April 2024

A year since the introduction of the updated regulatory measures by CIMA on corporate governance for regulated entities. How are the rules and guidance being implemented by funds?

The Cayman Islands Monetary Authority (CIMA) released updated regulatory measures in April 2023 in relation to the rule on corporate governance for regulated entities (Rule) and associated statement of guidance for mutual funds and private funds (Guidance). The Rule has been effective since 14 October 2023.

The Rule introduced numerous changes to the previous corporate governance obligations for regulated entities and extends to private funds, which was not previously included. The Rule creates binding requirements on all entities regulated by CIMA. A breach of a Rule could lead to the issuance of a fine or enforcement action taken by CIMA.

What is the purpose of the Rule and the Guidance?

Pursuant to the Rule, the governing body (i.e. the board of directors, general partner or managing members depending on the entity structure) of a regulated entity (Governing Body) must establish, implement, and maintain a corporate governance framework which provides for sound management oversight and protects the legitimate interests of relevant stakeholders.

The Guidance is expected to assist the Governing Body of mutual funds and private funds with interpreting the Rule for implementation in a fund context.

How are funds implementing the Rule and Guidance?

Funds are implementing a corporate governance manual by pulling together all their operational policies and procedures into one clear and simplified manual that cover the requirements outlined in the paragraph headed ‘What are the required Governance measures?’ below.

Even though the minimum requirement for funds is for the Governing Body to meet on an annual basis, we have been assisting the Governing Body with preparing for either their quarterly or annual meeting where they are approving the corporate governance manual and reviewing the ongoing legal and regulatory requirements of the fund.

What are the required Governance measures?

  • Corporate Governance Manual: A corporate governance manual that documents the entity’s corporate culture, business objectives & strategy and explains how the business objectives and business strategy will be achieved in line with the entity’s long-term goals. The manual should also include (i) a succession plan for Directors [1] and Senior Management [2], (ii) distinctly defined roles and responsibilities allocated to the Governing Body, Senior Management and the Control Functions [3].
  • Communication of Corporate Governance Manual: The corporate governance manual should be communicated to Senior Management and people responsible for Control Functions. The staff of the entity should be aware of the objectives and strategies of the entity.
  • Skills of Governing Body: The Governing Body should be comprised of a sufficient number of individuals with a variety of knowledge, skills, experience, and commitment to the role that ensure that there is an appropriate level of capability for the entity to have prudent and ethical oversight and governance. The Governing Body must perform its role with due care and skill that would be applied by a reasonably diligent person with the knowledge, skill, and experience of a member of the Governing Body and in compliance with any applicable fiduciary duties.
  • Internal Governance and Procedures: Internal governance and procedures should be documented to promote efficient, objective, independent judgment and decision making by the Governing Body such as guidelines on managing conflict of interests, self-dealing, private transactions, and preferential treatment of favored internal and external entities.

Governance procedures must cover the following:

  • Independence criteria: There must be clearly defined, objective independence criterion, which must be met by the Governing Body to promote independent judgement and objectivity in decision making and prevent undue influence from Senior Management.
  • Code of Conduct: A code of conduct must be put in place for the Governing Body with the following key principles: selflessness, integrity, objectivity, accountability, openness, honesty, and leadership.
  • Remuneration policy: The Governing Body must implement and oversee a remuneration policy for the remuneration of the Governing Body, Senior Management, employees in a Control Function and any other employees whose actions may have a material impact on the risk exposures of the entity. The policy must (i) not permit excessive or inappropriate risk taking, (ii) align with the risk appetite, cultural objectives, strategy, and long-term purpose of the entity, and (iii) consider the interests of the stakeholders of the entity.
  • Appointment & Termination Procedures: The nomination, appointment, resignation, disqualification and termination procedures for Directors and Senior Management should be documented.
  • Sub-Committee: If a sub-committee is appointed, the responsibilities of the sub-committee and its members should be documented, and the Governing Body should ensure that no single person has unfettered control of the business. The Governing Body retains ultimate responsibility for any delegated functions to the sub-committee.
  • Outsourcing: All outsourcing by the Governing Body must be documented and monitored to ensure the services outsourced continue to meet the needs and comply with the obligations of the entity. The Governing Body retains overall accountability for the functions delegated.
  • Complaints procedure: The Directors must be made aware of any issues or complaints raised regarding the Governing Body and be satisfied that an appropriate and timely course of action is taken to address the issue and appropriately document the corrective action.
  • Documentation: Meeting and decisions taken by the Governing Body should be sufficiently documented and maintained in accordance with the entity’s record keeping policy, regulatory & statutory obligations.
  • Minimum Time Commitment: Non-executive directors must state a minimum time commitment in relation to their role in their letter of appointment. It is acknowledged that such time commitment may change from time to time with respect to the needs of the entity.
  • Compliance Committee: The Governing Body must appoint a compliance committee or individual with the duty to report directly to the Governing Body on all compliance matters. The size, structure, nature, and complexity of the business should be considered when determining whether the role can be undertaken by a committee or an individual.

