Bell Rock Fund Governance - Cayman Fund Directors
Who are the directors of a Fund?
There is no precise definition of a ‘director’ under Cayman Islands law. The directors of a Fund may be individuals or corporate bodies and they are the persons with ultimate responsibility for the management and conduct of the Fund's affairs. The first directors of a Fund (whether described as ‘executive’ or ‘non-executive’) are typically appointed by the initial subscribers to the Fund or otherwise in accordance with the articles of association of the Fund (Articles). The register of directors maintained by the Fund will be prima facie evidence of the identity of the directors from time to time.
Executive directors, non-executive directors, shadow directors, nominee directors and de facto directors are all subject to the duties and obligations.
Questions to ask prior to accepting a fund director position
Who is the fund manager and associated service providers. What comfort do I have in terms of the risk associated with the strategy, the investment management team etc.
Do any conflicts of interest arise with my appointment? For example, am I a connected person such as the fund manager and do I have a vested interest?
What are the expectations from the investment manager or investors? Regardless of the time commitment, the risk remains the same.
Do you have sufficient knowledge of the fund strategy, what the investment objective is and the underlying investments? Do you understand the regulatory requirements, expectations and regulations where the fund manager and investors are based?
Do you have sufficient time to to dedicate as a director based on your understanding of the commitment?
Is Directors & Officers Liability Insurance provided?
What are the powers and authority of the directors of a Fund?
The powers and authority of a director are derived from, and constrained by, the Fund’s memorandum of association (Memorandum) and the Articles. The Memorandum sets out the capacity and powers of the Fund and the Articles set out the manner in which the Fund is to be operated.
The directors will need to ensure that the Fund is operated in accordance with the terms of any Offering Document issued by the Fund to its investors from time to time. Whilst the terms of the Offering Document do not fetter the powers of the directors of the Fund, the Offering Document forms a collateral contract between the Fund and its shareholders and so the directors should ensure that they regularly review, and are familiar with, the contents of the Offering Document.
The Articles will almost certainly allow the directors to delegate their powers to service providers. The directors of a Regulated Fund must appoint an auditor and will typically appoint an investment manager, an administrator and a custodian/prime broker, amongst other service providers. The directors of a Private Fund must appoint an auditor and a custodian (unless exempt) and may also appoint an independent third party or administrator to perform certain functions set out in the Private Funds Act.
In deciding to appoint a service provider the directors will need to be diligent and careful in their selection, forming the reasonable opinion that the service provider is competent to carry out the relevant function(s) on behalf of the Fund.
What are a Fund director’s duties?
The duties of a director of a Fund arise as a consequence of the fiduciary relationship between the director and the Fund and are based on a combination of English and Commonwealth common law, as applied in the courts of the Cayman Islands, statute and regulatory guidance. Furthermore, see the Statement of Guidance for Regulated Mutual Funds.
Directors’ duties will ordinarily be owed to the Fund but can, in particular circumstances, be owed to creditors or individual shareholders.
In the ordinary course of business, the interests of the Fund mean acting in the best interests of the Fund's shareholders as a whole. However, if the Fund becomes insolvent or ‘doubtfully’ solvent directors must take account of the Fund's creditors when discharging their duties.
Directors’ key duties can be summarised as follows:
Fiduciary duties
to act bona fide in what the director considers to be the best interests of the Fund
to exercise their powers under the Articles for the purposes for which they are conferred
to avoid conflict between the interests of the Fund and the director’s personal interests and duties or (where such conflicts are permitted by the Articles, as is common) making sure that any such conflicts are properly disclosed
to exercise the director’s powers as a director independently, without subordinating their powers to the will of others (except to the extent that such powers have been properly delegated)
not to make secret profits from acting as a director of the Fund Duties of skill and care to acquire and maintain a sufficient knowledge of the business of the Fund on a continuing basis; and
to supervise the discharge of functions which have been delegated to advisers and service providers
Directors are obliged to undertake these duties with care, diligence and skill. Directors are subject to a minimum objective standard as a director of the Fund, but the expected standard will be raised if a particular director has more knowledge, skill or experience than would ordinarily be expected of a director in their position. Directors will also have the relevant contractual duties and obligations set out under any service agreements that they may enter into with the Fund.
