EXTENSION OF FOUR EYES PRINCIPLE TO PRIVATE FUNDS
The four eyes principle is a requirement that two individuals must approve an action before it can be taken. It is confirmed that CIMA will extend the four eyes principle to Private Funds. A minimum of two (2) directors are required for applicants that are companies, and a minimum of two (2) natural persons are to be named in respect of a general partner or a corporate director of a Private Fund.
Unlike the open-ended fund regime, it is not currently required that these individuals be CIMA Registered Directors, and there is currently no independence requirement. It is, however, anticipated that non-Cayman Investment Managers will require at least one independent person who is familiar with Cayman requirements to be named as a director of a fund / manager of a GP. Independent governance can also be introduced through committees established through amendments of the limited partnership agreement. The dual pressures of increased regulatory complexity and increased investor scrutiny could potentially drive managers to appoint at least one local independent director in order to have oversight of Cayman private funds.
HOW CAN DMS ASSIST PRIVATE FUND MANAGERS?
Fund Governance / Investment Committee:
DMS has the largest pool of full-time professional independent directors based in the Cayman Islands. Many of our directors are very familiar with the unique characteristics of a Private Fund structure and specific asset types. This can be utilized in appointments to Cayman Master / Feeder Funds (often in conjunction with appointments to onshore U.S. entities), as well as appointments of Independent Members to Investment Committees where the investment decisions need to be made independently of the Investment Advisor.
DMS Governance professionals sit on the Conflicts Committees for a number of Private Fund managers in the U.S.. The appointment of a suitably qualified independent professional to the Conflicts Committee helps to strengthen the overall Governance model of the Investment Manager, providing great comfort to Institutional Investors and may be required to resolve specific ERISA related matters.
Independent Fund Representative:
This role is particularly applicable to Private Debt structures. The role of the IFR is to provide independent confirmation that the valuation process applied to the loans originated onshore and is correctly followed prior to sale to the non-U.S. vehicle. The IFR is not itself valuing the loans, rather it is a governance role that bolsters the ability of the originator to demonstrate that the sale to the offshore vehicle is a truly arms-length transaction.
In some cases the Investment Manager needs to divorce itself entirely from the Fund GP. DMS provides independent directors to the GP, as well as Trustee services via DMS Bank & Trust to hold equity interest in the GP.
More institutional investors are mandating Investment Managers to apply independence to onshore U.S. corporate funds and LP vehicles, with a particular focus on areas such as conflicts mitigation and expense allocations. DMS regularly takes on mandates for U.S. Independent Governance for Private Fund managers. In addition, under the Cayman Private Funds Law 2020, where the GP controls Cayman LP fund(s) filing an application with CIMA it must appoint two individuals to the board of the GP, prompting many groups to appoint at least one Cayman expert to the board of the GP entity.