Why and when should a fund appoint an independent director?

• Corporate governance requirements in the Cayman Islands are increasing demand for experienced independent directors across regulated fund structures.

• Stakeholders increasingly expect independent oversight that supports robust governance and clear accountability.

• Independent directors can strengthen board composition, support oversight and help manage conflicts effectively.

Fund sponsors and asset managers are increasingly selecting experienced, locally based independent directors to the boards of their Cayman Islands funds and general partner entities. This can strengthen regulatory compliance and give investors and counterparties greater confidence in the fund's oversight arrangements. 

The trend reflects changes both in the Islands' regulatory landscape as well as evolving expectations across different sectors and fund structures. 

What are the governance requirements for Cayman Islands regulated funds?

In October 2023, the Cayman Islands Monetary Authority's (CIMA) new Rule on Corporate Governance for Regulated Entities (the Corporate Governance Rule) came into effect. It established a consistent and enforceable governance regime for all regulated fund entities, in alignment with international best practices. Notably, it now applies to registered private funds which were not previously covered. 

The introduction of the Corporate Governance Rule has resulted in an uptick in the utilisation of independent directors. As the governing body of a regulated entity, the 'operator' (a board of directors of a company or general partner of a partnership) must be aware of the requirements under the Corporate Governance Rule, and that operator is directly responsible for ensuring the regulated entity implements a corporate governance framework suitable for its size, complexity and risk profile. 

Among other responsibilities, the operator must: 

• supervise delegated functions 
• implement effective risk management
• act independently and objectively
• regularly assess its own performance and suitability as well as that of its delegates
• declare and manage conflicts of interests

These requirements apply to CIMA-registered mutual funds and private funds, which have certain additional reporting obligations and requirements under the corresponding Mutual Funds Act or Private Funds Act.

Fund sponsors and asset managers should therefore consider whether their boards have the right experience, independence and local regulatory knowledge to meet these obligations effectively.

How do independent directors help facilitate structuring needs for investors and counterparties?

In addition to the maturing regulatory landscape, there is growing demand for independent directors being appointed on fund structures within certain industry sectors.

Within the alternative funds space, there is utility in forming an independent board where there is a requirement to have a board independent of the investment manager and for the directors to be located outside of the jurisdiction where the investment activity is occurring. This can be driven by the investors' preference, a counterparty's requirement or by professional advice in connection with the fund's structuring.

The use of a general partner entity that is also independent from an ownership perspective from the investment manager is an additional structuring and governance consideration, including within certain private credit structures, treaty funds and fund financing arrangements. 

In some cases, having a third party hold the controlling share of the general partner on trust for charitable purposes separates the ownership and control of the entity as well as the beneficial ownership from the investment manager. This allows for the entity to sit off-balance sheet and provides additional comfort to counterparties and investors.

What are the benefits of appointing a Cayman Islands-based independent director?

Where a fund is established within the Cayman Islands, familiarity with its regulatory landscape, including oversight obligations and CIMA reporting requirements, is of utmost importance to ensure compliance and good standing. An independent director based in the Cayman Islands can bring direct experience with the local regulatory frameworks and CIMA's expectations, including compliance with the Corporate Governance Rule, and is therefore well placed to appropriately discharge their fiduciary oversight and support meeting operator obligations. 

The right independent director will understand not only the fiduciary role but also the strategy and purpose of the applicable structure. This can help the governing body demonstrate and provide appropriate and effective board composition, with a governance and oversight function suitably designed to meet the needs and expectations of stakeholders. An independent director can also balance the board composition from a conflicts perspective and provides a demonstrably unbiased approach to the fiduciary function, supporting sound management and oversight.

How can Walkers Professional Services support your fund governance?

Walkers Professional Services (WPS) provides independent directorship and share trustee services through our Cayman Islands office. Our experienced team of fiduciary professionals reflect varying backgrounds to complement board composition and support fund regulatory compliance, prudent oversight and demonstrated independence.

We can help sponsors and asset managers:

• strengthen board independence and composition
• support compliance with fund regulatory requirements
• provide experienced fiduciary oversight for investment fund and fund financing vehicles
• establish independent ownership arrangements
• demonstrate effective governance to investors and counterparties

Get in touch with our team to discuss how we can support you with independent director or share trustee arrangements for your Cayman Islands fund structures.