Cayman Funds 2011

INDEPENDENT DIRECTORS: EXPERIENCE ADDING VALUE

An experienced, independent director is an invaluable resource: they have dealt with myriad issues, covering the spectrum from routine to one of a kind; they have managed complex relationships, carefully balancing the interests of investors and service providers; they have launched entities, wound them down and led them through everything in between. Michelle Morgan and Philip Dickie explain the value that such directors can add at each stage of the fund life cycle.

‘Value added’ is a popular marketing catchphrase these days, associated with a wide variety of services. The phrase may also be used to describe the services provided to investment funds by professional independent directors with years of relevant industry experience.

Fund design

In the decision-making stages of fund formation, an independent, experienced director can provide guidance in an advisory role even prior to their appointment to the fund board. If needed, they will assist with the selection of an appropriate structure for each fund and instruct as to what regulatory requirements and processes are to be expected. They will be familiar with many fund service providers and will make suitable recommendations as requested. When you are interviewing other providers, these experienced individuals can help you understand what due diligence procedures to undertake. Finally, they can share information on the costs and scope of services that should be expected, enabling the fund to engage the team of service providers that represents the best match.

The launch

Attentive, independent directors will spend time performing a detailed review of the constitutive documents that legal counsel has drafted for the fund—including the offering memorandum and the articles of association or limited partnership agreement—as well as the service provider agreements. Involving such directors at an early stage in this process may actually reduce the cost and time involved in creating fund documents, as their scrutiny may catch flaws in the terms or structure that are much easier to remedy at the initial stages. They will also ensure that there is consistency amongst the documents and that the terms therein are fair and reasonable. At the end of this process, the fund will have a comprehensive suite of documents that will satisfy the due diligence requirements of potential investors, ensuring that all of the necessary functions have been appropriately delegated to service specialists.

The directors are the operators of a fund and have ultimate responsibility for overseeing all aspects of it—even those delegated to the investment manager and other service providers. They have both a personal and professional interest in ensuring that all necessary steps have been taken before allowing a fund to accept capital and proceed with its launch. At the inaugural board meeting, they not only proceed with the formal appointment of service providers and the approval of documents, but an experienced board also attends to the finer details, such as delegation of specific anti-money laundering, compliance and Money Laundering Reporting Officer responsibilities, and providing the investment manager and administrator with appropriate authorisations to administer the routine operations of the fund effectively.

Operating mode

Once a fund is up and running, the directors have a responsibility to monitor that all parties are operating within the parameters that have been initially set up and agreed upon. Any variations to the service levels provided or amendments to the underlying service agreements are reviewed and approved by the fund board. Independent directors add value by making certain that such changes are in the best interests of the fund and don’t have any unintended consequences.

As part of the fund’s corporate governance, directors are often asked to approve various exceptional transactions that fall outside of the scope of authority delegated to service providers. In considering such requests, an independent director should consider whether their consent will be unfair to any stakeholders and whether it is in the interests of the fund as a whole. As this party has no vested interest in the approval or denial of such matters, potential conflicts of interest are avoided.

While boards are often convened for ad hoc meetings to consider specific matters, directors should also hold regular board meetings. These should include key service providers such as the investment manager, the auditors and administrators. The directors can receive updates on all operational aspects of the fund during these proceedings, and use their experience to determine whether they are satisfied with the information provided.

An experienced board should ask the administrator to provide representation during these meetings that they are complying with the terms of their service agreement and that all investors have met eligibility requirements. Any significant errors or exceptions will be disclosed by the administrator and contemplated by the board. The investment manager will be asked to give a report, confirming investment compliance and providing an update on fund performance. An experienced director will hold discussions with the auditor regarding planning for the upcoming audit and then later on, the actual findings of the audit process. As they have been through the process numerous times before, these directors are able to recognise and provide guidance on any issues.

As independent directors are not typically involved in the day-to-day operations of a fund, they should request less formal operational meetings on a periodic basis, where they will engage in more detailed discussion of procedural or operational matters. In this forum, an experienced director can act in an advisory capacity and provide valuable insight.

Recently, many investors have enhanced their due diligence procedures on the corporate governance of funds. An engaged director will be willing to participate in enquiries from existing and potential investors, providing meaningful and informed discussion of the fund’s operations and the role they play therein. By being involved in this process, the director is not only assisting the investor to make an informed decision as to whether to invest in the fund, but is also enhancing the overall promotion of the fund.

Experienced directors are familiar with regulatory requirements and work to ensure the fund is in compliance with these. On an annual basis, these directors will review and approve the fund’s audited financial statements and related statutory filings. They should also look to receive confirmation that any registration fees are paid on time so that the fund remains in good standing.

Wind-down

Every fund closes at some stage and provisions should be made for this from the fund’s inception. Adirector should be able to ensure adequate planning if they have both knowledge gained from direct fund closure experience as well as from general industry best practice obtained by reviewing documents related to other cases. Such a director can also, either at an early stage or over the life of the fund as the operating environment changes, recognise any provisions in the fund documents that may prove problematic in a number of scenarios and offer practical remedies.

When it is time for a fund to wind down, it is important to do it in accordance with local laws and the constitutive documents of the fund. Even at this final stage of the fund’s life, an experienced director adds value. It is essential that a proper course of action be taken to guide the fund into liquidation, otherwise the fund may encounter legal or administrative issues that delay the liquidation process and the return of capital to investors.

Experienced directors have generally navigated several market cycles and obtained significant leadership experience under a variety of conditions. This makes the wind-down process more efficient and less time-consuming for the investment manager and the fund’s legal counsel, maximising the amount that is ultimately returned to shareholders.

The value proposition

The right director adds value throughout every stage of a fund’s life cycle. Experienced, independent directors have their finger on the pulse based on their unique positioning within the industry. They have frequent contact with regulatory bodies, liaise regularly with law firms, administrators and auditors, and participate in various industry associations and advisory groups. They have seen what structures work in different circumstances, what document wording has led to difficulties and how this could have been avoided, and what service providers are reliable in good times and in bad. They stay abreast of the latest developments in the industry and understand the concerns that investors have.

A director’s most basic purpose is to provide an overview of corporate governance, but a truly independent and experienced director can and will go one step further, providing unparalleled value to your fund.

Michelle Morgan is a Vice President at Harbour. She can be contacted at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Michelle is a qualified chartered accountant. She has over ten years of experience in the funds industry having worked in the fund administration industry in Bermuda as a director of Prime Management, and before that as a manager at Hemisphere Management (subsequently BISYS and now Citi).

 

pdickiePhilip Dickie is a Director at Harbour. He can be contacted at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Philip is a chartered accountant, certified public accountant and chartered alternative investment analyst. He has over ten years of international experience in the funds industry having worked in managerial roles at the Bank of Bermuda in Bermuda, and at UBP in both Bermuda and London before joining Harbour.