By Alric Lindsay
Historically, when you thought of a non-executive director of an offshore fund, you pictured a retiree accepting a limited number of appointments to earn a passive income. The onshore and offshore regulatory landscapes have since evolved, necessitating that, in some cases, entities prove that their mind and management or control are based within the offshore jurisdiction of incorporation. This has given rise to the “business” of the provision of director services where professionals such as accountants, fund administrators, and lawyers act as independent or non-executive directors in exchange for a fee. As they take on an increasing number of appointments as directors of investment managers and funds, the question has been posed whether a limitation should be placed on number of directorship appointments that any one person may hold and whether regulators like the Cayman Islands Monetary Authority (CIMA) should regulate these numbers. For those involved in the Cayman funds industry, the issue is complex and depends on various factors, including the activities of the Cayman fund, the director’s capabilities, and the time required to fulfil their responsibilities effectively.
Fund activity
Concerning the activity of a Cayman fund, the operational dynamics may be influenced by its classification as either an open-ended fund or a private equity fund.
Additionally, the extent of director oversight required is contingent upon the volume of transactions executed by the fund during a specified timeframe.
For example, open-ended funds that exhibit high levels of activity may necessitate director oversight on a weekly or monthly basis. Conversely, those that are less active may only require directors to convene for quarterly meetings to fulfil their oversight responsibilities.
In the context of private equity funds, which typically engage in a limited number of substantial investments or concentrate on specific projects, semi-annual meetings are often adequate. In these instances, net asset value calculations may be conducted once or twice annually.
Director competency
The effectiveness of a director’s oversight function for a Cayman fund, whether managed actively or passively, is significantly influenced by the director’s personal competencies and approach, including his understanding of investment funds in general and legal and fiduciary duties specifically.
For instance, an individual new to director services, particularly one without a background in fund administration, law, or accounting, may find it challenging to comprehend extensive fund launch documentation. He or she may be asked to read 100 or more pages of a private placement memorandum, together with agreements with third-party service providers. Furthermore, this individual must coordinate with legal counsel both in the Cayman Islands and in onshore jurisdictions to ensure that all matters are finalized in a timely manner. This could be a daunting task for someone new to the industry.
In contrast, a seasoned director who has participated in numerous fund launches and possesses comprehensive knowledge of the various stages of a fund’s life cycle can expedite the review and approval of documents. This individual is also able to promptly address any issues that may arise following the fund’s launch.
Time spent
The competency of a director significantly influences the time spent overseeing the delegated responsibilities of the fund administrator and investment manager.
With a thorough understanding of pertinent factors, a competent director can formulate relevant inquiries, substantially reducing the time required. This efficiency may enable the director to undertake additional directorship appointments.
However, this does not mean that a competent director should attempt to take on an unlimited number of directorship appointments. Instead, he or she is encouraged to accept only those directorships that can be effectively managed after considering the type of fund and associated risks.
Regulatory approach
In light of the critical role that a director’s expertise plays in enhancing operational efficiencies, it is imperative that the Cayman fund regulator, CIMA, and policymakers currently considering the development of a Director’s Disqualification Act take care not to inadvertently implement overly stringent regulations on directors’ capacity. This could limit the income potential of professionals who provide director services and impact existing business models, including expansion plans. Additionally, if overly stringent limits are implemented, Cayman funds may be restricted in terms of their options for directors.
Of course, the above implications for directors must be balanced against CIMA’s concerns about protecting investors and ensuring adequate oversight. This balance, however, does not mean adopting a uniform policy. Instead, there should be a flexible policy that considers feedback received from the industry about existing director services models, the safeguards they have established, and the thresholds they identify as potentially introducing risks associated with the assumption of additional directorships.
Notes to readers:
The author, Alric Lindsay, is a professional director registered with the Cayman Islands Monetary Authority. He acts as a director of mutual funds, private funds, and investment management companies. He can be contacted at alric@caymanfs.com.
