Key Considerations In Director Selection

Operational risk, which includes weaknesses in a fund’s operational infrastructure and control environment, is not diversifiable and can adversely impact the value of a fund. Given the fund delegates out all operational functions, it is essential that thorough due diligence is performed on the service providers to a fund, including the directors, who have oversight responsibility for these providers.

Q. Is an independent non-executive board of directors required?

A. In limited cases independent directors may be legally required (e.g. for certain stock exchange listings), but this is not generally the case. Rather the need for an independent non-executive board is often a requirement of institutional allocators and investors. While the definitions of independence vary, it ultimately requires that directors are independent of major conflicts of interest, and in particular, conflicts that may arise between the fund and its various service providers.

Q. Are there minimum requirements for firms providing directorship services?

A. Directors of Cayman Islands investment vehicles are required to comply with the requirements of the Director Registration and Licensing Law, 2014.  While this law places directors under the regulatory oversight of CIMA, it does not dictate how professional services firms and their directors conduct business.  It is important, therefore, to perform extensive due diligence before appointing directors to your fund’s board. At a minimum you will want directors with appropriate industry experience and relevant qualifications in order to add value to the oversight function as well as provide comfort to your investors and prospective investors. Specific consideration should also be given to such factors as years of industry experience, education and professional qualifications, relevant exposure to different fund structures and strategies serviced, as well as indications of their stability, such as the number of years they have been in business, their professional insurance coverage and whether they have a business continuity plan in place.

Q. Will the inclusion of independent directors slow down the decision making process?

A. At Harbour, we understand the fast pace of the fund industry and we appreciate that there is a commercial need for decisions to be made in a timely manner. Further, we are actively engaged with and have an ongoing working relationship with all of our funds service providers, as such we are able to quickly get up to speed and address issues that arise. Early inclusion in the decision process also saves time, as we can suggest solutions based on our extensive experiences across a broad and diverse fund client base.

Q. What if the individual serving as a director is out of the office?

A. While each director is individually appointed to the board, Harbour uses a team structure to support them. Dedicated service teams, familiar with relevant materials and issues, are assigned to each fund. If the named director is not immediately available, members of your service team are always on hand to assist. Team members then liaise with the director, or a suitably experienced alternate, to ensure that matters are dealt with on a timely basis. Of course, all members of our management team also carry smartphones and are always contactable even when out of office.

Q. Will you participate in investors’ due diligence processes?

A. We appreciate that investors have increased the level of due diligence performed on all of a fund’s service providers, including its directors. We are happy to cooperate with requests for dialogue and information so as to provide investors with the comfort they require in order to make an informed investment decision. We have shared our model and processes with many of the world’s largest hedge fund allocators and operational due diligence professionals and have achieved their highest ratings.

Q. Will you remain involved throughout the life of the fund?

A. We can provide corporate governance throughout the life cycle of a fund, including from set up and launch through to wind down and closure. Engaging directors early in the set up process can add significant value. Knowledgeable directors that have extensive experience can provide invaluable insight at the launch and set up stage. Benefits include providing operational input on the constituent documents, such as offering guidance on valuation polices or dealing terms. We also have extensive experience reviewing service provider contracts and can provide guidance on standard matters, such as indemnification and anti-money laundering language. Another area that is often not considered at launch, but which may ultimately happen at some point, is winding down the fund. Our wealth of experience combined with an affiliated corporate recovery group means that we can provide everything from guidance on winding down and restructuring right through to formal liquidation services.