A company affiliated with DMS Organization Ltd, one of the largest providers of director services, has filed an application with the Grand Court alleging that the private sector consultation process used by the Cayman Islands Monetary Authority to reform corporate governance of fund directors and director services providers is flawed.
Cayman Private Manager II Limited, an affiliate of DMS Group, has filed an application for leave to apply for judicial review on 2 April, 2013, asking the Grand Court for an order directing CIMA to comply with the Monetary Authority Law and CIMA’s Regulatory Handbook in preparing a private sector consultation and prohibiting CIMA from making any decision regarding corporate directorships based on the consultation process initiated on 14 January.
In its filing, Cayman Private Manager II Limited said that as a director services provider any changes to corporate governance regulations would have an impact on its business practices and potentially its competitiveness.
In January, the monetary authority sent a consultation paper to various financial services bodies in Cayman proposing to develop a searchable, public database of licensed and registered entities to facilitate the due diligence process for investors.
In the document, the authority asked the industry for feedback on whether information such as an entity’s directors and its registered office would be relevant and appropriate and if further information – for example, an entity’s related service providers such as auditors, custodians, fund administrators or insurance managers – would be beneficial.
Some institutional investors have in the past called for a database to determine the number of client relationships that an individual director maintains. In the consultation paper, the monetary authority argues that limiting the number of directorships a director can hold may be beneficial, but it would be challenging to design.
DMS, one of the largest governance services providers, would be impacted most by a cap on the number of directorships, as it operates on the basis of a professional services model, similar to an audit firm, where each document is subject to three levels of review and each director is supported by associates and associate directors. Combined with technological infrastructure, DMS argues its individual directors are able to maintain a larger number of client relationships than directors without the same support structure.
CIMA’s proposals also include a recommendation to amend the Companies Management Law to enable the regulation and supervision of individuals offering themselves or acting as directors of six or more Cayman Islands-registered entities.
“Directorship services are a vital component of the Cayman Islands financial services sector, and the regulatory framework should allow for a supervisory structure that adequately regulates the standard of services being provided. We believe our proposals are proportionate and beneficial to the overall standard of the financial services sector,” CIMA stated in its consultation paper.
Cayman Private Manager II claims in the court filing that CIMA’s Corporate Governance Private Sector Consultation Paper fails to satisfy duties placed on the authority by the Monetary Authority Law and CIMA’s own regulatory handbook and that the authority is “likely to regulate on the basis of a deeply flawed consultation exercise”.
Among others, the filing questioned the reasons given by CIMA for the need of regulation. Taking aim at references made by the consultation paper to post-financial crisis corporate governance initiatives by the Basel Committee on Banking Supervision, IOSCO, the IAIS or the FSB, Cayman Private Manager II stated CIMA failed to distinguish the position of regulated mutual funds in the Cayman Islands from financial institutions and entities regulated by these bodies. In addition, CIMA failed “to provide any cogent reasoning, beyond simple slavish adoption of trend in other jurisdictions operating in industries not germane to the Cayman Islands, why a review of the corporate governance regulatory standards of the Cayman Islands is necessitated”, the filing said.
Cayman Private Manager II Limited claimed the authority also did not set out the evidence it relied upon to conclude that regulatory regime for funds in the Cayman Islands is not adequate or should be altered in line with its proposals, as well as the extent to which similar proposals have been adopted in other jurisdictions.
The application further alleges poor corporate governance practices at the monetary authority itself during the award of a contract to Ernst & Young to conduct an industry survey on corporate governance standards. The contract was awarded “on a no-bid basis despite the Chairman and the Deputy Chairman of the Respondent [CIMA] having significant affiliations with [Ernst & Young]” and CIMA did not demonstrate how it addressed those conflicts, the filing claimed.
Current CIMA Chairman George McCarthy was seconded to Ernst & Young for two years after gaining his accounting designation in the late 1980s and Deputy Chairman Lindburgh Martin worked for Ernst & Young in the UK and the Cayman Islands prior to 1994, according to the CIMA website.
Cayman Private Manager II Limited questioned that the issue of fund directorships could effectively be separated from corporate directorships as suggested by the consultation paper.
The application also suggests CIMA had neither properly examined the alleged benefits of its proposals nor their effects on the competitive position of the Cayman Islands within global financial services marketplace. With regard to a public database the applicant noted CIMA had not taken into account increasing financial privacy standards and data protection laws enacted in competing jurisdictions such as the UK, the EU and Hong Kong, nor the burden this would place market participants.
Cayman Private Manager II Limited said that following CIMA’s announcement of the Private Sector Consultation Paper on Corporate Governance, it had received numerous concerned comments from global and local industry stakeholders regarding “potentially poor predetermined outcomes deriving from CIMA’s haphazard consultation process”.
Cayman Private Manager II Limited said, “More than 75 per cent of the solutions recommended to CIMA from local industry associations had been excluded by CIMA from the consultation paper so stakeholders did not get any opportunity to consider these solutions during the consultation process.”
In January, DMS said it supported the monetary authority’s efforts to improve corporate governance in the Cayman Islands, but argued CIMA’s proposals did not go far enough in addressing the root of the governance problem in the hedge funds sector.
Fund governance providers should be required to be licensed and regulated to operate under strict professional and regulatory standards, like all other service providers to a CIMA-regulated hedge fund, DMS said.
At the time, the fund governance provider also pointed to a legislative proposal delivered by the Cayman Islands Directors Association in 2012 which included requirements for the registration of all hedge fund directors, continuing obligations for all hedge fund directors, director disqualification for non-performance and one resident director responsible for Cayman-specific compliance obligations.
This framework if approved by government would provide CIMA with an effective foundational framework to harmonise implementation of its survey findings to further enhance fund governance standards in the Cayman Islands, DMS said. Prior to filing its court application, Cayman Private Manager II said it had sent CIMA a request under the Freedom of Information Law to disclose documents or information on the supporting evidence of the corporate governance prop
osals to gauge whether the authority had satisfied its duties.
Because CIMA had indicated it was unable to provide the information before the board of the authority would meet to discuss the policy implications of the private sector consultation, the applicant was left with no remedy other than the legal challenge, the filing said.
“To date, the information has still not been received. In the interest of industry stakeholders and the reputation of the Cayman Islands as a premier offshore financial centre, Cayman Private Manager II Ltd filed this action to create transparency and understanding with respect to the consultation process and to compel production of the required information, if available,” Cayman Private Manager II Limited said in a statement.
“Due process and adherence to the law is necessary to ensure continued global confidence in the Cayman Islands.”
The monetary authority said it is aware of the proceedings and “intends to vigorously oppose the application” in due course. Managing Director Cindy Scotland said it would be inappropriate to make any further comment at this stage.
*Editor’s note: This story has been corrected from the original for clarity.