On 4th June 2014 the Cayman Islands Government enacted the Directors Registration and Licensing Law 2014. The law was in response to the Cayman Islands Monetary Authority (CIMA) proposals included in its Corporate Governance Consultation Paper of January 2014.
The law requires all directors of funds regulated by the Mutual Funds Law and directors of companies registered as excluded persons under the Securities and Investment Business Law to register with CIMA within three months. Corporate Directors have six months to register.
As a leading provider of consulting services to the asset management sector, KB Associates sought the views of the asset management community on this important topic.
Transparency and board composition were considered and the key conclusions in respect of each of these are as follows:
The overwhelming response from asset managers (75%) was that transparency would be enhanced if registration of directors was required. This corresponds with the results of a KB Associates survey carried out in February 2013 when over 70% of managers surveyed wished to see directors registered with CIMA.
Asset managers endorsed the view that transparency would be enhanced only if the information provided upon registration was made available to investors and asset managers. Comments included “registration will be helpful as long as it enables investors to verify the number of boards the directors sit on” and “this will allow investors to get a good sense of how thinly spread a Director is – as well as provide some comfort that Directors have the background qualifications that they claim.”
When asked to consider the number of directorships which would require a director to register with CIMA views differed. CIMA has proposed that all directors with more than 20 directorships should be licenced. Respondents to the survey were evenly split at 50% (yes and no) when asked if 20 was an appropriate number.
Some managers thought 20 was too high with one commenting “the bar should be lower. I would have them license from 5 directorships onwards”, however, many thought other criteria should also be evaluated when considering an absolute number. Most believed that a simple numerical limit was not appropriate and that fund complexity and structure should also be considered. Comments from managers included “Should be limited but, should also consider fund AUM” and “It depends on the definition…20 directorships including master and feeder would be appropriate but not 20 separate funds.”
A majority (58%) of managers maintained that 20 (or less) board positions was manageable, 24% thought a director could have up to a maximum of 50 board positions and 17% thought there should be no limit.
When the number of fund manager relationships was considered, all managers surveyed felt that a director should not maintain more than 30 manager relationships.
Over 70% of managers felt details of a director’s residency was important information. Furthermore 44% of those surveyed stated that details of outside business interests (i.e. those interests not connected to the fund or fund manager) was important information.
Independence of directors was highlighted as of significant importance by most respondents. On a scale of one to five (five being the highest) over 90% rated director independence either four or five. Furthermore it was felt that directors needed to demonstrate sufficient time capacity, with over 80% rating this as four or five on a scale of importance.
Consideration was given to the influence that remuneration may have on the independence of a director and approximately 40% of managers felt that this was relevant information while nearly 60% responded that this should not be disclosed. One suspects that a survey of investors would be more supportive of disclosure in this area.
Experience of investment management, risk management and legal and compliance issues were identified as important areas of understanding for a director. One respondent said “the board has to be composed of a mixture of experts in each field” and another added “As long as we deal with long-only active equity funds, the required skill sets can be knowledge of and expertise in fund accounting, legal, documentation, etc. However, when we talk of alternatives, the skill sets which are necessary shift to risk management and investment management.”
About KB Associates
KB Associates is an independent advisory firm offering its services exclusively to the asset management industry. KB Associates has particular expertise in fund governance and compliance issues relating to offshore funds. Established in 2003, the firm has offices in Cayman, Dublin, London and New York.
For further information regarding this survey or the governance and advisory services offered by KB Associates please contact us.