Concerns in the U.S. and Europe over security leaks and the debate about access to public versus private information runs in some ways parallel to the discussion regarding the information investors prefer and require to make informed decisions about their investments in Cayman Islands funds.
New investors in a Cayman Islands fund may expect that such investment entitles them to information about the fund analogous to what would be disclosed by a public company.
However, subject to the attitude of the fund and its investment manager, and the investor’s bargaining power, an investor may not in fact be entitled to receive information they may feel necessary to be fully informed regarding the fund’s performance and risk management procedures, amongst other matters.
The starting position
While each fund is different, the information an investor is commonly entitled to receive in respect of their investment is; (i) annual audited financial statements; (ii) updates from the investment manager in the form of an investment report, which might cover fund performance, together with commentary on what external economic circumstances affected the trading of the fund and the potential future investment direction; and (iii) the independent fund administrator’s monthly/periodic net asset value calculation. The investment manager’s reports may be issued monthly, quarterly or otherwise and the annual audited financial statements should be prepared and filed with CIMA within six months of the fund’s financial year end.
The fund’s offering document will outline the information which the fund will provide its investors. However, there are no substantive Cayman Islands statutory provisions that require the provision of information to investors, save for the obligation in the Mutual Funds Law obligation to detail in the offering document all information necessary for an investor to make an informed decision regarding whether or not to invest in the fund. It is also important to note that closed-ended funds such as private equity funds are not required to register with CIMA and thus are not subject to this requirement.
Beyond the offering document
The articles of association of the fund should be reviewed to determine whether they provide investors with the right to obtain any information in addition to that provided for in the offering document. However, that is often not the case.
If a prospective investor intimates that they wish to receive more extensive information than the offering document specifies will be provided, the fund may consider entering into a side letter with the investor. A side letter is a written agreement whereby the fund grants certain entitlements to an investor that are additional to those set forth in the offering document and/or articles of association. Arguments have been raised regarding the fairness and appropriateness of the use of side letters in such a manner; however, it is still common practice. There is not enough room in this article to discuss more technical issues regarding the enforceability of side letters, a matter which has to a limited extent been addressed in recent decisions of the Cayman Islands courts.
It is, however, important to note that if a side letter is entered into which affects the suitability of the fund for investment by other investors, then the terms of the Mutual Funds Law would require disclosure of the relevant terms of such side letter to all investors. An obvious example would be if the fund agrees to additional investment trading restrictions.
Where an investor has raised a grievance with CIMA regarding the inability to obtain information from a registered fund, we have seen CIMA take a pro-active role in liaising between the fund and the investor. CIMA usually ask questions of the fund and its directors to ascertain whether further regulatory action may be required. Providing CIMA with a helpful and deliberate response is advisable in order to ensure CIMA is confident that the fund and its directors and manager are capable of resolving such issues fairly. CIMA play a vital role in providing a strong review of the industry.
We recommend investors obtain agreement to the provision of such additional information regarding the operations of a fund as they feel may be required prior to an investment being made.
An investor should always consider the reliability of the requested information. Where further information is available to an investor from either the investment manager or another service provider, such as the administrator, consideration should be given as to whether the information from the independent administrator is more reliable.
An investor may require more extensive information than normally provided due to regulatory, securities or tax requirements applicable in their home jurisdiction. It is, for example, common for pension funds to require the provision of additional information so as to be able to satisfy their own regulatory requirements. In some instances, an investment manager may not be in a position to confirm whether this is a genuine need for information or whether there is an intentional exaggeration by the investor to obtain further information for commercial advantage.
If fees are to be incurred in collating and preparing the information, it may be reasonable to address who should bear the costs; the fund − and other investors − or the requesting investor.
There is a trend toward more transparency of Cayman Islands funds driven by institutional investors, regulators and risk management considerations. United States and European regulators have significantly enhanced the disclosure requirements applicable to investment managers situated in their jurisdictions. The Cayman Islands provides a flexible framework for a fund and investors to set the parameters regarding the sharing of information. The Cayman Islands courts have ample experience in analyzing offering documents, enforcing investor rights where contractually provided for and ensuring adherence to established principles.
Some investment managers, however, remain reluctant to provide further information where, for example, it may contain direct or indirect evidence of proprietary trading systems employed by the investment manager, as this could allow an investor either to effect trades against the fund or replicate the investment manager’s strategy, reducing opportunities for the fund. This is particularly relevant in fund investments in thinly-traded or illiquid markets.
CIMA’s recently released report “Cayman Islands Hedge Fund Corporate Governance Survey” contains other fertile areas for discussion. These include consideration of issues such as disclosure of the number of directorships held by directors of Cayman Islands funds; which has been of ongoing interest for some years, without resolution.
However, there are other matters that have not received the same level of attention such as transparency to investors regarding corporate governance practices of a fund’s board of directors. This could be as simple as whether investors are aware of how many meetings the fund’s board holds per annum. Another more controversial example is whether the minutes of meeting of the directors of funds should be made available to investors.
Investors are keen to avoid making investment decisions to invest in or redeem from a Fund without having all relevant information. It is for Cayman independent directors, administrators, attorneys and others to work with investment managers to meet the enhanced expectations of investors, to avoid the possible loss of investor confidence.