By James Bolton, Country Delivery Director, Cayman Islands
The Cayman Islands has long been a preferred jurisdiction for investment funds, thanks to its robust legal framework and investor-friendly regulations. If you’re considering becoming a director or general partner (GP) of a CIMA-registered fund incorporated under the Companies Act of the Cayman Islands, it’s essential to understand the responsibilities and legal obligations that come with the role.
In this article, we’ll review the most important information you need to know about serving as a director of a Cayman Islands fund, including the regulatory framework and practical considerations to ensure you’re prepared for the job ahead.
Who can become a fund director?
Though there is no strict definition of a ‘director’ according to Cayman Islands law, an individual or corporate entity may act as a fund director. The first directors of a fund are typically appointed by its initial subscribers, and the register of directors the fund maintains will serve as prima facie evidence of directors’ identities.
Key considerations before becoming a director
Before deciding whether to act as the director of a Cayman Islands fund, consider the following:
- Board composition: Who are the fund’s other directors, and can you work effectively with them? You’ll need to collaborate with your fellow directors to manage and oversee the fund’s operations
- Conflicts of interest: If you have any connection to the fund’s service providers—for example, as a principal of the fund’s investment manager—evaluate the risk of potential conflicts of interest. Transparency with investors and fund stakeholders is critical for risk mitigation
- Investor expectations: Key investors may expect independent directors to balance oversight. Make sure the board’s composition aligns with these expectations
- Expertise: Do you have the time and expertise to fulfill your duties? Fund directors should maintain up-to-date knowledge of the fund’s activities and understand its financial and operational details. Are you registered under the Directors Registration and Licensing regime, as required?
- Insurance: Investigate whether the fund provides directors and officers (D&O) insurance, which can provide crucial liability protection
Powers and responsibilities
As a director, your authority is derived from the fund’s governing documents: the Memorandum of Association and the Articles. The Memorandum defines the fund’s objective and powers, while the Articles establish the framework in which it operates. You’ll also be responsible for ensuring the fund is managed in line with its offering document, which acts as a contract between the fund and its investors.
While directors are allowed to delegate many of their duties to professional service providers, such as fund administrators, they retain ultimate responsibility for overseeing the fund’s operations. As such, make sure you’re prepared to regularly monitor and evaluate third-party performance to ensure compliance with the fund’s objectives and regulatory requirements.
Core fiduciary duties
In general, acting in the interests of the fund entails acting in the best interests of the fund’s shareholders. However, if the fund becomes insolvent or “doubtfully solvent,” directors must also protect the interests of the fund’s creditors.
A director’s principal obligations include:
- Disclosing conflicts: Directors must avoid conflicts between their own interests and the interests of the fund. Unavoidable conflicts must be disclosed to investors
- Duty of care: Directors must exercise a reasonable level of care, skill and due diligence when performing their duties. Expected standards of care rise with your level of experience and knowledge
- Independent judgment: Directors must not allow their decision-making to be unduly influenced by third parties—including the investment manager—unless formally delegated
Additional duties apply for directors of segregated portfolio company (SPC) funds, including maintaining the segregation of assets and liabilities for each segregated portfolio.
Statutory obligations
Statutory obligations for Cayman Islands fund directors include:
- Maintaining registers of directors, members, and mortgages and charges
- Ensuring the fund adheres to anti-money laundering (AML) obligations and all other regulatory obligations
- Paying the annual fees and filing annual returns and audited financial statements with the Cayman Islands Monetary Authority (CIMA)
- Updating the fund’s offering document as needed to reflect any material changes
- In the event an individual is appointed as a director of a mutual fund they will need to register under the Cayman Islands Directors Registration and Licensing Act (as amended)
These obligations are especially important; failure to comply can result in penalties, fines and even personal liability.
Corporate governance and oversight
CIMA’s Rule on corporate governance requires a regulated entity to establish, implement and maintain a corporate governance framework that provides for sound and prudent management oversight of the regulated entity’s business and protects the legitimate interests of relevant stakeholders.
Directors should ensure that the fund’s structure, investment strategy and service provider arrangements align with both legal requirements and industry best practices. You should also expect regular reports from service providers, including investment managers and custodians, and actively oversee their activities to ensure they match the fund’s objectives.
It’s critical that the governance structure overseen by the directors is appropriate for, and proportionate to, the size, complexity, structure, nature of business and risk profile of the fund’s operations.
Managing risks and conflicts
Directors are also responsible for effective risk management, ensuring that the fund has adequate processes in place. For private funds, it’s especially important to verify that valuation, title verification and cash monitoring are being handled correctly, preferably by third-party providers.
CIMA also emphasizes the importance of disclosing any potential or actual conflicts of interest in the fund’s offering documents. These disclosures help investors make informed decisions and reduce the risk of legal trouble down the road.
Potential liabilities and indemnification
If a director fails to meet his or her fiduciary or statutory duties, he or she may be held personally liable. Cayman Islands law allows for the indemnification of directors against certain liabilities as long as they have not acted fraudulently or with gross negligence. D&O insurance can offer additional protection.
Conclusion
Becoming a director of a Cayman Islands fund is no small responsibility, requiring a thorough understanding of both legal obligations and practical tasks. Directors must balance their fiduciary duties with their role in overseeing the fund’s operations while staying vigilant against potential risks and conflicts of interest.
Contact our team for expert support administering your Cayman Islands fund.
