DMS seeks judicial review challenging CIMA governance reform consultation
A subsidiary of DMS, the Cayman-based professional services firm, has sought a judicial review in the Grand Court of Cayman challenging the Cayman Islands Monetary Authority's (CIMA) reform consultation on corporate governance.
The DMS subsidiary – Cayman Private Manager II Limited – is arguing CIMA’s proposals will undermine the company’s ability to compete, and has sought an injunction or prohibition that would prevent CIMA from acting upon the findings of its recent consultation exercise of institutional investors undertaken by Ernst & Young.
DMS also claim the consultation did not give detailed proposals on any changes, adding any reform must be compatible with the best economic interests of the Cayman Islands. Furthermore, DMS said in its claim that CIMA had not demonstrated why reforms needed to be made in the first place.
The Grand Court has yet to determine whether a judicial review will be forthcoming. DMS refused to comment on the case.
Institutional investors, who did not want to be identified, described the judicial review as a delaying tactic. One investor said CIMA was unlikely to backtrack on its reform agenda. Some investors were surprised by the judicial review, highlighting the reform proposals have not even been finalised by CIMA.
Earlier this year, DMS urged CIMA to impose residency requirements on Cayman directors, although this is unlikely to happen. Market participants have repeatedly said residency requirements will lead to further over-capacity with 60% of asset managers telling a KB Associates survey such provisions would not be helpful.
Delegates at GAIM Ops Cayman have broadly welcomed CIMA’s proposals and have acknowledged reform will bolster the jurisdiction’s reputation in the eyes of institutional investors. Nonetheless, the DMS challenge to the reforms is likely to delay the proposals’ implementation.
While the rules have not been finalised, speculation is mounting CIMA will create a database of directors. The key question is whether the database will list directors on a fund-by-fund basis or provide an over-arching list of the funds individual directors sit on. Institutional investors such as the USS and Mesirow Financial, the Chicago-based fund of funds, have been lobbying hard for the latter.
Many investors stress such a database would simplify operational due diligence, while others have repeatedly criticised professional services firms for being opaque and uncooperative about making public the number of boards their directors sit on. One investor said a regulatory-driven database was inevitable as a consultant or private sector company could easily create such a resource.
An online database or caps would certainly challenge DMS’s business model, which has faced scrutiny over the number of boards its individual directors sit on. However, imposing a hard and fast cap on boards would increase hedge funds’ cost base at a time when margins are increasingly thinning. Furthermore, a one size fits all approach is unlikely to be conducive to bolstering corporate governance standards given how diverse hedge funds are.
Corporate governance has become something of a hot potato for institutional investors with 91% of allocators telling Carne Group they would shun a hedge fund with substandard corporate governance, while 76% confirmed they had already failed a fund at least once because of governance concerns.