CIMA’s rules and statements of guidance – update 2023

The vast majority of Cayman Islands hedge funds, i.e. open-ended vehicles that pool capital and hold multiple investments, are regulated by the Cayman Islands Monetary Authority ("CIMA") under the Mutual Funds Act (the "MFA").

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As part of CIMA's review of its regulatory measures, CIMA issued a number of new rules, including on Corporate Governance and Internal Controls (the "Rules"), which come into effect on 14 October 20231. CIMA has also issued a revised Statement of Guidance – Corporate Governance for Mutual Funds and Private Funds (the “SOG”)2. The Rules apply to various types of regulated entities in the Cayman Islands, rather than just regulated funds. The SOG, on the other hand, applies to regulated funds only. 

One of CIMA's principal objectives was to modernize the measures dealing with corporate governance and internal controls, so that they apply more consistently across regulated entities. However, the new regulatory measures reflect CIMA’s longstanding acknowledgement that funds are, in several important respects, different from other regulated entities. As such, there is a recurring emphasis throughout on proportionate application, thus providing some helpful flexibility, particularly with respect to regulated funds.

CIMA expressly recognises that each regulated entity’s corporate governance framework and internal controls should reflect its size, complexity, structure, nature of business and risk profile. It also acknowledges that regulated entities may rely on their service providers or group-wide frameworks for their corporate governance frameworks and internal controls, assuming that these demonstrably enable the entity to meet its regulatory requirements.

There is also no change to the fact that breach of a Rule may lead to a fine or regulatory action, whereas a Statement of Guidance is a measure against which CIMA will assess a regulated entity's compliance with laws, regulations and rules.

The SOG is therefore intended to be the measure against which CIMA will assess a fund's compliance with laws, regulations and the Rules in particular. Accordingly, the SOG clarifies CIMA’s expectations with respect to the corporate governance process in a regulated funds context, and confirms best practice for the board of directors.

While there are a range of vehicles available in the Cayman Islands for hedge fund structures – the exempted company, segregated portfolio company, limited liability company, exempted limited partnership and unit trust – due to their popularity, this advisory focuses on hedge funds structured as exempted companies, which are operated by their board of directors. However, similar considerations apply to Cayman Islands hedge funds that are operated by managing members (in the case of a limited liability companies), general partners (in the case of exempted limited partnerships), and trustees (in the case of unit trusts).

In summary, the SOG provides that:

  • The governance structure must be appropriate and suitable to enable effective oversight of a fund. To determine the appropriate governance framework, regard should be given to factors such as assets under management, number of investors, the complexity of the structure, the nature of the investment strategy and the nature of the operations.
  • The board of directors should regularly monitor and supervise delegated functions. A suggested method of achieving this is to require regular reporting from the investment manager and other service providers. Further, the board of directors should regularly take steps to ensure that the fund is conducting its affairs in line with all applicable laws, regulations and other rules. In addition, the board of directors should also satisfy itself that its service providers are doing the same with all delegated functions and appropriate information being requested from service providers and/or professional advisers so that the board of directors can satisfy itself that such compliance is being achieved. Importantly, the directors should request the attendance of service providers at board meetings, where necessary.
  • The board of directors should establish a written conflicts of interest policy commensurate with the size, complexity, structure, nature of business and risk profile of the operations of the business of the fund. The SOG reiterates this requirement, but makes it clear that it may be documented in the constitutional documents or offering documents of the fund.
  • The board of directors should meet at least once a year. Meetings should be more frequent if the circumstances or size, complexity, structure, nature of business and risk profile of its operations necessitates it.
  • Full, accurate and clear written records should be kept of all meetings and/or determinations, which should include: the agenda and documents circulated; a list of attendees present and whether that attendance was in person or via telephone/videoconference; the matters considered and decisions made; the information requested from, and provided by, service providers and advisors; and a declaration of conflicts of interest

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