One of the discussions that often comes up when speaking with lawyers, fund managers, and other relevant parties is: Does the fund really require an independent director?
Cayman-regulated funds, either those registered as open-ended mutual funds or closed private funds, do not require the appointment of independent directors. Having said that, the latest CIMA Rules on Corporate Governance (effective October 2023) require fund boards to ensure sound governance, including proper oversight of service providers, regular board meetings, documented decision-making, and maintaining adequate independence, competence and accountability.
While some may argue that this can be achieved with the appointment of executive directors (associated with the fund manager/sponsor) if there is a strong compliance culture and adequate segregation of duties/information barriers, from a practical perspective, this is not readily achievable. This is where engaging an experienced and proactive independent director will add value in many more ways than fund managers may have initially considered – and can, in the long run, prove to be a cost-effective and strategic investment by enhancing governance, improving operational efficiency, and supporting compliance with evolving local regulations.
In my view, these are some of the key aspects relevant parties should consider when assessing the appointment of an independent director:
- Independent directors can help existing and emerging managers launching new funds by reviewing the constitutional/offering documents and service agreements to ensure they are all consistent with each other and in line with industry market standards, and help ensure a smooth launch and ongoing operations.
- The presence of experienced independent directors can help ensure that regulatory deadlines with bodies like CIMA and the DITC are appropriately tracked and met, reducing the risk of costly fines that often arise when no one is clearly accountable.
- For regulated private funds which are also subject to CIMA’s Corporate Governance Rules, we continue to see managers rely heavily on internal governance models –often without proper board meetings, documentation, or disclosure of conflicts –typically handled at the Master Fund GP level. This highlights the importance of appointing independent directors to strengthen oversight and demonstrate compliance with regulatory expectations.
- Having an independent director overseeing the fund activities will enhance the ability to market the Fund and its distribution to family offices / institutional investors and pass complex ODD exercises.
- Independent directors can be invaluable through the fund’s audit process, particularly for emerging managers. They will participate in the introductory calls with the audit team, review draft financial statements and management representation letter, ensure all parties are comfortable with the content and disclosures, and will typically chair a formal board meeting with the auditors, fund administrator and fund manager to discuss the audit findings and formally approve the financials.
- When a fund engages a one-stop-shop provider for multiple roles (legal, admin, AML, etc.), appointing an independent director is more important than ever to ensure proper segregation of duties and oversight –helping identify regulatory or operational issues that might otherwise be overlooked in an overly integrated setup.
- The addition of at least one independent director to the board supports growing expectations for board independence, which may become a regulatory focus following CIMA’s recent emphasis on separating the roles of directors and AML officers.
- An independent board with the right expertise in Cayman AML matters will request ongoing reporting from the AML officers, ensure the right questions are asked during board meetings and overall remain on top of AML matters to ensure there are no ongoing issues and pending ítems are resolved in due course between the administrator and the AML officers.
- An independent director can act in some instances as a tie-breaker where two executive directors are in a deadlock, ensuring that decisions can move forward without indefinite stalemates.
- From a tax perspective, having a majority independent board based in Cayman helps establish the fund’s mind and management outside the manager’s fiscal jurisdiction – supporting its status as tax resident in Cayman.
- From a mere fiduciary standpoint, independent directors will ensure all actions taken by the fund (which are often proposed by the fund manager) are made taking into consideration investors as a whole and that no small investor is put at a disadvantage in favour of a bigger investor.
- In connection with the above, independent directors will help review side letters to ensure these are drafted in accordance with the governance documents and that any advantages given to specific investors have been disclosed and do not breach any fiduciary principles.
- Independent directors are typically required to approve waivers/exemptions with respect to subscription and redemptions, and they will ensure fair treatment when approving those.
- Independent directors play a key role in overseeing the implementation of redemption gates during periods of market stress or liquidity challenges. They help ensure any gating decisions are made in accordance with the fund’s constitutional documents and in the best interests of all investors. By acting as a neutral party, they provide an essential check on potential conflicts of interest between the manager and investors. Directors are typically responsible for approving the gate’s terms, such as the timing and percentage of redemptions, in consultation with the manager. Their involvement enhances transparency, reinforces sound governance, and supports the defensibility of the decision in the eyes of both regulators and investors.
With all of this in mind, it would be sensible to say that independent directors have a role to fill and a value to add in the context of investment funds.
Whether it is a majority independent board or at least one independent individual, an experienced director will provide critical support and enhance the quality profile of the fund, can make its operations and oversight more efficient, prevent difficult regulatory situations such as fines/penalties, and increase the fund’s profile and appetite for a wide range of investors.
Martin Laufer is an independent director at Daymer Group.
C +1 345 3232748
E Martin.Laufer@daymer.group
