CIMA Fund Governance Guidance: Board Responsibilities

CIMA's corporate governance guidance for regulated funds, set out in its Statement of Guidance, establishes minimum standards for how the board of a Cayman regulated fund oversees, directs and manages the fund. Published in 2014 after the Weavering decision, it covers governance structure, oversight of service providers, conflicts of interest, board meetings, record keeping and director capacity, and is useful guidance for every Cayman fund board.

Key takeaways

• The Statement of Guidance (SoG) applies to regulated funds and expects oversight, direction and management to be conducted in a fit and proper manner.
• Directors are ultimately responsible for overseeing the fund and its service providers, and should receive regular reporting from the investment manager, administrator and others.
• Boards should meet at least twice a year and keep full, accurate and clear written records of meetings and resolutions.
• Directors should monitor the fund's NAV policy, approve the financial statements and make sure the offering document discloses conflicts of interest.
• Directors of regulated funds must be registered or licensed under the Directors Registration and Licensing Act (As Revised); directors of private funds are not subject to it.

Why CIMA issued the Statement of Guidance

Following the 2011 first instance decision of the Grand Court of the Cayman Islands in Weavering Macro Fixed Income Fund (In Liquidation) v Peterson and Ekstrom (Weavering), CIMA published a Statement of Guidance in 2014 that applies to regulated funds. The SoG sets out good practice and establishes minimum corporate governance standards for the governing bodies of funds. Although it applies only to regulated funds, it provides helpful guidance for all funds.

The SoG does not impose a strict or all-encompassing code of conduct on the governing bodies or operators of regulated funds. It expects the oversight, direction and management of a regulated fund to be conducted in a fit and proper manner, and establishes an overall framework for good corporate governance within which regulated funds should operate.

The SoG does not contain specific restrictions on investments, risks or strategies, and it does not attempt to direct, prescribe or constrain the management or business activities of regulated funds. Bell Rock's independent director services are built around these board responsibilities.

What the Statement of Guidance covers

Governance structure

Directors should make sure that the fund's governance structure is appropriate for effective oversight, taking account of the fund's size, nature and complexity, including its assets under management, number of investors and investment strategy. Directors should also make sure that the fund's constitutional documents and offering document comply with Cayman Islands law.

Oversight and compliance

The directors of a fund are ultimately responsible for overseeing and supervising its activities. They should regularly monitor, and take steps to ensure, that the fund and its service providers conduct the fund's affairs in line with its investment criteria, strategy and restrictions, and with all applicable laws, regulations and rules.

Directors should receive regular reporting from the investment manager, administrator and other service providers so that they can make informed decisions and adequately oversee the fund. They should regularly ask service providers to confirm that they are acting in accordance with the constitutional documents and offering document, including whether the investment manager is acting within the fund's investment criteria, strategy and restrictions.

What counts as "regular" depends on the fund structure, strategy and service provider relationships, and must be assessed case by case. As part of this function, directors should also be mindful of CIMA's Statement of Guidance on Outsourcing. Directors should act transparently and honestly with CIMA, disclosing any matter that would materially and adversely affect the fund's financial soundness and any non-compliance with applicable laws.

Conflicts of interest and risk

Directors must ensure that the offering document adequately and accurately discloses conflicts of interest, and that the fund has adequate measures to identify, disclose, monitor and manage them. Directors should also provide suitable risk management oversight and make sure that risks are appropriately managed and mitigated.

Board meetings and records

The board should meet at least twice a year, in person or by telephone or video conference, and more often depending on the circumstances or the size, nature and complexity of the fund. In practice, many investment fund boards meet quarterly.

Service providers should attend and report to board meetings. Full, accurate and clear written records must be kept of meetings and of all resolutions passed, including agenda items, circulated documents, a list of attendees and whether they attended in person or remotely, all matters considered, decisions made, and information requested from and provided by service providers and advisers.

