Such is the level of scrutiny facing alternative fund managers that the general trend towards increased usage of independent directors has risen in recent times. Maree Martin, Counsel at Conyers Dill & Pearman, confirms that fund boards are not only becoming comprised of majority independent directors but that a more recent trend is the use of split independent boards.
"This is adding even greater independence to the board," says Martin. "The perception being that whilst directorships are an individual appointment, if two directors are from the same firm they may adopt the same approach to matters arising for their consideration. A split independent board overcomes this issue."
To underscore the importance of finding well qualified, suitable independent directors, fund managers are doing more due diligence on candidates for such positions. Prior to the global financial crisis, fund managers would often be satisfied to choose a directorship provider and accept any two directors suggested to them to use on the board. This is happening far less.
"At the very least managers want to know the background of each director, interview them and in some cases, meet with them in person. It increases trust in the whole process. The independent aspect helps allay investors' concerns when it comes to other functions being done in-house by the manager," says Martin.
Another aspect to consider is the Statement of Guidance (SoG) that CIMA issued in 2013 and which it updated in 2016. The SOG provides a governance framework aimed at the governing bodies of entities regulated by CIMA. In short, it sets out how a board should operate and the minimum expectations for prudent fund governance.
"When it was first published there were a few items that your average small to mid-sized fund didn't customarily comply with," comments Martin. "Now we are seeing most managers complying with the SoG, which covers general oversight, management of conflicts, frequency of meetings, applicable fiduciary duties and the type of documentation that should be kept by the fund."
"Whilst common for the larger fund manager, now small and medium sized fund managers are putting together their own operating manuals. There's a general increase in the expectation that funds need to operate in a way that meets international standards rather than simply doing the bare minimum to satisfy Cayman requirements."
Investors want to make sure that when they invest in a Cayman fund that the jurisdiction is doing everything that is expected of a leading financial centre. The updated SoG is one of the latest examples of Cayman's commitment to transparency and effective oversight of fund operations. Martin confirms that the board always has to have "effective oversight and supervision" of all service providers including the investment manager.
"Independent directors may have more experience in complying with a range of different operational and regulatory requirements; a director from the fund manager might wish to focus more on commercial matters and the investment activities of the fund.
"The board needs to monitor all service providers and ensure that they know what is going on in terms of the fund's operations. It is therefore increasingly important to have independent directors who are experienced in these matters. Split boards can provide a diversity of experience and expertise that can prove valuable for funds in these times of increasing regulatory and investor scrutiny," concludes Martin.
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