CIMA Regulated Funds: New Corporate Governance Rules in Cayman Islands

Following on from private sector consultation in 2022, on 14th April 2023 the Cayman Islands Monetary Authority (“CIMA”) published in the Gazette a new Rule on Corporate Governance for Regulated Entities (“Rule”) and issued a new Statement of Guidance on Corporate Governance for Mutual Funds and Private Funds (the “Guidance”).

The Rule sets out CIMA’s requirements for corporate governance and covers all entities regulated by CIMA.

The Guidance provides an overview of what CIMA’s minimum expectations are for the sound and prudent governance of regulated funds — this replaces the Statement of Guidance — Corporate Governance for Regulated Mutual Funds issued by CIMA in 2013, bringing private funds in scope for the first time after their initial settling in period.

What is the difference between the Rule and the Guidance?

The Rule sets out CIMA’s requirements on corporate governance for regulated entities; it provides binding obligations on regulated entities and non-compliance therewith may lead to enforcement action being taken against the regulated entity and/or its operators by CIMA.

The Guidance is to be read in conjunction with the Rule and is intended to assist operators of regulated entities in their compliance with the Rule and is a measure against which CIMA will assess the regulated fund’s compliance with and implementation of the Rule.

Who is the Rule and Guidance applicable to?

The Rule and Guidance applies to:

• Funds regulated pursuant to the Mutual Funds Act (including licensed or administered funds under section 4(1)(b) and registered funds under section 4(3)).
• Funds regulated pursuant to the Private Funds Act, including funds registered under section 6 thereof

When does the Rule and Guidance take effect?

The Rule becomes effective 6 months after publication (i.e. October 2023). The Guidance became effective upon being published in April 2023.

Why is it important?

In the event that the Rule is breached, CIMA has discretion to apply penalties against regulated funds and their operators in accordance with CIMA’s Enforcement Manual and the Monetary Authority Act (as revised).

What are the main highlights of the Rule and the Guidance which regulated funds and their operators need to be aware of?

The main change from the previous guidance on corporate governance is the expanded scope of its application to include private funds (previously it was just applicable to mutual funds).

The Guidance otherwise remains similar to previous guidance with increased focus and requirements from CIMA on certain areas, as follows:

Oversight Function of Operators

• Whilst underlining that the operators of a regulated fund hold ultimate responsibility for effectively overseeing and supervising the activities and affairs of the regulated fund, CIMA has emphasised that the board should be composed of directors with a diversity of skills, backgrounds, experience and expertise to ensure that there is an overall adequate level of competence at the operator level.
• CIMA highlights the need for the operators to ensure regular oversight and assessment of the regulated fund’s service providers including requiring regular reporting from the regulated fund’s investment manager. Oversight of the administrative and compliance functions would also be expected and would usually be met via regular reporting to the board in respect of these services. In particular, existing AMLCO/MLRO and DMLROs need to ensure that they are in a position to be able to report non-compliant Cayman regulatory matters to the board who will then be in a position to direct any service provider to rectify any noncompliance with applicable Cayman laws and regulations.

Conflicts of Interest

• Operators of a regulated fund should have a written conflict of interest policy commensurate with the size, complexity, structure, nature of business and risk profile of the operations of the business of the regulated fund — such policy may be set out in the constitutional documents, offering memorandum or marketing documents as applicable.
• CIMA underlines the importance of identifying, disclosing, monitoring and managing all conflicts of interest in an appropriate manner ensuring they are documented as applicable. In particular, all conflicts of interest relevant to a meeting during which a matter is being decided or approved should be disclosed and documented in meeting minutes. Further, all conflicts of interest should be disclosed at least on an annual basis.

Operator Meetings

Board meetings should be held at least once per year. Notwithstanding, subject to the size, complexity, structure, nature of business and risk profile of the regulated fund, more frequent meetings may be required to ensure effective oversight. Where deemed necessary to fulfil the operators’ responsibilities service providers should be asked to provide reports and attend such meetings. Generally this would include the investment manager, the administrator and AMLCO.

