The Directors Registration and Licensing regime

Gazetted on March 21, the Directors Registration and Licensing Bill makes provision for the establishment of a registration and licensing regime for directors, professional directors and corporate directors of mutual funds regulated under the Mutual Funds Law (2013 Revision) and persons to whom section 5(4) of the Securities Investments Business Law (2011 Revision) applies.   

The proposed law can be seen as a natural extension of the Cayman Islands government’s initiative to improve standards of corporate governance, increase regulation and provide for greater transparency in the provision of fiduciary services across certain regulated industry sectors.  

This same initiative has already led to the publication of the Statement of Guidance on Corporate Governance for Mutual Funds published by the Cayman Islands Monetary Authority in December 2013 and the publication of the Issues Paper on Codification of Directors Duties by the Cayman Islands Law Reform Commission in January 2014, which may also lead to new statutory corporate governance standards (albeit across a broader range of industry sectors) in the near future. 

It is important to note at the outset that the proposed law will only apply to directors, professional directors and corporate directors of entities that are either (a) excluded persons for the purposes of the Securities Investment Business Law (2011 Revision) or (b) mutual funds for the purposes of the Mutual Funds Law (2013 Revision) (each a “covered entity”), whether or not such persons are resident in the Cayman Islands.  

The law as proposed will therefore create a regime where any person (including a corporate person) who acts as a director of a covered entity must be licensed or registered under the Law or otherwise affiliated with an entity that is regulated by CIMA or an overseas regulatory authority.  

 

Directors  

The proposed law prohibits persons from acting as a director of a covered entity unless registered under the law, but does grant those currently acting as a director of a covered entity a grace period of three months from the date of commencement of the law to make an application for registration.  

The law provides that persons who contravene these provisions are liable on summary conviction to a fine of $50,000 and to imprisonment for 12 months, or to both. 

The law provides that applications for registration must be made in the prescribed form and be accompanied by the prescribed fee (although no details of such are available as yet) and must be renewed annually. Further, if there is any change in such information, the registered director must inform CIMA within 21 days. A registered director who fails to do so is liable on summary conviction to a fine of $20,000. In all cases, a person may commence acting as a director of a covered entity upon submitting an application on the condition they must cease to act if, for any reason, such application is refused.  

The proposed law provides that CIMA may refuse to register an applicant if such applicant has been convicted of a criminal offense involving fraud or dishonesty or is the subject of an adverse finding, financial penalty or sanction arising from any disciplinary action or proceeding by a regulator, self-regulatory organization or professional disciplinary body. 

 

Professional directors  

The law creates a prohibition from acting as a professional director for a covered entity unless licensed under the law. A professional director is defined to mean a natural person appointed as a director for 20 or more covered entities. However, there are two exceptions. The first is for any natural person who is affiliated (by employment or otherwise) with an entity regulated by CIMA and licensed to provide fiduciary services. The second is for any natural person affiliated with a fund manager of a mutual fund regulated under the Mutual Funds Law (2013 Revision) where such fund manager is regulated by an overseas regulatory authority and such natural person acts a director for a covered entity by virtue of his relationship to that fund manager.  

The first of these two exceptions will grant some relief to the many members of the fiduciary services industry resident in the Cayman Islands and currently employed or otherwise affiliated by any of the licensed fiduciary service providers. The second will grant some relief to those persons employed or otherwise affiliated with fund managers who typically accept directorships of entities under their own management. However, in both cases, such persons must still be registered in accordance with the law.  

The law provides that persons who contravene these provisions are liable on summary conviction to a fine of $100,000 and to imprisonment for 12 months, or to both. 

The law otherwise contains similar provisions to those noted above. The law grants persons currently acting as a professional director of a covered entity a grace period of three months from the date of commencement of the law to make an application for a license. The law provides that applications for registration must be made in the prescribed form and be accompanied by the prescribed fee (although no details of such are available as yet) and must be renewed annually. Further, if there is any change in such information, the registered director must inform CIMA within 14 days. A registered director who fails to do so is liable on summary conviction to a fine of $20,000. In all cases, a person may commence acting as a professional director of a covered entity upon submitting an application on the condition they must cease to act if, for any reason, such application is refused.  

