Publicly accessible CIMA database of directors still a long way off
The Cayman Islands Monetary Authority (CIMA) is still some way from creating an accessible database identifying the fund boards on which directors sit on.
The recently enacted Directors Registration and Licensing Law requires certain directors of Cayman Islands domiciled mutual funds and hedge funds to register with CIMA by the end of 2014. Many experts in the industry had predicted this initiative would prove to be a precursor to a public database which would list the boards on which directors sat.
While it is believed the database will become searchable in due course, guidance presently on the CIMA website points out directors are protected by confidentiality provisions contained within Cayman law. This stipulates that details on directors supplied to CIMA be protected from Freedom of Information requests. A search of CIMA’s website will reveal only a director’s name, the type of registration and license they hold, the registration or license number and the dates on which these were issued.
“The registration and licensing of directors is another step albeit a small one towards further enhancing Cayman’s reputation for best practice and good governance,” said Sean Scott, partner at Harneys, an offshore law firm.
Directors of mutual funds will also be subjected to CIMA inspections and expected to adhere to the Statement of Guidance issued by CIMA in January 2014. The guidance for regulated mutual funds outlined the minimum standards it expected from mutual fund board directors, including independence, the necessary skill-sets, engagement with service providers and disclosure of any conflicts of interest.
“The rules should help bolster the standards of governance in the Cayman Islands, which is something institutional investors have been calling for over the last few years since the financial crisis,” said Mike Parton, a Cayman Islands-based director at KB Associates, the boutique hedge fund consultancy.
Investor awareness of corporate governance has risen since the financial crisis with 71% of respondents telling a Carne Group survey in October 2013 that it had become a more important issue over the last four years. Eighty-three per-cent of investors said they would like fund boards to be comprised of a majority of independent directors and 62% stated it was essential to have an independent chairman to mitigate the risk of conflicts of interest and misdemeanours at the fund level.
In terms of corporate governance shortcomings, lack of independence and experience were cited as investors’ biggest concerns in the Carne Group study, with a number of respondents wanting directors to have greater expertise in risk management as opposed to a legal background. A study by CIMA in conjunction with Ernst & Young (EY) revealed just 11% felt corporate governance was fit for purpose and no single investor rated hedge fund governance standards as being outstanding. Seventy-one per-cent said major improvements needed to be made.
Ignoring these problems is not an option for managers. A Deutsche Bank study of operational due diligence executives at institutional investors with $2.13 trillion in assets highlighted a quarter had vetoed an investment because of governance concerns while 34% acknowledged they would devote more resources to this area. CIMA is unlikely though to impose hard and fast caps on directorships, a move that would have been welcomed by some institutional investors. Caps would ramp up the price for managers at a time when the fund management industry is already grappling with mounting costs.
“It is very easy to oversimplify some of the arguments in favour of increased regulation of fiduciaries but the reality is that investor demand is what will drive change in fiduciary services. All directors, not just those who are now subject to registration, are subject to fiduciary duties and duties of care and skill derived from English law. They ultimately will be held to account on that basis. Admittedly, there are different models for delivery of fiduciary services but that is true across the financial services sector generally. Larger providers have simply institutionalised their business but they all have a place and all directors have the same duties and responsibilities in Cayman,” said Scott.