Residency requirements for directors on Cayman-domiciled funds must be rejected

Operational Risk
13 Feb, 2013

Calls for directors of Cayman-domiciled funds to have residency on the island should be rejected by CIMA as it will lead to further overcapacity at professional services firms, it has been warned.

This comes following a comment letter by DMS, a Cayman-based professional services firm, advising CIMA to consider residency requirements for directors on Cayman funds.  There are currently no residency requirements for directors serving on Cayman funds, something which gives directors much needed flexibility, although there is speculation CIMA might impose residency rules.

A survey by KB Associates of asset managers revealed 60% felt such residency requirements would not be beneficial to the industry.

“I believe part of the concern in regards to having residency requirements in Cayman would be a resources issue. There would not physically be enough people to act as directors to Cayman funds if there were residency requirements. Furthermore, it would accentuate the risk of having too many directors sitting on hedge fund boards in Cayman, which is already an issue for some investors,” said Andrew Ritchie, director at KB Associates.

Another expert who did not want to be named went further, describing the DMS comment letter as “self-serving.” DMS, however, said of the 10,000 directors serving on Cayman-domiciled funds, just 215 were residents of the island and therefore subject to the Code of Conduct of the Cayman Islands Director Association (CIDR).  This lack of oversight by CIDR of the majority of these directors exposed investors to unsophisticated governance models, argued DMS.

Institutional investors have criticised the number of boards some directors sit on, particularly in Cayman, which is one of the reasons for prompting CIMA to undertake its consultation on corporate governance in the first place.

The KB Associates survey highlighted 70% of managers believed directors should have no more than 30 relationships although a significant minority of 30% felt 50 relationships was appropriate. Nonetheless, a hard and fast cap by CIMA was universally rejected by respondents.

“The number of boards a director sits on depends on the strategies they are overseeing. A vanilla long/short equity hedge fund strategy would not be that complex so the director could probably sit on more boards. However, a complex strategy would require more of the directors’ time,” said Ritchie.

CIMA has also proposed directors sitting on more than six boards should be registered, something the majority in the industry acknowledged as a positive development. The KB Associates survey said 70% of those polled wished to see directors registered with and regulated by CIMA, adding “respondents noted that many other service providers are regulated and felt regulation of directors would increase investor confidence.”

Transparency is also a controversial issue for investors. A majority of managers surveyed by KB Associates believed a centrally maintained database containing details of director appointments and possibly details of funds’ other service providers would help investor due diligence and aid transparency.

Question marks remain, however, on whether the database would list directors on a fund-by-fund basis or give an overarching list of funds directors sit on. While most institutional investors prefer the latter option, there is a risk vested interests could stifle such transparency.

“I think a database, should it ever materialise, will not happen in the short-term but I believe it will eventually come into being. I think there will be a lot of resistance from directors citing client confidentiality concerns and there will undoubtedly be pressure from directors which sit on a number of different boards,” said one industry source.

Some investors have been criticised for taking an excessively militant approach to corporate governance while DMS, speaking last year to COOConnect, warned restrictive corporate governance policies among investors, risked stifling smaller hedge funds. Furthermore, DMS warned fund governance can never be a substitute for quality operational due diligence.