As CIMA’s Rules and Statements of Guidance on Governance and Internal Controls come into force, Laura McGeever, Director at Paradigm Governance Partners, considers some of the key takeaways for operators of regulated Cayman entities.
CIMA’s Rules and Statements of Guidance on Governance and Internal Controls come into force on October 14, 2023. This is a reminder that these Rules apply to all regulated entities in the Cayman Islands and now bring Private Funds within scope.
Two specific Rules are effective from October 14, 2023: Rule and Statement of Guidance – Internal Controls for Regulated Entities (SoG); and Rule – Corporate Governance for Regulated Entities.
Importantly, a Rule is a directive issued by CIMA which creates binding obligations on those regulated entities. A breach of a Rule may lead to the imposition of a fine or enforcement action being taken by CIMA.
It would appear that the intention of these updates is to enhance the regulatory framework and to redefine minimum expectations of sound and prudent governance for Directors and Operators of regulated entities. The Rules and SoG, require analysis of the adequacy and suitability of the overall governance structure depending on the nature, size and complexity of a regulated entity.
Furthermore, Directors and Operators must consider if the existing governance framework is sufficient based on the nature, size, complexity and structure of the entity. In the context of a fund, it requires the governing body to consider the investor profile, AUM, strategy and operations when reviewing the suitability of the governance structure as well as the proportionality of internal controls.
A couple of key areas that should be considered:
Governance Framework – The expectation is that the Governing Body of regulated entities will need to consider the following as part of the overall governance framework and have this sufficiently documented: the scope of duties and responsibilities (individual and collective), independence and objectivity, supervision and oversight of delegates, approach to risk management and internal controls, ongoing communications and transparency, documentation of conflicts of interest, remuneration and succession policies.
Frequency of meetings and record keeping – the Governing Body of a regulated entity should convene at least once a year. While the new SoG has reduced this requirement for Mutual Funds, it is a new requirement for Private Funds. Board meetings are an integral part or the overall governance architecture and a mechanism by which the Governing Body can discharge oversight and supervise delegated and outsourced functions. The Governing Body should also take steps to ensure that they receive adequate and frequent reporting from service providers and request their attendance at Board meetings.
Crucially, as Private Funds are now scoped into the SoG, operators of General Partners or advisory / governance committees will also need to consider industry best practice and conduct themselves in the same manner as Mutual Funds.
Coupled with the above, the Governing Body should ensure that adequate and structured meeting agendas and board packs are in place. It is paramount that there is a robust process in place to retain records of all meetings by way of formal minutes and actions that may arise from such meetings. This process can be facilitated by an experienced governance professional / Chartered Corporate Secretary that can support the administrative aspect by tracking attendees, the salient discussion points and generally coordinating the meeting process.
Another area which has come into increased focus in the Rule and SoG concerns conflicts of interest and the requirement to formalize this in the constitutional/offering documentation of the regulated entity. It is good practice to consider any conflicts which may arise as part of each meeting in addition to an annual review of existing conflicts disclosures.
Communications, transparency and relations with CIMA – the Governing Body must communicate adequate information to the fund’s investors, including any material changes to the regulated entity. The SoG requires operators to notify the relevant regulator by email within 10 days of any substantive or material issues.
Structure and Governance of the Governing Body – the SoG calls on Operators of a regulated entity to consider the board composition in terms of having the appropriate number of individuals based on the applicable regulatory acts and regulations. In reviewing the construct of the Governing Body, consideration should be given to the diversity of skills, background, expertise and experience to ensure that there is a well-rounded and competent Board. This calls upon entities to review their Board composition to consider whether there are appropriate documented internal governance practices to support the decision making and independent judgement exercised by the Governing Body.
Internal Controls Rule and SoG – regulated entities must consider the various components of internal control such as the control environment, risk identification and assessment, control activities and segregation of duties, information and communication, monitoring activities and correcting deficiencies in internal controls. In the context of a fund, the Internal Controls Rule and SoG provides that a regulated fund may place reliance on its service providers systems of controls over its outsourced activities i.e. the Investment Manager or other group-wide internal controls systems. The Board of the regulated fund should be able to demonstrate to CIMA that such a reliance system meets the requirements of the Internal Controls Rule and the SoG. Fundamentally, the regulated entity should consider whether existing controls are proportionate to demonstrate compliance with these requirements.
For further information, please reach out to the team at Paradigm Governance Partners to discuss how this may apply to your entity in advance of the effective date.
Our industry experts have over 250 years of collective experience spanning various jurisdictions and professional qualifications who can help you navigate the current regulatory environment.
Paradigm is a fully regulated and licensed as a Company Manager by the Cayman Islands Monetary Authority.
This update does not and is not intended to constitute legal advice.