The Cayman Islands Monetary Authority (CIMA) issued rules on corporate governance and internal controls (Rules) applicable to all its regulated entities last year and those Rules have been effective since 14 October 2023. The Rules apply to both hedge funds and private equity funds registered with CIMA.
This publication provides a summary of the requirements set out in each of the Rules and takes a look at some of the options available to Cayman funds to ensure compliance with the Rules.
NEW RULES AFFECTING CAYMAN FUNDS
At the core of each Rule is a proportionality test requiring the implementation of the Rules in a manner that corresponds with the size, complexity, structure, business and risk profile of the Cayman fund. This proportionality test allows scope for Cayman funds to implement the rules in a variety of ways. Since the Rules came into effect, we have seen a number of different approaches taken by Cayman funds to ensure compliance with the Rules and we take the opportunity here to outline some of those approaches as a guide to implementation for those Cayman funds that have not yet taken steps to address the Rules.
The Rule on corporate governance imposes requirements around the objectives and strategies, governance structure and transparency of the Cayman fund, the delegation, oversight and risk management by its governing body and the independence, duties, conduct and remuneration of its governing body.
The Rule of internal controls imposes requirements around the control environment, risk identification, risk assessment, control activities, segregation of duties, information, communication and monitoring which are to apply across the Cayman fund's governing body, its management and employees. Cayman funds do not generally have employees and the requirements set out in the Rule on internal controls are likely best addressed through instructions to the fund's service providers to report on their own internal control policies and procedures and to identify any lapses in compliance with those policies, remedial action taken or to be taken and any resulting risks.
CAYMAN FUNDS COMPLIANCE
Most Cayman funds will already be largely compliant with the Rules by virtue of the common terms set out in their constitutional and/or offering documents and the common areas covered by service provider reports to the fund's governing body but there may be certain areas that may need to be addressed to ensure full compliance with the Rules.
Many of our fund clients have taken the approach that an analysis by their directors, general partner or trustee of the fund's governance and internal control structure, the documenting of that analysis and the resolution of any deficiencies identified is sufficient to ensure compliance with the Rules.
We have also seen some Cayman funds wanting to ensure a detailed implementation of the Rules through the adoption of specific compliance policies, or the updating of their existing compliance policies, to address the requirements of each of the Rules and set out the rationale for the adopted approach to comply with those requirements.
Where the update of existing policies or the adoption of new policies is impractical for a Cayman fund, they may choose to set out their commitment to comply with the Rules in resolutions of their governing body.
Generally, the areas of the Rules that Cayman funds may feel require additional steps to be taken are either one-off steps or annual requirements.
The one-off steps set out in the Rules that a Cayman fund may want to address are the adoption of independence criteria and the CIMA code of conduct for its governing body and the formal establishment of the fund's governing body as the fund's audit committee.
Generally, the areas of the rules that Cayman funds may feel require addressing on an annual basis are the declaration of conflicts, board self-assessments, confirmation of time commitments, remuneration policies and the documentation and monitoring of outsourced functions. These annual requirements might be addressed by regular annual declarations at one of the board meetings held by the Cayman fund throughout the year.
OUR FUNDS AND REGULATORY SUPPORT
Our funds and regulatory team have seen an increased demand from clients for advice and assistance on ensuring that their regulatory policies and procedures are aligned with CIMA's expectations as contained in the Rules. We regularly conduct gap analyses against these CIMA requirements and advise of any deficiencies and how best to address them.
Our board support services, if not already adopted by our Cayman fund clients, can provide an essential tool to ensure that they are appropriately addressing the Rules and that they are kept up to date with all regulatory developments in the Cayman Islands.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
