Implementation deadline is here: New Cayman rules on corporate governance and internal controls

The Cayman Islands Monetary Authority’s (CIMA) new corporate governance and internal controls requirements are now in force (the Rules) from 14 October 2023.

If not already done, CIMA regulated entities should review their internal governance and control frameworks and make the necessary adjustments to ensure compliance with the new requirements.

The Rules are applicable to all regulated entities, including private funds regulated under the Private Funds Act and mutual funds regulated under the Mutual Funds Act. However, the Rules are subject to a proportionality test based on the entity’s size, complexity, structure, the nature of its business, and its risk profile.

The Rules are legally binding and non-compliance could result in fines or other regulatory action by CIMA. However, CIMA has issued a Statement of Guidance Corporate Governance for mutual funds and private funds which focuses on elements of the corporate governance requirements with which funds should already be operationally compliant.

Funds should focus on CIMA’s Statement of Guidance on Corporate Governance for Mutual Fund and Private Funds (April 2023) (the Guidance). The Guidance covers:

1. The importance of the oversight function of the “Operator”. The Operator is “the Board of Directors where the entity is a corporation, the General Partner where the entity is a partnership, the manager (or equivalent) where the entity is a Limited Liability Company, and the Board of Trustees where the entity is a trust business”
2. The management of conflicts of interest
3. The importance of holding and the content of Operator meetings
4. The duties of the Operator (including exercising independent judgment, effective oversight and always acting honestly and in good faith)
5. Documenting full, accurate and clear written record of Operator meetings and determinations

The new internal controls requirements are separate from and not specifically addressed by the Corporate Governance Rules and Guidance. A fund should consider the new internal controls for the Regulated Entities Rule and Statement of Guidance in light of “the size, complexity, structure, nature of business and risk profile of its operations”.

The new internal controls requirements entail:

1. A controlled environment
2. A dynamic and iterative risk identification and assessment process
3. Control activities which are documented in policies and procedures
4. Segregation of duties commensurate with the size, complexity, structure, nature of business and risk profile of the fund's operations and where segregation of duties is not reasonably practical, establishing and implementing appropriate alternative control activities
5. Systems that provide information across the operation of the fund that are “relevant, reliable, timely, accessible, and provided in a consistent format”
6. Continuous monitoring and evaluation of internal control systems considering changing internal and external conditions
7. “Effective and comprehensive audits of the internal control system carried out by operationally independent, appropriately trained, and competent staff”
8. Reporting internal control deficiencies “in a timely manner to the appropriate parties for corrective action”

For a fixed fee, Harneys can assist in reviewing existing fund policies and procedures, the fund’s offering documents and constitutional documents and, if necessary, preparing a compliance manual that addresses the requirements for policies and procedures in the corporate governance and internal controls requirements. In addition, we anticipate that most funds will need to make some changes to their offering documentation or make some up to date investor disclosure about the requirements of the new corporate governance and internal controls requirements. We can also prepare meeting agenda and advise on the governance elements of meetings and annual reports.

For guidance relating to your ongoing regulatory compliance obligations, please speak to any of the Harneys attorneys listed in this briefing or your usual Harney’s contact to discuss your needs.