The Cayman Islands is the leading offshore domicile for hedge funds, and as regulators and investors have placed more stringent requirements on good governance and oversight, independent directors have taken up the mantle of supporting the asset management industry.
A very active service sector of Cayman’s financial services industry is the provision of professional independent directors across a range of structures, including hedge funds, private equity funds, special purpose vehicles, Web3 foundations, and insurance companies. Excellence in corporate governance is a critical aspect of the global financial services industry, especially in light of several high-profile cases in which investors were defrauded—partly due to inadequate independent oversight.
During and after the global financial crisis, independent directors based in the Cayman Islands added significant value as alternative investment funds faced difficult decisions aimed at ensuring investor interests were appropriately protected. Institutional investors have taken note and now frequently require independent governance oversight—typically in the form of professional directors—when making investment allocations.
In addition to providing oversight, the appointment of a local Cayman director can deliver meaningful benefits by establishing local substance. This may be necessary under Cayman Islands economic substance legislation or to demonstrate to foreign authorities that an entity has a physical operational presence in Cayman. A Cayman-based director also helps ensure that the entity remains up to date with applicable legislation and is compliant with all relevant Cayman Islands legal and regulatory obligations.
For all Cayman-registered corporate mutual funds, investment managers, investment advisors, and broker-dealers in particular, their directors must be registered with the Cayman Islands Monetary Authority (CIMA) under the Directors Registration and Licensing Act (DRLA) 2014.
This law provides for the registration and licensing of individuals or companies appointed as directors of Cayman Islands mutual funds and entities carrying out securities investment business. This includes Cayman Islands incorporated or registered investment managers. The DRLA requires any individual acting as a director for 20 or more ‘covered entities’ (e.g. funds and investment managers) to be licensed or employed by a licensed firm.
Professional directors are required to have insurance with a minimum aggregate cover of CI$1 million and minimum cover of CI$1 million for each and every claim. An amendment to the DRLA was passed in early 2020 as a consequence of amendments to the Securities Investment Business Act (SIBA).
As mentioned, the use of independent directors has been brought into increased focus following the implementation of the Economic Substance requirements, which came into effect with the passing of the International Tax Co-operation (Economic Substance) Act in December 2018. This legislation does not currently apply to investment funds but requires all other relevant entities to prove that their ‘mind and management’ are in the Cayman Islands, and to allow them to claim the tax benefits of being domiciled in an offshore jurisdiction.
For a list of the top firms in the Cayman Islands who offer independent director services please see here:
