CAYMAN 2012 - HFMWeek

CAYMAN 2012
FINANCIAL SERVICES
REPUTATIONAL RISK AND THE
CHANGING PRACTICES OF FUND
DIRECTORS
ALRIC LINDSAY TALKS TO HFMWEEK ABOUT WHY A SERVICE PROVIDER WITH A ROBUST AND SUPERIOR MODEL IS CRUCIAL TO WIN NEW CLIENTS
Alric Lindsay is a
principal with a firm regulated
by the Cayman Islands
Monetary Authority. He is a
qualified investment funds
lawyer, holds the accredited
director (Acc. Dir.) designation
and is a former auditor with
PwC Cayman Islands.
In the financial services industry, a service provider’s
ability to win new clients or maintain existing
engagements may hinge on the reputation of that
firm. Standing may be linked to the firm’s principals,
name, work quality, performance and ability
to deliver in a manner that meets clients’ needs.
Cayman independent directorship providers understand
this and, further, that their services and reputational expectations
must exceed stakeholder perceptions and best
practices. Such awareness is also critical for Cayman’s continued
success as a hedge fund domicile.
A SUPERIOR MODEL
One often tries to picture the optimal model for a Cayman
independent directorship firm. A superior method, which
is practiced by Alric Lindsay, has the following features:
• Independence: the firm and its principals should be
independent in appearance
and structure from the Cayman
fund. It is preferable to
avoid conflicts of interests in
order for the board of directors
to act in the best interests
of the Cayman fund, rather
than being faced with complex
fund decisions and being in the
awkward position of having to
choose between personal interests
and the fund’s interests
• Limited capacity: the firm
must insist that the persons
that it provides as directors to
a Cayman fund only accept a
limited number of directorship
appointments. This ensures the right amount of
attention is paid to each hedge fund board and that
the capacity of persons provided by the service provider
is of such adequacy that they can properly discharge
their legal and fiduciary duties as directors of
a Cayman fund
• Competence: the firm’s principals and persons that it
provides as directors must hold recognised qualifications,
be members of professional organisations with
good standing, have relevant industry experience and
keep abreast with continuing professional education
obligations established by the firm in order to ensure
THERE MUST BE NO
‘COMPLACENCY’ AS A
MEMBER OF A CAYMAN
FUND’S BOARD OF
DIRECTORS
”
each person maintains the technical knowledge required
to discharge his or her duties as a member of
the board of directors of the relevant hedge fund
• Executive approach: there must be no ‘complacency’
as a member of a Cayman fund’s board of directors.
That is, a board member must not exist simply to go
through the motions of acting as a director but, instead,
must adopt more of an ‘executive’ mindset,
which involves the regular monitoring and supervision
of the fund’s service providers, positing the right
questions and raising red flags when it is proper to do
so in the best interests of the fund.
MASS DIRECTORSHIP MODEL
A high-risk method practiced by some service providers is
known as the ‘mass model’. While it is not widely adopted
in Cayman, a few directorship service firms follow this
model, whereby a small number of persons act as directors
on a large number of investment
funds. In some cases, one person
may sit on the boards of hundreds
of entities.
It is not clear how one individual
can manage mass appointments in
this way. However, this purported
‘mass model’, when applied to the
performance of the role of a fund
director, poses financial and governance
risks to a fund and its investors.
The risks flow from one or
more failures of a director to properly
discharge his or her duties to
hundreds of entities on whose
board he or she sits, including duties
of skill, care and diligence and
fiduciary responsibilities to act in the best interests of the
fund, to exercise powers for a proper purpose and to avoid
conflicts of interest. Such a breakdown is inevitable as long
as fund directors serve on so many hedge fund boards that
they either do not appreciate what is happening with a particular
fund or they do not have sufficient time to properly
review complex fund documentation and exercise independent
judgment. If a lawsuit follows, the entire jurisdiction
may suffer a dangerous blow as it may be construed by
international stakeholders that the flawed ‘mass model’ is a
widely accepted practice for the provision of directorship
services in Cayman.
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