Statutory obligations
Directors of a Fund are obliged under Cayman Islands legislation:
to maintain the Fund’s register of members, the register of directors and officers and the register of mortgages and charges
Funds are likely to be exempt from having to maintain a register of beneficial ownership but when an exemption applies, the Fund must file written confirmation of the exemption with its registered office provider, with instructions to file the written confirmation with the competent authority in the Cayman Islands.
to maintain proper books of account for the Fund
to maintain a registered office in the Cayman Islands for the Fund
to comply with the Anti-Money Laundering Regulations (AML Regulations) issued under the Proceeds of Crime Act
to ensure that the Offering Document issued by the Fund describes the shares in all material respects, and contains such other information as is necessary to enable a prospective investor in the Fund to make an informed decision whether or not to invest;
to update the Offering Document to take account of any material changes
file any material changes to the information previously filed with CIMA, including an amended Offering Document, within 21 days of the change
to ensure that the Fund is audited on an annual basis
to comply with reporting obligations including, without limitation, notifying the Registrar of Companies (Registrar) of any changes in the directors, officers or registered office of the Fund, arranging for the filing of the Fund's annual return and exempted company declaration with the Registrar and filing the Offering Document and annual audited financial statements with CIMA
to comply with the requirements of the Director Registration and Licensing Act
Offering document obligations
CIMA has issued a Rule for the Content of Offering Documents for Regulated Funds and a Rule for the Content of Marketing Materials for private funds, which set out the specific content to be included in Offering Documents for each type of fund.
Automatic Exchange of Information and AML obligations
A Fund also has reporting obligations under Cayman Islands legislation which implements the US Foreign Account Tax Compliance Act (FATCA) and the OECD’s Common Reporting Standard (CRS, and together with FATCA, AEOI Legislation). AML officers are also required at the Fund level and should report periodically to the board.
Whilst the directors may be entitled to delegate these functions, the directors are still obliged to supervise the appointed service providers’ discharge of them.
Statement of Guidance on Corporate Governance (SoG)
CIMA published a Statement of Guidance (SoG) in 2014 which applies to Regulated Funds. The SoG sets out best practices and establishes certain minimum corporate governance standards for governing bodies of Funds and whilst only applicable to Regulated Funds at this stage, it provides helpful guidance for all Funds.
The SoG includes the following:
Structure
Directors should make sure that the governance structure of the fund is appropriate and suitable for effective oversight of the fund, looking at the fund’s size, nature and complexity, including the level of assets under management, number of investors and nature of its investment strategy.
Oversight and compliance function
The directors of a fund are ultimately responsible for overseeing and supervising the activities of the fund. They should regularly monitor and take steps to ensure that the fund and its service providers are conducting the affairs of the fund in compliance with the fund's defined investment criteria, investment strategy and restrictions as well as with all applicable laws, regulations and other rules. Directors should receive regular reporting from the investment manager, administrator and other service providers to ensure they are able to make informed decisions and to adequately oversee and supervise the fund.
Conflicts of interest and risk
Directors of funds must ensure that the fund's Offering Document adequately and accurately discloses conflicts of interest and ensure that the fund has adequate measures in place to identify, disclose, monitor and manage any conflicts of interest. Directors should ensure that they provide suitable risk management oversight and that risks are appropriately managed and mitigated.
Board Meetings
The board of directors of a fund should meet at least twice a year, in person or by telephone or video conference call, and more often depending upon the circumstances or size, nature and complexity of the fund. Full, accurate and clear written records must be kept of such meetings and all resolutions passed at such meetings, including agenda items, circulated documents, a list of attendees and if they were present physically or by telephone or video conference, all matters considered and decisions made and information requested from and provided by service providers and advisors.
Ongoing monitoring and crisis management
Throughout the life of a Fund, directors should be pro-active in ensuring that the investment manager is required to provide information on an ad hoc basis which might require urgent action by the board. In addition to standard regular reporting requirements, directors should be asking the investment manager and any other relevant service providers whether there is anything that should be brought to the attention of the board.
Bell Rock - Independent Fund Directors
With over 25 years of senior level experience, our team of professional independent directors provide experience in fund governance that adds real value to the fund structure and the offering. We act for many of the leading hedge funds and private equity funds in the industry, acting on a select number of fund boards across a wide range of fund strategies.
There are many benefits of appointing professional independent directors that greatly outweigh the cost of doing so:
Expected of almost all investors investing in alternative investment funds these days;
Meets institutional investor due diligence requirements;
Avoids perceived or real conflicts of interest;
Mitigates any fraud on the part of the fund manager;
Provides insight to the fund manager in terms of matters that impact the fund; We have witnessed many funds set up and once legal counsel is no longer involved after launch, the directors and principals of the fund manager are unaware of the Cayman regulatory requirements and deadlines which can often lead to breach of regulations, penalties or both;
Appointing independent directors can add real value to the board from their experience in the asset management industry;
Having directors based offshore can also meet tax-neutrality requirements.
For further information on our independent fund directors services, please contact us: info@bellrockgroup.com
