For some time, persons available to act as directors to Cayman funds fell into three categories:

Category 1

Located within or outside the Cayman Islands and being provided as a director by an entity operating under a license issued by the Cayman Islands Monetary Authority (CIMA) pursuant to the Companies Management Law

Category 2

Located within the Cayman Islands and obtaining a trade and business license and generally acting as a director to the entities registered with CIMA as registered funds and administered funds.

Category 3

Located primarily outside the Cayman Islands and not falling within any of the above categories.

These official and unofficial groupings led to differences in interpretations by Cayman fund managers regarding the suitability of a particular Cayman fund director (specifically, the “fitness” and “propriety” of the relevant Cayman fund director). For example, one assessment was that only Cayman fund directors falling within Category 1 appeared to be officially regulated by the CIMA, while Cayman fund directors grouped in Categories 2 and 3 loosely acted as directors without the official CIMA stamp of approval.

It was not long before regulatory eyebrows were raised in the Cayman fund industry regarding these disparities. This was especially the case after the Cayman courts handed down an initial, hefty 100 million dollar fine to two directors of Cayman funds (in the famous Cayman “Weavering” judgment) falling under the unofficial Category 3. Stakeholders of Cayman funds quickly asked for a regulatory change.

CIMA’s Policy Statement on Corporate Governance

CIMA provided a timely response to stakeholder requests by publishing a policy statement of guidance on corporate governance (SOG) for Cayman Islands regulated mutual funds. Affected entities included registered funds, administered funds and licenced funds. Persons charged with compliance with the new policy are those who comprise the “governing body” and who act as “operators” of the affected entities (an “operator” is a director in case of a corporate fund, a trustee in the case of a unit trust and a general partner in the case of a partnership).

While the SOG was only a policy and not in the form of legislation, operators of Cayman funds registered with CIMA were generally expected to comply with the new policy. This appeared to be the case whether the Cayman fund director fell within Category 1, 2 or 3 above. The hope was that compliance by all persons acting as directors of CIMA registered funds would eventually lead to a stronger Cayman fund governance framework, lessening the likelihood of another “Weavering” case.

Arrival of the Directors Registration and Licensing Law, 2014

To further emphasise the importance of Cayman fund governance and the regulation of directors of CIMA registered funds, CIMA underlined the Cayman fund governance framework by articulating The Directors Registration and Licensing Law, 2014 (the “Directors’ Law”). (The provisions of the Directors’ Law, 2014, with the exception of sections 11(2)(a), 18(2)(a) and 24(1)(b), came into force on the 4 June, 2014.)

One of the welcome features of the Directors’ Law is that it requires all legal and natural persons (whether falling within Category 1, 2 or 3 above) who wish to act as directors of CIMA registered funds to first be licensed, approved and registered with CIMA. The available categories of licensing are as a registered director, professional director or corporate director. All applications are conveniently completed online with CIMA.

A surprise feature of the Directors’ Law is that it also captures persons acting as directors to companies to which paragraphs 1 and 4 of Schedule 4 of the Securities Investment Business Law (2011 Revision) apply. Such companies are commonly referred to as “excluded persons” in the Cayman fund sector and they are generally investment management companies to Cayman funds.

Failure to comply

Persons to whom the Directors’ Law applies must be licensed and registered with CIMA within three months of the date of commencement of the Directors’ Law (the deadline, which, if remains unchanged, will occur following the end of August 2014). Any failure to comply will result in the relevant person being prohibited from acting as a director of a Cayman fund registered with CIMA. Fines are also applicable under the Directors’ Law.

Next steps

To avoid the above consequences, relevant persons should immediately complete their CIMA online application and payment. They should not wait until the end of August 2014 to start this process. Submitting the information quickly will enable CIMA to consider the application, which may be accepted or rejected in CIMA’s discretion (where an applicant is initially rejected, he or she may reapply).

The SOG and the Directors’ Law have changed forever the standards for Cayman fund governance and the regulatory environment for directors of CIMA registered funds. Stakeholders must now choose to either comply or be denied.

About the Author:

Alric Lindsay is a corporate lawyer and an independent fund director approved by the Cayman Islands Monetary Authority. Alric is also licensed as a professional director under The Directors’ Registration and Licensing Law. Alric also acts as voluntary liquidator to Cayman Islands entities. Alric can be contacted at alric@caymanfs.com.