While there is no 'one size fits all' solution as to how boards of directors should regulate their business and conduct their meetings, directors must pay regard to applicable law, the fund's memorandum and articles of association and the rules on both Corporate Governance and Internal Controls (the "Rules") and the Statement of Guidance - Corporate Governance for Mutual Funds and Private Funds (the "SOG"). Overall, they must act at all times in accordance with their duties as directors, including fiduciary duties. How these principles/duties translate as a matter of practice will be a question for the board of directors, in consultation with the fund's professional advisors, including legal counsel.

In practice and in a 'business as usual' environment for a hedge fund, say, pursuing a long/short equity strategy with monthly liquidity, it would be typical for a board of directors to meet quarterly (bearing in mind that the Cayman Islands Monetary Authority's ("CIMA") minimum expectation is at least one meeting a year). However, the circumstances of the size, complexity, structure, nature of business and risk profile of a fund's operations may necessitate more regular meetings to enable effective oversight and supervision, including with respect to risk. In the early stages of operation and when assets under management quickly increase (or decrease), more regular meetings may be appropriate until operations regularise.

In advance of each board meeting, an agenda should be circulated with a board pack containing any reports to be discussed at the meeting that have been prepared by the fund's service providers, e.g. legal counsel, the investment manager, the administrator and compliance officer and, after the financial year end, the auditor. The directors should familiarise themselves with such documents and identify any issues that ought to be discussed and addressed at the meeting.

Note that directors have, both collectively and individually, a continuing duty to acquire and maintain sufficient and relevant knowledge and experience to properly perform their duties as directors.

At the meeting itself, there is no substitute for active engagement by the directors: the directors should be proactive and prepared to ask questions of and, if required, challenge the fund's service providers. This is because the directors retain ultimate responsibility for functions delegated to service providers, including the need to monitor and supervise such delegations (as well as the need to verify/seek confirmation from service providers that they are acting in accordance with the fund's articles, offering document and marketing materials, as applicable).

The board of directors must be satisfied that the fund is conducting its affairs in line with all applicable laws, regulations and other rules (including, but not limited to, CIMA's Rules on Segregation of Assets and Calculation of Net Asset Values), and consistently with all representations to investors, while satisfying itself that its service providers are doing the same with respect to all delegated functions. Accordingly, appropriate legal advice should be taken and then information should be requested from service providers and/or professional advisors, so that the board of directors can satisfy itself that such compliance is being achieved.

In addition, the directors should:

  • regularly assess the suitability and capability of the fund's service providers, e.g. do the systems and processes of the administrator address the obligations of the fund as regards delegated Cayman Islands regulatory obligations1?
  • regularly monitor whether the investment manager is performing in accordance with the defined investment criteria, investment strategy and restrictions, and consistently with its internal controls; and
  • as necessary and at all material times, inform themselves of the investment activities of the fund, as well as performance and the financial position, including material risks (which should be discussed and addressed, where necessary).

If required, the directors should make further enquiries, obtain advice from legal counsel, and give directions to rectify noncompliance, with all relevant action points being actively followed-up in an appropriate and timely manner until resolved to the satisfaction of the board of directors.

Accurate minutes of the meeting (including all the information noted above) should then be prepared for the review and sign-off by the directors.

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.