Managing the suspension No investor wants to hear that their fund is being suspended. But


once the die is cast, the operators need to manage what unfolds very carefully until normal operations can resume if, indeed, they can resume. Taking a step back, it goes without saying that the suspension resolutions should cite the correct reasons for initiating the suspension, and the procedure should be carried out in accordance with the fund documentation and constitutional documents. With increasing scrutiny of the role of independent directors of funds, and further pressures for reform in this arena, minds will no doubt be focused on ensuring that the processes comply with the requirements set out in a fund’s organisational documents. What an operator does not want to do is to provide an opportunity, or the grounds, for an investor to present a petition for the winding up of the fund, on ‘just and equitable’, or any other, grounds.


“There are scores of unredeemed investors and unpaid redeemed investors, hoping, waiting and, in many cases, litigating their way back to what is left of their investment returns.”


Ultimately, if suspensions are not managed appropriately, there is


no doubt that the reputation of the operator can be put at serious risk. And in this industry, a great reputation takes years to establish but only a moment to lose.


So, what is the report saying, and should Cayman fund operators


pay heed despite its not having direct applicability? Six best practice principles are discussed and outlined, but there


are two which we would like to highlight in this article, namely (i) disclosures to investors, and (ii) what steps operators should take during a suspension.


The mechanics of disclosures to investors are simple, and most jurisdictions currently require operators to disclose in the offering memorandum their ability to suspend redemptions to investors, before they invest. Indeed, it has long been the practice for Cayman fund operators to make these disclosures prominent. More importantly, the constitutional documents should provide that redemptions can be suspended and set out the possible reasons and criteria for the suspension. The recent landmark Privy Council decision definitively highlighted the importance of a fund’s constitutional documents in the suspension process. Principle 3 of the report emphasises this importance and also suggests that suspensions should be allowed to occur only in ‘exceptional circumstances’.


In jurisdictions such as the Cayman Islands, where the Mutual


Funds Law or other applicable law does not contain a definition of ‘exceptional circumstances’, the report recommends the inclusion of ‘non-exhaustive’ examples of what might constitute ‘exceptional circumstances’, instead of the use of definitions. It was felt that as definitions in offering memoranda may in time become dated, or out of touch with market developments, or inadvertently exclude circumstances which could, in time, be considered ‘exceptional’, the better approach was to avoid definitions where possible.


48 CAYMAN FUNDS | 2012


Where the suspension is ongoing, the decision to maintain the suspension should be regularly reviewed by the operators and, as Principle 8 in the report recommends, all necessary steps should be taken with regard to the best interests of the investors as a whole. Directors may therefore wish to consider whether seeking independent professional advice in respect of the valuation or potential for resale of the illiquid assets is appropriate. Until liquidity returns (for the fortunate ones) and the suspension is lifted, or the fund is ultimately wound up, the operators must keep investors informed of the decisions that are being taken.


Should operators be interested in the report? The short answer


is ‘yes’. As we know, the Cayman Islands continues to lead as the domicile of choice for offshore funds and hedge funds, so it is certainly possible that the Cayman Islands Monetary Authority will, at some point, review, and even implement as appropriate, the principles and practical guidance contained in the report. It would be good for operators to be one step ahead of the game.


Jonathan Fitzgibbons is a partner in the corporate/commercial and funds group of Solomon Harris, a Cayman Islands law firm. He can be contacted at: jfitzgibbons@solomonharris.com


Simone Proctor is a senior associate in the corporate/commercial and funds group of Solomon Harris, a Cayman Islands law firm. She can be contacted at: sproctor@solomonharris.com


Jonathan Fitzgibbons has been in private practice for more than 10 years, with the last five years of his experience spent practising in the Cayman Islands. He specialises in corporate and commercial matters and investment funds.


Simone Proctor has more than eight years of corporate and investment funds practice in the UK. She specialises in corporate, investment funds and regulatory matters.


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60  |  Page 61  |  Page 62  |  Page 63  |  Page 64  |  Page 65  |  Page 66  |  Page 67  |  Page 68  |  Page 69  |  Page 70  |  Page 71  |  Page 72  |  Page 73  |  Page 74  |  Page 75  |  Page 76  |  Page 77  |  Page 78  |  Page 79  |  Page 80