It may be business as usual for hedge funds as they seek to weather the market storm caused by Covid-19. However, the true economic effects are perhaps yet to be seen.
This five-part series considers some of the guiding principles that apply to corporate governance in a Cayman Islands hedge fund context and some of the best practices that boards of directors should be implementing as a matter of course, which may need to be re-visited and adapted in times of distress.
Part 1: CIMA's Statement of Guidance - Corporate Governance
The vast majority of Cayman Islands hedge funds, i.e. open-ended vehicles that pool capital and hold multiple investments, are regulated under the Mutual Funds Law of the Cayman Islands ("MFL") by the Cayman Islands Monetary Authority ("CIMA").
By way of reminder, CIMA's Statement of Guidance for Regulated Mutual Funds - Corporate Governance ("the SOG"), which is not intended as a prescriptive or exhaustive guide, applies to all funds that are regulated under the MFL. In summary, the SOG provides that:
- Fund governance must be appropriate and suitable to enable effective oversight, direction and management of a fund, including oversight of its risk management. To determine the appropriate governance framework, regard should be given to factors such as assets under management, number of investors, the complexity of the structure, the nature of the investment strategy and the nature of the operations.
- The board of directors1 should regularly monitor and supervise delegated functions. A suggested method of achieving this is to require regular reporting from the investment manager and other service providers. Further, the board of directors should regularly take steps to ensure that the fund is conducting its affairs in line with all applicable laws, regulations and other rules. In addition, the board of directors should also satisfy itself that its service providers are doing the same with all delegated functions and appropriate information being requested from service providers and/or professional advisers so that the board of directors can satisfy itself that such compliance is being achieved.
- Rather than requiring a formal conflicts of interest policy to be documented, the board of directors must identify, disclose, monitor and manage all conflicts of interest.
- The board of directors should meet at least twice a year, either in person or via telephone/video conference call. Meetings should be more frequent if the circumstances or size, nature and complexity of the fund dictate, in order for responsibilities to be effectively fulfilled.
- Full, accurate and clear records should be kept of all meetings, which should include: the agenda and documents circulated; a list of attendees present and whether that attendance was in person or via telephone/videoconference; the matters considered and decisions made; and the information requested from, and provided by, service providers and advisors.
Further aspects of the SOG are considered below.
While the SOG is just that - guidance as opposed to law - CIMA would likely refer to the SOG in the event it considered the exercise of its regulatory powers pursuant to the MFL; namely, whether the direction and management of a fund had been conducted in a "fit and proper manner". Accordingly, the SOG clarifies CIMA's expectations with respect to the corporate governance process and confirms best practice for the board of directors.
About Walkers Professional Services
Walkers Professional Services is the leading provider of corporate, company secretarial, regulatory, compliance and fiduciary services to corporate and institutional clients across global financial centres.
Our Company Secretarial and Corporate Governance Services group has extensive experience in their respective fields and offers tailored services to help clients meet ever-changing legal and regulatory demands. Services include: Meeting Support Services, Shareholder Support Services, Global Company Secretarial Services, Action Point Maintenance, Economic Substance Solutions and Custom Data Room Solutions.
Part 2 of this series will consider corporate governance in a launch and 'business as usual' environment.
1. While there are a range of vehicles available in the Cayman Islands for hedge fund structures - the exempted company, segregated portfolio company, limited liability company, exempted limited partnership and unit trust - due to their popularity, this article focuses on hedge funds structured as exempted companies, which are operated by their board of directors. However, similar considerations apply to Cayman Islands hedge funds that are operated by managing members (in the case of a limited liability companies), general partners (in the case of exempted limited partnerships), and trustees (in the case of unit trusts). Please contact your usual Walkers contact, or use the details below, for any queries relating to other Cayman Islands vehicles.
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.