Duties of Operators

• Exercising judgment of operators, acting in the best interests of the regulated fund and taking into consideration the interests of all investors.
• Making relevant enquiries and be satisfied that an appropriate and timely response is being taken, documenting concerns that have been raised and how the concerns were allayed.
• Communication adequately with investors at times of material changes being made and on an ongoing basis.
• Acting honestly and in good faith.
• Only taking on responsibility as operator of a regulated fund where the operator is able to perform its functions and duties in a responsible and effective manner and ensuring that it has sufficient and relevant knowledge and experience to carry out its duties as an operator.
• Ensuring at the regulated fund’s registration with CIMA that the constitutional documents, offering documents and marketing materials comply with applicable laws and regulations and that such documentation provides sufficient information on the investment strategy, conflicts of interest and all other material aspects regarding an investment in the regulated fund in order to enable an investor to make a sufficient determination of the risk to which their investment would be subject.
• Supervision and assessment of service providers both at time of registration and on an ongoing basis, ensuring investors are notified of any material changes to these appointments, ensuring service providers are acting in accordance with the constitutional documents, marketing documents and offering documents as applicable.

Documentation

The Guidance sets out certain requirements in relation to the documentation and record keeping requirements generally including the requirement for full, accurate and clear written records of meetings and/or determinations which should include a note of the agenda and circulated documents, list of attendees present at the meeting and whether that attendance was in person or via telephone or video conference, all matters considered and raised, information requested from and provided by service providers and advisors and full declaration of conflicts of interest.

Relations with CIMA

The Guidance highlights that the regulated funds should conduct the regulated fund’s affairs with CIMA in a transparent and honest matter, ensuring material matters are disclosed to CIMA (i.e. the regulated fund’s ability to continue as a going concern) and any non-compliance with applicable law and regulation. If in doubt whether a matter needs to be brought to CIMA’s attention, operators should err on the side of caution and communicate the matter to CIMA.

Risk Management

The Operators should ensure it has a suitable risk management framework in place that meets Cayman obligations; and that material risks are discussed and assessed at meetings and appropriate action taken as required. As such, the appointment of an AMLCO who is familiar with Cayman regulations is of particular importance.

How can ZEDRA Cayman Islands help regulated funds and their operators comply with the Rule and Guidance?

ZEDRA Cayman Islands provides a number of services which can help assist regulated funds and their operators in achieving compliance with these new requirements:

Corporate and Individual Independent Directors

• Fund professionals with the seniority, qualifications, breadth of knowledge, experience and expertise
• Fund professionals with a wide range of backgrounds including accounting, administration, operations, legal and corporate management
• Extensive industry experience
• Well informed of latest market trends
• Well versed in local rules and regulations
• Good optics for investors
• Robust in-house support team
• Selective number of appointments to ensure a focused and personalized service
• Good relations with CIMA
• Although no need to be Cayman resident, a Cayman-based director may be recommended by onshore counsel given increased recent international focus on economic substance and transparency

Fund Administration

• Accounting
• Registrar and transfer agency services (including investor AML compliance)
• Financial statement preparation and audit support
• FATCA/CRS Reporting and Support
• Registered Office and transaction support services
• Provision of Named Officers for the roles of AMLCO/MLRO/ DMLRO including a review of the funds AML/CFT manuals where necessary and the provision of a risk assessment on at least an annual basis.

About ZEDRA Cayman Islands

ZEDRA Cayman Islands is comprised of Zedra Fund Administration (Cayman) Ltd (“ZFA”) and Zedra Trust Company (Cayman) Ltd (“ZTC”) and their subsidiaries.

Established in 2007, ZFA is a licensed fund administrator regulated by CIMA (Mutual Fund Administrators Licence #15591) and provides services to a range of hedge funds, fund of funds, private equity funds, family offices, private client funds and real estate funds.

Established in 1988, ZTC holds a Trust Company Licence (#88013) and provides a range of corporate management and trust services to private clients and institutions including trustee services, enforcer services, incorporation of companies, registered office, corporate directorships, individual independent directorships, beneficial ownership and economic substance reporting.