For mutual or private funds (bearing in mind the complexity, size, structure, nature of business and risk profile of the fund) this obligation may be discharged by the Governing Body receiving, at least annually, a report directly from the anti-money laundering compliance officer, or another suitably qualified compliance or legal professional.

  • Audit Committee: The Governing Body must establish an audit committee to be responsible for:
    • Approving or recommending to the Governing Body the approval, appointment, compensation, and dismissal of auditors.
    • The financial reporting process for oversight of the entity’s internal and external auditors.
    • Reviewing and approving the audit scope and frequency.
    • Receiving key audit reports and ensuring that Senior Management takes appropriate action in a timely manner to correct any issues highlighted by the auditors.

The size, structure, complexity, nature, and risk profile of the business should be taken into consideration when determining whether the role can be undertaken by a committee or an individual.

What are the ongoing obligations of the Governing Body?

  • Management Structure: The Governing Body is obligated to ensure that the entity’s management structure is proportionate, and aligned with its size, complexity, structure, nature of business and the risk profile of its operations. For regulated mutual or private funds, the Governing Body should consider the assets under management, investment strategy, and number of investors in its analysis.
  • Communication with CIMA: The Governing Body has various obligations to communicate with CIMA in a timely manner with transparency and honesty especially in relation to any substantive issue which would materially affect the entity, including financial soundness and non-compliance with regulations and laws.
  • Oversight: The Governing Body must consistently monitor Senior Management and service providers to ensure effective governance and compliance with regulations, constitutional documents, policies, and procedures and, where relevant, investment criteria and strategies. Where non-compliance is identified, the Governing Body should implement measures for remediation.
  • Communication with Investors: For mutual or private funds, material changes to the fund should be communicated to investors and, where necessary, CIMA.
  • Annual obligations [4]: At least once per year, the Governing Body should:
    • Conduct a meeting of the Governing Body and document in formal minutes.
    • Disclose conflicts of interest in a meeting.
    • Review the strategic objectives and policies of the entity and either amend or re-adopt them as appropriate.
    • Evaluate the progress made towards achieving the strategic objectives.
    • Review the collective skill set of the Governing Body and determine if any training or outsourcing is required.
    • Self-assess the performance of the Governing Body members and document and remedy any gaps identified.
    • Review the risk assessment and risk management systems to ensure that all significant risks are being adequately measured, monitored, and mitigated.
    • Review the internal controls of the entity, ensuring they are operating effectively and that any deficiencies are adequately addressed.
    • Review the remuneration policy.
    • Confirm to the non-executive directors the minimum time commitment expected on an annual basis at the beginning of the entity’s financial year.

How can we help?

Given the regulatory landscape in the Cayman Islands, all regulated entities must review their current governance practices and make any necessary adjustments to ensure ongoing compliance and appropriate record-keeping. Our team of legal and regulatory experts can assist you with the following services:

  1. Compliance review: conduct a gap analysis of your existing corporate governance framework to identify any areas that may need improvement or adjustment to comply with the Rule and Guidance.
  2. Draft and review policies and procedures: assist you to develop or update your corporate governance policy in compliance with the Rule and Guidance.
  3. Fund and regulatory document updates: review and / or amend your offering documents or other disclosure/regulatory materials to determine if they need amendment to reflect your updated corporate governance policies.
  4. Regulatory update: attend your board meeting(s) to provide a regulatory update on the current laws and regulations of the Cayman Islands.

Please contact Laura Oseland, Senior Associate, for further details and assistance.

Email: loseland@nelsonslegal.com

Phone: +1 (345) 949 9710

 

References

  •  [1] Director means a member of the Governing Body, and any person who fulfils the functions of a director. Where the Director is a corporate entity, the natural persons who represent such corporate entity or the entity’s governing body.
  • [2] Senior Management includes the heads of divisions and persons who fulfil the role of a senior manager by conducting functions such as daily planning, supervision, administration and the execution of the entity’s objectives and strategy.
  • [3] Control Functions properly authorised functions, whether in the form of a person, unit, or department, serving a control or checks and balances function from a governance standpoint and which carry out specific activities including strategy setting, risk management, compliance, actuarial matters, internal audit, and similar functions.
  • [4] Additional obligations apply to portfolio insurance companies.