Don Seymour, managing director of DMS Management, one of the largest fund governance firms in the Cayman Islands, called for closer regulation of hedge fund directors by the Cayman Islands Monetary Authority and the introduction of a director disqualification regime during last week’s Cayman Fund Focus conference hosted by law firm Campbells.
“At a minimum we need a directors disqualification regime in Cayman,” Mr. Seymour said in a panel debate about the future of fund directors. “I think that CIMA needs more power over the way directors run their business.”
“To bring what is a very core function in the fund control structure under the regulatory ambit would be really good for the industry,” he said.
While he had a clear idea of what regulation should look like, Mr. Seymour said, the conference was not the appropriate forum to share any details. However, he said if CIMA had the power to regulate the individual investor, it would remove some of the questions, because there would be some independent oversight from CIMA in terms of whether a director has sufficient capacity to discharge their duties.
“I don’t think you can leave that question to self certification,” he said.
Currently the conduct of hedge fund directors is governed by a combination of common law duties and specific regulations in the Mutual Funds Law that extend to governance, but there is no codified regulation.
Asked whether directors’ duties should be codified in the Cayman Islands Companies Law as it has recently been done in UK law, Mr. Seymour responded: “Yes.”
CIMA’s powers are weak
Hedge fund directorships have come under more scrutiny in the wake of the Cayman Islands Grand Court decision in the Weavering case, in which the court found the fund directors guilty of wilful neglect or default in the discharge of their duties and fined each of the defendants US$111 million.
Although panellists at the one-day conference agreed the Weavering case was not indicative of fund director services in the Cayman Islands, because the directors were Swedish and family relations of the fund manager, Jason Papastavrou of Aris Capital Management, was critical of his experience with fund directors in the Cayman Islands.
Mr. Papastavrou gave the example of a court case in which the fund director did nothing in response to an obvious false statement by the fund manager during court proceedings relating to the retention of auditors.
“What I would like to see is that directors who do not act to protect investors when problems emerge should be prevented from being fund directors,” he said.
Mr. Seymour said he has been on both sides of the issue and noted that when he was the first head of investment services at the Cayman Islands Monetary Authority, he took enforcement action and disqualified directors.
CIMA has some limited powers, such as the requirement within the Mutual Funds Law setting the requirement that directors need to be “fit and proper” persons. RJ Berry, head of compliance at CIMA, noted that according to the law the authority has the power to “substitute” directors, but there are question marks over who should take over the directorship and how this would work in practice. In the Weavering case, substitution of the directors would not have changed anything, he said, adding things would be different if Cayman had a disqualification regime.
The number one item on his agenda is to tie the fit and proper test to some sort of disqualification regime, “because right now it is a very weak power to substitute somebody”, Mr. Berry said.
As far as regulating directors is concerned, there is a whole spectrum of opinions from “it is not broke, don’t fix it” on one end to “complete overhaul” of the current regime on the other, Mr. Berry said. He personally has “a long list of things that should be considered” by CIMA to improve fund governance, but currently he is focused on the entities not complying with regulatory requirements, he said, and warned in the future there will be an increase in the number of regulatory and enforcement actions.
No hard cap
One criticism of Cayman fund directors in the past has been that there is no limit on the number of directorships an individual director can take on. This has raised doubts among investors over the ability of directors to a large number of funds to perform their duties effectively.
A survey of large institutional investors in hedge funds by fund governance firm Carne found 58 per cent of respondents believed that an individual director should not hold more than 30 directorships and a third said that 40 directorships should be the maximum.
An article published in the Financial Times this week said FT research had “identified 19 individuals across the Caymans’ fiduciary service firms with more than 50 appointments, 14 of whom held more than 70”.
Mr. Seymour, who was named by a separate article in the Financial Times this week as one of the fund directors in Cayman with the highest number of directorships, said there should not be a cap on the absolute number of directorships. But he said CIMA should be enabled to determine whether individual directors are able to discharge their duties in an effective way.
“I do think this is a resource question and certainly there is a limit to what any one director can do. My issue is that it needs to be adjudicated by someone from an independent perspective because not every person has the same capacity,” he said. “There should not be any sort of hard cap, but I do think that CIMA needs to be empowered to make capacity decisions.”