UK: CIMA Issues Important Statement Of Guidance For Boards Of Regulated Mutual Funds

Last Updated: 15 January 2014
Article by John Donohoe and Roisin Cater

New recommendations will help fund managers to meet governance expectations of investors.

The Cayman Islands Monetary Authority (CIMA) has issued its proposed Statement of Guidance for Regulated Mutual Funds (SOG). CIMA has reviewed and considered the industry comments it received during an extensive consultation process and has confirmed the final draft of the SOG for Mutual Funds, with effect from 13 January, 2014.

The SOG has been issued following an extensive survey and consultation by CIMA which found that 61% of institutional investors believed that governance was inadequate and another 25% believed it needed improvement. By contrast, only 7% of investment managers believed it to be inadequate. Given that investors and managers should work in partnership, these findings were concerning to many who had the interests of the asset management industry at heart.

Applied properly, the SOG will help Cayman funds to bridge the gap in governance expectations between investment managers and investors, and provide the basis for a higher level of overall satisfaction by investors and regulators.

The new SOG is in line with international governance practices as well as codifying common law and the principles set out in the Weavering case. There are some highlights which we would like to draw your attention to:

  • Managers and fund boards should note that while CIMA guidance is not mandatory it reflects what CIMA believes to be the minimum level of governance (not best practice) that should exist for Cayman funds. In the event of any issues, investors, regulators and courts would examine actual practices versus SOG.
  • The SOG gives principles to be applied which need to be interpreted by boards and managers. Carne has published research (see below) and can provide guidance on request. As we expect investors, regulators, auditors and other fiduciaries to request proof of SOG compliance, we have developed a GAP analysis template which managers and boards should use to demonstrate this.
  • Although there is no formal requirement for independent directors, there is a requirement for the board and all directors to act independently. A board without any independent directors would find it difficult to prove this.
  • There is a requirement for the board and individual directors to have the necessary skills and experience to oversee the fund adequately and according to the SOG, including risk oversight (see below). Boards should ensure they have directors with different skills and experience, taking account of the complexity, size, and risks of the fund.
  • Boards of licensed, administered and registered funds will be required to hold a minimum of two meetings per year, and have service providers report to the board in order to ensure adequate supervision of service providers;
  • The SOG is not prescriptive or exhaustive;
  • The SOG applies to ALL directors of Cayman Islands funds, not just those resident on the Islands;
  • Boards are encouraged to make regular (frequency not defined) and structured enquiry of service providers, to act with an independent mind, and not abrogate responsibility once delegated;
  • The board should communicate with investors and CIMA where appropriate;
  • Conflicts of interest must be adequately disclosed and documented;
  • Risk management must be supervised and material risks discussed at board level. Anyone interested in receiving further guidance on this can contact our team of risk experts at

The SOG is in line with the findings of Carne's 2011 survey of institutional investors in hedge funds, which provided extensive detail of board composition, governance oversight, etc. The survey is of assistance in interpreting the SOG. Further details of that survey can be found here.

We recognise and welcome CIMA's emphasis on proper documentation of board meetings, and its role in transparent evidencing. Proper company secretarial services are critical to governance, and we have always advocated not only proper evidencing of board meetings, but that boards hold a minimum of two meetings per year, ideally quarterly.

The emphasis on conflicts is in line with that of other regulatory agencies such as the SEC and FCA and institutional investors more generally. Carne's most recent survey on governance and conflicts focuses on these issues and fund boards and managers can gain insight on investors' opinions from its findings.

In the covering commentary, CIMA noted that it is planning to introduce a public database which will be searchable by director as a means to let the market address capacity and limits on the number of appointments held, rather than being prescriptive as to an appropriate limit. CIMA also noted that separate legislation is to be drafted regarding the licensing and registration of directors, rather than trying to work within the existing Companies Management Law.

Carne applauds CIMA's considerable efforts in conducting the consultation in an extensive and transparent manner and providing the updated SOG to the investment industry. It has been a comprehensive and diligent process and has gone a long way towards addressing investor concerns regarding Cayman Islands fund governance. It is important that the correct balance is struck between good corporate governance and excessive regulation: we believe this SOG achieves this.

Carne is confident that the SOG will pave the way to enhanced governance and respect for Cayman Islands funds, and we encourage managers of funds domiciled in other jurisdictions to adopt its principles.

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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