The law provides that CIMA may not grant a license to an applicant unless it is satisfied that the applicant has sufficient capacity to carry out the applicant’s duties as a professional director and that the applicant is a fit and proper person for licensing as a professional director. In determining whether a person is a fit and proper person regard shall be had to all circumstances including that person’s honesty, integrity and reputation, competence and capability and financial soundness. A license may also be granted with or without conditions as CIMA may consider appropriate but it is prescribed that a professional director must at all times maintain insurance with an authorized insurer for a minimum aggregate cover of $1 million and a minimum cover of $1 million dollars for each and every claim. 

It is interesting to note that the issue of capacity falls for consideration here. A discussion of this issue had been included in the Consultation Paper that preceded the publication of the Statement of Guidance on Corporate Governance for Mutual Funds when it was posited whether a limit should apply to the number of directorships held by any particular person. The overwhelming majority of respondents to that Consultation Paper were not in support of imposing any kind of limit on the number of directorships, but CIMA appears committed to ensuring there is some kind of control over the number of directorships held by certain persons. In this context then, one keenly notes that employees of licensed service providers who are exempt from the requirement to be licensed are therefore not subject to this same control. 

 

Corporate directors  

The law also creates a prohibition for a corporate director acting as a director for a covered entity unless licensed under the law. The law provides that a corporate director who contravenes this provision is liable on summary conviction to a fine of $100,000. 

The law otherwise contains similar provisions to those noted above – providing that applications for registration must be made in the prescribed form and be accompanied by the prescribed fee (although no details of such are available as yet) and must be renewed annually. Further, if there is any change in such information, the registered director must inform CIMA within 21 days. A registered director who fails to do so is liable on summary conviction to a fine of $20,000. A corporate director may commence acting as such upon submitting an application on the condition it must cease to act if, for any reason, such application is refused.  

The law provides that CIMA may not grant a license to an applicant unless it is satisfied that the applicant has sufficient capacity to carry out the applicant’s duties as a corporate director and that the applicant is a fit and proper person for licensing as a corporate director. 

The law further clarifies that any entity that is appointed to act as a director must be licensed under the Law unless otherwise licensed by CIMA. This point would appear to be an attempt to clarify what has been an inconsistent practice in the past where some corporate groups have used subsidiaries to act as corporate director while maintaining a single license elsewhere within the group. 

A license may also be granted with or without conditions as CIMA may consider appropriate, but it is prescribed that a corporate director must at all times maintain insurance with an authorized insurer for a minimum aggregate cover of $1 million and a minimum cover of $1 million for each and every claim. 

The law further provides that a corporate director shall, within six months of the commencement of the law, take all necessary steps to comply with the law.  

 

General provisions  

The law confers on CIMA the duty to maintain a register of directors of covered entities which must include certain particulars such as name and address and any other particulars that may be prescribed. However, there is nothing in the law that suggests such register is public information (although any cancellation or revocation of a registration or license will be gazetted). 

The law also confers on CIMA broad powers, including powers to examine the affairs or business of any director, professional director or corporate director, to compel the disclosure of any books, records or documents to CIMA as it may reasonably require and to apply to the Court for certain orders to support any examination or investigation.  

Any person who fails to disclose information on request is liable on summary conviction to a fine of $10,000 and on indictment to a fine of $100,000. Any person who provides false information is liable to the same level of fines but also to imprisonment for six months and five years, respectively. 

The law confers on CIMA the additional power to cancel or suspend the registration or license of any person, impose conditions or require action be taken if CIMA is of the opinion, among others, that any person is not a fit and proper person to hold a position as a director, is not carrying on business in a fit and proper manner or is carrying on business in a manner detrimental to the public. 

 

Intertrust Cayman welcomes the introduction of the law and fully supports the Cayman Islands government’s continued efforts to improve standards of corporate governance, increase regulation and provide for greater transparency in the provision of fiduciary services in the regulated mutual fund sector.  

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