Directors Association Educational Day: The Cayman Islands Monetary Authority Explains Its Expectations About Governance Frameworks For Directors Of Regulated Funds

By Alric Lindsay

At the Cayman Islands Directors Association’s “Educational Day” at Hotel Indigo yesterday, December 5, 2024, CIDA members received updates on key industry topics, including the new beneficial ownership regime, risks surrounding digital assets and governance. One of the most interesting discussions was governance, specifically, the expectations of the Cayman Islands Monetary Authority for directors of CIMA-regulated entities. This discussion was led by Rohan Bromfield, Head of the Fiduciary Services Division at CIMA and Gaone Dube, Deputy Head of the Investments Supervision Division at CIMA.

Addressing the minimum standard for governance

For those unfamiliar with CIMA’s governance rule and Statement of Guidance on Corporate Governance for Mutual Funds and Private Funds, these state that “A regulated entity must establish, implement, and maintain a corporate governance framework which provides for sound and prudent management oversight of the regulated entity’s business and protects the legitimate interests of relevant stakeholders.”

It is important to note that while the CIMA rule and statement of guidance set out a list of measures that CIMA expects to see within a governance framework, these are minimum standards only.

Bromfield elaborated on this, saying:

So, if you are going to follow it to the letter and do nothing else, then you’re at base level.

But if you’re truly trying to be contemplative and ensuring that you have a framework that’s fit for the business that you’re overseeing, then you will have the latitude to make adjustments.

And yes, even leave some things out that don’t fit your particular business model.

He added:

There are some things that may not apply to you.

And if you can justify that and, and communicate that and document that in a clear way that makes sense for the business you’re overseeing, then the Authority is okay with that once we can understand that the risks are identified, the risks are covered and the risks are being appropriately mitigated with the control environment.

In other words, fund directors should consider on an ongoing basis whether the governance framework they adopt for a specific regulated fund remains appropriate or adequate given its nature, size, risk profile and complexity.  A director’s analysis of these factors may prompt a director to consider whether it is sufficient to maintain CIMA’s minimum governance requirements or expand them.

Attendees at the Cayman Islands Directors Association Educational Day

Proper oversight must be in place after the framework is established  

Once an adequate governance framework is established, directors must exercise proper oversight of the fund’s activities.  In practice, this is usually done by overall supervision and monitoring of the parties to whom the directors have delegated the fund administration, investment management and other functions.

Regarding this delegation, Bromfield explained:

… there are opportunities to delegate, there are opportunities to rely on other persons, but the ultimate responsibility still stops with the board.

While directors appreciate that the buck stops with them, Bromfield clarified to the audience that CIMA was not insisting that directors should have the same level of expertise as an investment manager or that directors should be able to replicate the tasks delegated to a skilled investment manager. Instead, he told directors that “you do have to have a good enough understanding to be able to discharge your function.”

Documenting discharge of functions through board meetings

One of the ways that directors can document their approach, level of oversight and understanding is through board meetings. Concerning this, CIMA’s minimum standard is that “The Governing Body must hold regular meetings, at least annually.”

Commenting on this, Bromfield said:

I think we can all agree that “at least once” is at the bare minimum of what you should be doing.

But in some cases, it could be four times, in some cases it could be two times.

In some cases, once was more than enough.

He added:

But by saying “at least,” it tells you that we’re not requiring you to do more than is necessary and appropriate for the framework that you oversee.

We are not the practitioners here.  We’re here to monitor and oversee and support as much as we can.

Directors must fill in any gaps

When the overall supervision or oversight function includes a fund’s activities in other jurisdictions, directors will be aware that it is important to ensure that the fund complies with not only Cayman requirements but also those of other jurisdictions. If any gaps are identified, directors should seek to fill them.

Giving an example of this, CIMA’s Deputy Head of the Investments Supervision Division, Gaone Dube, said:

So I think we recognize as well, sometimes you may be operating within like a group, affiliated entities, for example.

… the expectation would be for you to look at that gap analysis and ensure that anywhere where you know, you are falling short at the overall, I guess, umbrella level, that you are supplementing that to ensure that still you are operating within, you know, the guidelines the jurisdiction would require.

Two ways for the directors to confirm whether there are any governance shortfalls are to obtain periodic confirmations from the fund’s onshore and Cayman legal advisors regarding compliance or governance matters and raise compliance queries from time to time for service providers during board meetings.

Attendees during a break between presentations

Takeaways

Based on the discussion with Bromfield and Gaone, adequate documentation appears to be the key for CIMA to measure the strength of a fund’s governance framework. Once the directors document things clearly in a way that makes sense for the business they oversee, CIMA may be okay with the directors’ approach, provided that the risks are identified, the risks are covered, and the risks are appropriately mitigated with the control environment.

Notwithstanding that the directors may have adopted an acceptable approach based on the circumstances specific to a fund at any point in time, they should review the governance framework regularly to determine whether it remains adequate and appropriate.

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