Carne Global Financial Services

Cayman Islands Statement of

Guidance

Yvonne Connolly

Carne Group

Summary

• Background

• Investor feedback

• Weavering Case

• Statement of Guidance – what is required?

• Directors Registration and Licensing Bill

• Implications of governance reforms

May 14 3

Background

• Weavering Case

• Investor Dissatisfaction

• Regulatory Pressure (e.g. G8,

IOSCO)

• Press reporting on jumbo

directorsMay 14 4

Lessons of Weavering

• Poor governance = substantial risk to fund

• Failure to discharge fiduciary duties

• Directors must act in best interests of the

company

• Directors must avoid conflicts of interest

• Directors must exercise independent judgement

• Proper independent review of documentation

• Regular board meetings

May 14 5

Carne Fund Governance Survey 2011

Are you happy with overall governance levels in these

jurisdictions?

Ireland 83%

Luxembourg 80%

Channel Islands 53%

Cayman Islands 37%

Survey based on interviews with hedge fund investors representing over $600

billion in assets under management.

May 14 6

E&Y/Greenwich survey feedback

Jan 2013: Ernst & Young / Greenwich Associates survey of

fund managers, directors, service providers and investors

• 53% concerned that directors not devoting enough time

to fund boards

• 71% of investors still felt governance needed to be

improved

• 86% of investors wanted to see total # of directorships

held by each director

• 54% of hedge fund managers felt governance standards

fit for purpose versus only 11% of investors

May 14 7

Definition of ‘operator’

What is an ‘operator’ in the context of the SOG?

• Director of a company

• Trustee of a trust

• GP of a partnership

What is a ‘service provider’?

• Investment manager of the fund

• Administrator

• Prime broker

• Any other delegates of the fund

May 14 8

Statement of Guidance

• Directors must act independently

• Directors must have necessary skills and experience

• Applies to all directors of Cayman funds including non-

resident directors

• Regular and structured inquiry of service providers

• Communication with investors and CIMA where

appropriate

• Conflicts of interest must be adequately disclosed

• Risk management must be supervised

May 14 9

SOG: Is it voluntary?

• Reflection of common law as set out in

Weavering – NOT voluntary

• Directors must be able to explain non-

compliance to CIMA

• CIMA and courts will refer to SOG in

disciplinary proceedings

• CIMA will be carrying out examinations of

firms and individuals

May 14 10

Oversight function

• Board of directors has responsibility for overseeing and

supervising activities

• Must require regular reporting from IM and SPs

• Must monitor and ensure that IM and SPs are meeting

defined investment and service criteria including

regulatory responsibilities

• Should request relevant information from SPs and

professional advisers when appropriate

• Should provide appropriate directions to rectify non-

compliance

May 14 11

Conflicts of interest

• Identify, disclose, monitor and manage

conflicts at the board level

• Disclosed conflicts must be documented

• Currently no requirement for documented

conflicts policy

May 14 12

Meetings and documentation

Board Meetings

• Recommends that Boards meet at least twice a year

• Directors/operators responsible for ensuring that full record of meetings are

kept

• We recommend use of Company Secretary to support documentation

Documentation

• Ensure clarity of documents, including constitution and offering documents,

description of strategy, any conflicts

• Communicate adequate information to investors where able

• Ensure compliance of documents with Cayman regulations

May 14 13

Director’s duties

• Care, skill and diligence

• Independent judgement

• Best interests of the fund

• Must ensure adequate capacity before taking on

new funds

• Make relevant inquiries where issues are raised

• Ensure appropriate and timely action

May 14 14

Service providers / IM

Service Providers (inc Investment Manager):

• Board must approve appointment / removal

• Notify fund and CIMA of changes

• Responsible for all delegated functions

• Review contracts – ensure responsibilities clearly defined / divided

• Must be satisfied that SP is performing functions adequately

• Regular assessment of suitability / capability

• SP acting in accordance with fund’s constitutional documents?

• Is IM performing in accordance with defined investment

criteria/strategy/restrictions?

May 14 15

Financial and risk oversight

• Must keep informed of activities,

performance, financial position

• Review and approve results

• Monitor NAV and calculation thereof

• Oversight of risk management and Risk

Management Policy

• Compliance with regulations

• Reporting to CIMA

May 14 16

Directors Registration and Licensing Bill 2014

• Licensing regime for resident and non-resident directors

of CIMA-regulated funds and SIBL-excluded persons

• Database of Cayman fund directors

• ALL directors of Cayman funds must be registered

• Directors with 20+ funds must also be licensed

• Licensed directors will be subject to greater regulatory

requirements

• Penalties for non-compliance, inc fines and

imprisonment

• Obligatory insurance cover

May 14 17

Directors database

• No details on content - e.g. search criteria

• No details on costs related to search

• Access likely to be only for sophisticated

investors

• Investors will be able to decide how many

directorships are tolerable to them

• Investors have asked to see historic as well as

current board membership

May 14 18

Corporate Directors

• Tighter supervision of corporate directors

• Two natural persons to be pre-approved

as directors of corporate entity

• Directors cannot change without CIMA

approval

• Foreign entity to be registered as Cayman

vehicle

May 14 19

Unanswered questions

• What will be contained in the database?

• How will director capacity be assessed?

• What about other activities of the director?

• What will the fees be – e.g. database fees,

director registration, licensing?

• What information will CIMA require for

registration?

May 14 20

Implications for Cayman

• Addresses investor concerns over director capacity and

responsibilities

• Documented regime for fund boards will generate more

investor confidence

• Paves way for more acceptable regime for EU investors

• Keeps Cayman Islands in ranks of top grade fund

jurisdictions

• Clearly defines role for CIMA in regulating fund directors

• Cautious welcome from leading investors

• CIMA – regime may evolve as market matures

May 14 21

Carne Group

• Offices in all key fund domiciles, including Cayman

Islands

• All Carne directors have minimum 10-15 years funds

industry experience

• Carne insists on regular board meetings

• Wide range of skill sets ensures Carne directors can

complement board composition

• Secretarial services play important role in documenting

board meetings

• Full transparency on directorships held by each Carne

director

May 14 22

Contacts

Ireland

Yvonne Connolly

T: +353 1 489 6821

E: [email protected]

Twitter: @carneglobal

Cayman Islands

Julie O’Hara

T: +1 345 769 9980

E: [email protected]

May 14 23