and financial institutions have the resources and expertise necessary to adhere to the necessary standards of corporate governance and address ongoing compliance requirements.

Conclusion

Following the global trend of institutionalisation and adapting its regulatory and legal system to meet the demands of the financial sector, the Cayman Islands continues to be the pre-eminent jurisdiction for the offshore alternative investment funds industry. The jurisdiction is recognised for its established reputation for attentiveness and responsiveness to developing international trends and commitment to high standards of professionalism and client service and continues to evolve to ensure it meets the requirements of governmental and regulatory authorities, as well as financial sector participants.

As the demand for an inexpensive, tax-neutral and secure method of pooling capital from multiple jurisdictions, and of transmitting that capital to where it can best be employed, continues to grow, the Cayman Islands will be well placed to maintain its position as the premier jurisdiction for offshore investment funds and will undoubtedly solidify its role as a pre-eminent international financial centre in 2016 and beyond.

This article first appeared in the Cayman Funds 2016, published by Newton Media Limited, in 2016.

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 Mondaq.com.

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

Authors
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
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
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

Mondaq.com (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 www.mondaq.com

To Use Mondaq.com 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.

Disclaimer

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.

General

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