As a fund manager or investor, you may ask yourself what the role of a Cayman Islands Director is during the different stages of a fund’s life. In the first instance decision in the Weavering case the judge divided the life of a fund into three distinct phases that provide a useful frame of reference when looking at the duties of a director.
These three phases are:
Before a fund is established the directors will have to ensure they review all the relevant offering documents of the fund. This includes the overall structure of the fund, confirming the investment strategy and restrictions and ensuring any risk factors and conflicts of interest are properly disclosed.
Where a director’s role is limited to being an independent director they will not be expected to be involved in negotiations with service providers before the fund is launched. However, they should review service providers and assist the fund in asking the correct questions in making their final decision.
The directors should ensure launch board minutes and resolutions include approval of delegation of the agreed functions to service providers and that appointments occur on terms that are consistent with industry practices.
At launch directors should keep in mind potential investors and act in the best interest of investors and the fund.
2.Ordinary course of business/regulatory requirements
After the fund has been established the director is expected to perform an oversight role for the fund. We have detailed the duties of a Cayman Islands Director in a previous article.
At a high level these duties are:
- To act in the best interest of the fund;
- Ensure the fund is managed in line with the offering documents
- Disclose and avoid any conflict of interest with the interests of the fund
Duties of skill and care
- Ensure they maintain the required level of knowledge and skills
- supervise the appointment and conduct of of service providers
Additionally, in accordance with laws the Cayman Islands director is responsible for the following:
- To maintain the register of members, register of Directors and Officers and Register of Mortgages and Charges
- To maintain proper books of account for the fund or over see the appointment and performance of this function by a service provider;
- To ensure compliance with the Money Laundering Regulations (AML Regulations);
- To ensure offering documents are up to date
- To ensure that the Fund is audited on an annual basis;
- To ensure an annual general meeting is called at least once a year
- To comply with reporting obligations including:
- Filing of annual return;
- Filing of Offering Document and annual audited financial statements with CIMA;
- Filing changes to directs, officers or registered office
- To ensure they comply with the requirements of the Director Registration and Licensing Law and
- Ensure compliance with Automatic Exchange of Information and AML obligations
The director is responsible for ensuring all of the above is performed and that the fund is fully compliant with all laws and regulations.
3.Ongoing monitoring and crisis management by Cayman Islands Director
The directors are also responsible for gaining a thorough understanding of the operations of the fund and raising any issues identified to ensure they are resolved or mitigated. Cayman Islands Directors should correspond with the investment manager and service providers to identify any potential issues and also keep themselves up to date on the industry the fund is investing in. Just a few of the points directors should be considering include:
- Cybersecurity risks
- Changes in Accounting treatment
- Changes in Tax treatment
- Protocol changes in Digital Assets the fund has invested in
- Pending or threatened litigation against the Fund
- Market conditions and potential impacts on the fund
- Any significant counterparty risk
- Changes in the investment strategy set out in the offering documents
When the fund finds itself in trouble it is the directors responsibility to work with the investment manager and service providers to resolve any issues. Cayman Islands Directors may rely on the advice of suitably qualified third-parties, in respect of areas where they do not have the expertise. Directors may also seek advice from the fund’s legal advisers as soon as they become aware of any circumstances that could have a material impact on the operations of the fund. In the end directors are responsible to act in the best interest of the fund in line with their fiduciary duties and must take whatever actions are needed to fulfill these duties.
It’s good for any investment manager to understand the duties of a Cayman Islands director when they are appointed on the funds as well as their role in the different stages of the life of a fund.
It should be noted that this was only commentary in the Weavering case and the initial decision was over- turned by the Cayman Islands Court of Appeal in 2015, nonetheless it provides a good overview of the stages of a fund’s lifecycle.