Independent Directorships
The Cayman Islands Journal (Cayman Free Press Ltd.)

MARHedge Cayman January 2007
The fact that MARHedge chose to present a conference on Hedge Fund Best Practices: Operations and Regulatory Compliance is a statement within itself. In times gone by this would have been con­sidered somewhat dry and less pop­ular than a forum dealing with the “cutting edge” of the latest strate­gies and investment trends affecting the industry. This was most cer­tainly not the case with the confer­ence attracting substantial overseas attendance and is a testament to the importance the industry is placing on sound practice in running a hedge fund. Pivotal to this is the function of the directors of a cor­porate fund and the conference had an entire session dealing with the role of independent directors which I had the opportunity to participate in. Allison B. Nolan, Managing Director, Athena International Management Limited reports.
 
The subject of independent directors was divided into three stages for the discussion; factors to consider when selecting an independent director prior to the launch of the fund, the role of the indepen­dent director during the ongoing course of the fund and finally, hedge fund blow-ups – what happens when things go wrong.

It is becoming essential to the integrity of a fund from an investor perspective that high quality independent directors are part of the board. Often there are additional reasons driving this such as listing requirements or taxation treatment. To be classed as inde­pendent, a director should not be part of the investment management function and should not have an executive role within any of the service providers to the fund, except to the extent that they do not themselves provide the services to the fund.

The Alternative Investment Management Association (AIMA) has produced an Offshore Alternative Fund Directors’ Guide and since the inception of the Cayman Islands Chapter of AIMA, plans are under way to establish a sub-committee regarding the provision of director services within Cayman. The AIMA guide has been very well received by the funds industry and includes factors to consider when selecting the members of the board of a fund. Whilst it is clear that any director should have suffi­cient and relevant knowledge and experience to carry out their duties, the AIMA guide also mentions amongst other things age and other commitments.

The issue of other commitments leads us into the question of capacity and whether a particular director has too many director­ships to be able to devote sufficient time and attention to the fund in question. This is sometimes addressed by the director who is acting in his or her own name having a team working alongside them and assisting with some of the administrative functions. However, generally speaking directors who are too busy to contribute effectively should be avoided. There are currently no regulatory provisions in the Cayman Islands controlling the amount of directorships that a person may hold at any one time. Whilst it is desirable that exces­sive numbers of directorships should be avoided, this is very difficult to legislate for as comparing the directorship of one fund with another is a bit like comparing apples and oranges due to the diversity of the requirements of the role.

Essential to the understanding of the ongoing role of independent director is the fundamental premise that all directors of a company have a fiduciary duty to the com­pany and a general duty of care. Generally, no distinction is made between the indepen­dent director and any other director, such as one affiliated to the investment manager of a fund. The duty of loyalty to the fund encom­passes amongst other things, the duty to act in good faith in the best interests of the fund without regard to the interests of any third parties and avoid any conflicts of interest between the director’s own interests and those of the fund.

The practical duties incumbent upon a director during the course of a fund include attendance at regular (usually quarterly) board meetings incorporating a detailed explanation behind the performance and valuation figures and additional meetings to review the annual audited and semi-annual accounts and one-off matters. Throughout the duration of a fund, it is essential that there is regular reporting by the investment manager to the board so that the directors can ensure that the investment manager is acting within the investment management parameters. Directors should be given all of the information that is provided to inves­tors in the fund and should monitor the key documents and ensure that the fund is kept up to date in terms of legal and regulatory requirements.

Last but certainly not least is the role of the independent director of a fund if things go awry. It is crucial that directors accept responsibility for seeing the fund through the entire course and do not leave investors in the lurch when the going gets tough. If the directors stay with the fund and are there to facilitate the fund trading through any difficulties, the resulting continued investor confidence can obviate the consequence of the collapse of the fund.

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Based in the Cayman Islands, Athena International Management Limited is a sophisticated offshore provider of directorship services, primarily to the investment funds and structured finance industries, together with a comprehensive range of corporate services. For more information visit www.athena.ky