The duties of directors of regulated funds

Under the SoG, the directors of a fund:

• are responsible for the appointment, removal, monitoring and supervision of service providers and their contractual terms, including notifying investors and CIMA of changes to service providers and updating the offering document;
• should communicate adequate information to investors, including enhanced disclosure where appropriate, make relevant enquiries when issues are raised and be satisfied that appropriate action is being taken;
• must have sufficient capacity to apply their minds to overseeing and supervising each fund in accordance with relevant laws, regulations, rules, statements of principles, the SoG and other relevant CIMA statements of guidance;
• should ensure that the offering document contains the information a prospective investor needs to make an informed decision, including clear descriptions of the investment strategy and conflicts of interest policy;
• should exercise independent judgement, act in the best interests of the fund, take into account the interests of investors as a whole, operate with due skill, care and diligence, and act honestly and in good faith at all times, with sufficient and relevant knowledge and experience;
• must exercise the care, skill and diligence of a reasonably diligent person with the relevant general knowledge, skill and experience;
• should be fully aware of the fund's investment activities, performance and financial position, and review and approve its financial statements; and
• should regularly monitor the fund's net asset valuation policy and whether NAV is being calculated in accordance with it at the relevant intervals.

No specific limit is set on the number of directorships an individual or corporate director may accept. Under the Directors Registration and Licensing Act (As Revised), however, a director of 20 or more covered entities must be licensed as a professional director. The common law and statutory duties that sit behind these expectations are explained in our article on Cayman fund director duties and appointment criteria, and the valuation point is developed in our guide to hedge fund valuation policies.

Outsourcing arrangements

Where functions are outsourced to service providers, directors should be mindful of CIMA's Statement of Guidance on Outsourcing (the Outsourcing SoG). It gives regulated entities guidance on establishing outsourcing arrangements, including sub-outsourcing, and on outsourcing material functions or activities.

The Outsourcing SoG is not intended to be prescriptive or exhaustive. It sets out CIMA's minimum expectations, and covers:

• appropriate due diligence on service providers;
• the contents of outsourcing agreements;
• materiality assessments, meaning the impact of an arrangement on the entity's finances, reputation and operations;
• confidentiality and disclosure of information;
• what boards of regulated entities are expected to do when material functions or activities are outsourced;
• termination and exit strategies; and
• the regulated entity's relations with CIMA in respect of outsourced material functions or activities.

Outsourcing AML compliance

CIMA's Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing also describe how funds may outsource or delegate AML compliance, provided the fund designates natural persons as its AML compliance officer, money laundering reporting officer and deputy money laundering reporting officer. Those roles are described in our article on AML obligations for Cayman entities.

Directors registration and licensing

The Directors Registration and Licensing Act (As Revised) (the DRL Act) requires directors of regulated funds and certain securities investment businesses (covered entities) to register with CIMA before being appointed as a director of a covered entity. Directors of private funds are not subject to the DRL Act.

The definition of "director" also includes managers of covered entities formed as limited liability companies under the Limited Liability Companies Act (As Revised). The categories are:

• Registration for a natural person acting as director of fewer than 20 covered entities.
• Licensing as a professional director for a natural person appointed to the boards of 20 or more covered entities.
• Licensing for corporate directors of covered entities.

Registration and licence fees are set by CIMA, differ between these categories and are published in CIMA's fee schedule. Annual fees are payable to CIMA by 15 January each calendar year to maintain registration or licensing.

Where Bell Rock fits

Bell Rock Group is licensed by CIMA as a company manager under the Companies Management Act (As Revised). It provides independent directors to hedge funds, venture capital and private equity funds, digital asset funds, investment managers and investment and governance committees through named individuals, who act in their personal capacity. Bell Rock also provides AML officer roles, registered office, board support and fund formation and registration support. Its directors take a limited number of board positions so that each has capacity for the boards they serve.

Frequently asked questions

How often must a Cayman regulated fund board meet?

At least twice a year, in person or by telephone or video conference, and more often where the fund's size, nature or complexity requires. Many boards meet quarterly.

Does the CIMA governance guidance apply to private funds?

The SoG applies to regulated funds, but CIMA's expectations provide helpful guidance for every fund board, including private funds.

Is there a limit on how many boards a Cayman fund director can sit on?

The SoG sets no numerical limit, but each director must have sufficient capacity for each fund. A director of 20 or more covered entities must be licensed as a professional director under the DRL Act.

What records must a fund board keep?

Full, accurate and clear written records of meetings and resolutions, including agendas, circulated documents, attendees and how they attended, matters considered, decisions made and information requested from service providers.

Related reading

• Governance priorities for crypto fund boards
• Cayman fund audit requirements and extensions
• Governance across Cayman master-feeder funds
• Independent Directors: What Allocators Expect from Cayman Fund Boards
• Directors Registration and Licensing Act: Who Must Register and How
• Fund Board Minutes and Meeting Practice in the Cayman Islands
• CIMA's Rule on an Effective Compliance Programme: What Changes for Cayman Entities

To discuss board appointments, see Bell Rock's independent director services.