You’ve appointed your independent directors. They seem like good people, came highly recommended, have great resumes and seem interested and enthusiastic about your strategy. Now that you have them on board though, do you know what they should actually be doing?
Since the 2008 financial crisis, directors of investment funds have faced more and more scrutiny of their actions and decisions. Recent court cases have confirmed the rules on directors’ duties and in December 2013 the Cayman Islands Monetary Authority (CIMA) issued a statement of guidance on corporate governance (the Guidance) which it expects regulated funds to follow as a minimum. Although the BVI does not have an equivalent to the Guidance, the principles under BVI law are the same and a BVI fund director would be well advised to take direction from the Cayman Guidance.
So what should the directors of a regulated fund in Cayman or the BVI actually be doing?
There’s been increased focus from the courts and regulators on the duties owed by directors of a Cayman Islands or BVI fund since the financial crisis of 2007-8 and various high profile fund meltdowns. So what duties does a director of a fund actually owe?
In both the Cayman Islands and the BVI, directors’ duties are based on a mix of English common law, statute and regulatory guidance. A director of a corporate fund owes the same duties to the fund as a director of any other Cayman Islands or BVI company owes to its company. Under common law a director owes fiduciary duties and duties of skill, care and diligence.
Directors’ fiduciary duties are:
– to act in good faith in what the director considers is the best interests of the fund;
– to exercise powers for the purposes for which they were conferred and in the fund’s interests;
– to act with unfettered discretion; and
– to avoid conflicts of interest and to disclose personal interests in transactions.
If you are thinking of setting up an offshore hedge fund our new infographic which sets out the key steps is just for you.
So you’ve got a great idea for your fund’s investment strategy, perhaps you have tested it and developed a track record and maybe you even have proposed seed financing, but who else needs to be involved in setting up and launching your fund? I have set out a list of the key players below.
Cayman and BVI funds are not restricted to using Cayman and BVI service providers. They have the flexibility to appoint service providers from all over the world, subject to some technicalities which are beyond the scope of this blog.
Securities investment business in or from the Cayman Islands is regulated by the Securities Investment Business Law (Revised) (SIBL). SIBL sets out which securities investment business activities are regulated, and so need a license to do them, and also various exemptions from the licensing requirement.
So how does SIBL work? Continue reading
There comes a time in a registered Cayman fund’s life when it needs to de-register from the Cayman Islands Monetary Authority (CIMA). This could be early on, if the fund launches but never carries on business, or much later on the fund’s winding up. It could also be anytime in between if the fund is no longer carrying on business as a regulated mutual fund, merges with another fund or transfers to another jurisdiction. A fund can also choose to de-register if it no longer meets the definition of a mutual fund, because it has become a single investor fund or a closed—ended fund, or it has become an exempted mutual fund, where the fund’s shares are held by not more than 15 investors, a majority of whom are capable of appointing or removing the directors of the fund.
As part of the Cayman Islands’ continual evolution of its regulatory environment, in 2014 the Directors Registration and Licensing Law introduced a requirement that all prospective directors of a Cayman Islands regulated corporate mutual fund must be registered or licensed with the Cayman Islands Monetary Authority (CIMA) before they are appointed as directors. This applies to individuals and corporate directors of mutual funds which are regulated by CIMA, whether they are resident in the Cayman Islands or elsewhere and also applies to directors of certain companies which are registered under an exemption to the Cayman Islands Securities Investment Business Law. If a director does not register or become licensed, the director could be exposed to heavy penalties, including fines and imprisonment.
The impact of FATCA on Cayman and BVI funds
After getting to grips with the EU Alternative Investment Fund Managers Directive, many Cayman and BVI fund compliance departments are now turning their focus to reviewing what they need to do to comply with the US Foreign Account Tax Compliance Act (FATCA). Although Cayman and BVI funds are not directly subject to FATCA, the Cayman Islands and BVI have each introduced legislation implementing FATCA requirements for ‘financial institutions’ to identify and report certain US accounts. The Cayman Islands and BVI have also each entered into an intergovernmental agreement with the United Kingdom (UK FATCA) which set out similar due diligence and reporting obligations for ‘financial institutions’ to identify and report certain UK accounts, without imposing a withholding tax regime for non-compliance (as applies under FATCA). The majority of Cayman Islands and BVI mutual funds fall within the definition of an ‘investment entity’ and are generally classified as a ‘financial institution’ for FATCA and UK FATCA purposes and so have information gathering and reporting obligations.
One of the reasons why Cayman Islands investment funds are so popular is the flexibility of the fund products available. The Cayman Islands Monetary Authority (CIMA) supervises regulated investment funds via the Mutual Funds Law, which regulates open-ended funds such as the classic Cayman hedge fund. Closed-ended funds by contrast are not regulated under the Mutual Funds Law, although they can choose to be.
For funds where the investor is able to choose whether to redeem (ie cash-in) their investment on a regular basis, the Mutual Funds Law offers 3 types of regulated funds and a useful exemption in certain circumstances where there are 15 or fewer investors.