Articles & Alerts

New rules and guidance on corporate governance (Corporate Governance Rule) published by CIMA took effect in October 2023 and apply to funds registered under Cayman’s Private Funds Act and Mutual Funds Act (regulated funds).

Importantly, the Corporate Governance Rule should be read in conjunction with the Corporate Governance Statement of Guidance (SoG) that took effect in April 2023. The SoG is an accompanying document that contains recommendations as to how regulated funds should operate, and offers a measure against which CIMA will assess regulatory compliance.

CIMA has stated that the adequacy and effectiveness of the corporate governance structure of a particular regulated fund should be proportionate to the size, complexity, structure, nature of business, and risk profile of a regulated fund’s operations, allowing the operators of regulated funds to take a measured approach to the corporate governance framework. CIMA notes that there is no “one size fits all” approach to corporate governance for regulated funds. However, if operators of a regulated fund believe that any provision of the Corporate Governance Rule is not applicable to their fund due to the size, complexity, structure, nature of business, or risk profile of its operation, they must ensure they can adequately demonstrate the underlying facts to CIMA.

The new rules are currently in effect and private funds operating in the Cayman Islands must  ensure compliance if they have not done so already. Fines and penalties can be levied against fund operators who are not in compliance.

Key Changes

Some of the key changes effected by the new Corporate Governance Rule include:

• Private funds are now in scope of the SoG (previously, only Mutual Funds were under this purview).
• Expanded expectations from CIMA for board meetings of private funds and records thereof.
• Clarified requirements from CIMA regarding board composition including diversity of skills, background, experience and expertise of operators, and an appropriate number of individuals.
• Increased obligations from CIMA around self-assessment of the performance of operators.
• Increased focus from CIMA on independence of operators, adherence to a code of conduct and application of independent judgement.
• Increased expectations from CIMA on management and disclosure of conflicts of interest of operators.
• Once the Rule is in effect, noncompliance with CIMA’s requirements relating to corporate governance can result in penalties for both regulated funds and their operators.

The new Corporate Governance Rule also addresses several additional areas including oversight and management responsibilities, independence and objectivity, collective duties of a governing body, duties of individual directors, risk management, conflicts of interest, remuneration policies, financial reporting, duties of senior management and relations with CIMA.

For the purposes of the Corporate Governance Rule, a regulated fund’s “governing body” refers to the board of directors of a fund incorporated as a company, the general partner of a fund established as an exempted limited partnership, the manager (or equivalent) of a fund incorporated as a limited liability company, or the trustee of a fund established unit trust.

Recommendations

Operators and sponsors of private funds in the Cayman Islands should review the corporate governance frameworks of their regulated funds. They must fully comprehend their compliance obligations outlined in the Corporate Governance Rule.

Additionally, fund operators and sponsors should review the SoG to understand the rationale behind certain provisions of the new rule and establish a roadmap to implement governance structures that meet or exceed the Corporate Governance Rule.

The new Corporate Governance Rule continues a pattern of increased regulation of private funds and mutual funds doing business in the Cayman Islands. In 2020, following recommendations from the European Union and other international bodies, the Cayman Islands enacted legislation establishing registration requirements for private funds and tightening existing registration rules for mutual funds. The stated purpose of these measures was to increase oversight and confidence in Cayman Islands funds.

This overview highlights the key points of the new Corporate Governance Rule applicable to private funds operating in the Cayman Islands. For further information on how this rule will affect your private fund, please reach out to Ed Thorp or your Anchin Relationship Partner.