Fund administration: the customer still comes first

In this fast-changing world of technological advancements and regulatory developments, the role of the fund administrator is ever-evolving—but client service is still the key, as Susan Levy-Elliott from Cayman National Fund Services explores.

In 1993, when the Mutual Funds Law came into effect in the Cayman Islands, there were only a handful of fund administrators—today approximately 100 administrators are licensed here.

This growth is founded upon the well-recognised strengths of the Cayman Islands as the leading hedge fund domicile, including our robust regulatory environment which meets international standards, our tax neutrality and our economic and political stability.

All these features are founded upon a reliable and sophisticated legal system and, over time, all these factors have resulted in the concentration of a vast amount of relevant professional expertise in the Cayman Islands, including within the administration sector.

The role of a fund administrator has altered substantially, particularly in recent years, and continues to evolve. Nowadays, due to increased and ever-changing regulatory requirements, technological advancements, increased complexity of the markets and more sophisticated investors, the fund administrator wears multiple hats and, instead of having a limited engagement with a client’s servicing for only a few days each month, the administrator’s role now provides ongoing, day-to-day servicing in a broad range of areas.

Long gone are the days when a fund administrator would do little more than periodically “strike a NAV”, presumably in Excel. The scope of the administrator’s work now generally includes:

• Maintaining records for the fund in accordance with its governing documentation;
• Preparing NAV calculations for the fund;
• Reviewing and reconciling securities and cash position statements;
• Independently valuing securities;
• Calculating and accruing fees;
• Preparing annual financial statements;
• Liaising with the auditor and facilitating the timely completion of the audit process;
• Communicating with investors regarding their activities;
• Processing investors’ transactions;
• Preparing and distributing investors’ NAV statements;
• Maintaining the registers of participating shares/LP interests;
• Conducting AML duties on behalf of the fund;
• Ensuring the fund’s compliance with all relevant legal and regulatory requirements;
• Conducting any necessary regulatory filings;
• Liaising with counterparties and other service providers re ongoing requirements; and
• Facilitating fund governance meetings.

Without doubt a key function of the fund administrator remains the validation and valuation of assets but, as can be inferred from the above (non-exhaustive) list of responsibilities, administrators now require a far broader range of skillsets, expert knowledge and capabilities in order to best protect the interests of investors.

The expansion in the scope of an administrator’s responsibilities is ongoing and, against this dynamic background, raises some interesting questions on how an administrator should be selected to provide the best fit for a fund. There is a vast spectrum of fund characteristics and there is likewise a significant range of fund administrators, each with its own characteristics.

Fund administration ranges from small, boutique type companies that are generally geared towards smaller clients or startups, to the international, global administrators, which are often small parts of much larger financial services institutions.

Generally, when deciding upon a fund administrator, there are some key aspects to consider.

Service provider background and stability

It is prudent to know how long the fund administrator has been in in the industry. Experience counts and the administrator should have many decades of experience overseeing funds and should have developed systems and procedures to address challenges. Reputation should be considered, along with the number of clients the fund administrator provides services for. Also, the stability of the company, staff turnover, along with disaster recovery and business continuity must be assessed.

Personnel and service team

It really goes without saying but fund administration staff need to be qualified to do the job. They should have the relevant experience, along with regular training, and be briefed on industry updates. Certain fee calculations can be complex, and the administrator must be able to accurately process these in a prompt manner.

There should be enough support staff for reviewing of the work and segregation of duties. A good fund administrator splits its services into specific areas to allow specialisation and has dedicated staff to support each area. While independence is absolutely vital, an administrator should have a strong connection with the client, with a sense of a shared objective to operate the fund optimally.

Technology

The fund administrator should have a sophisticated platform in place that is built for alternative investments. Processes should be automated and maintained in a centralised database. This type of system will minimise errors and save significant time on a daily basis. It will support a wide group of strategies, and asset classes.

It will allow integration between the shareholder record-keeping and accounting systems, and compile information in a manner that is useful for audit and tax purposes, analytics, and compliance reporting. Also, cybersecurity threats are on the rise, and risks like these must be managed proactively.

Controls and compliance

The fund administrator must have up-to-date documented policies and procedures in place, and there must be checks and balances to ensure these are in effect. The accounting standard SSAE 16, SOC1 certification is a key item to have, as it documents the required internal controls including processes, quality control, risk, and business growth. An administrator that has this certification is meeting higher standards. These compliance documents allow the protection of investor information, as well as data security.

Regarding the regulatory compliance requirements of a Cayman Islands-domiciled fund, a fund administrator based in this jurisdiction has a key advantage in being abreast of the industry’s best practices, as well as the country’s dynamic regulatory framework and requirements.

Innovation

New products and ideas must constantly be evaluated in order to offer clients the best services. Fund administrators must strategise, and demonstrate the flexibility to navigate rapid change and growth. In fact, the fund administrator must bring the subject matter expertise to the table so that evolving obligations of the fund can be met.

According to the EY 2017 Global Hedge Fund and Investor Survey, “Technology-driven disruption is changing financial services organisations enterprise-wide. Today, it’s not about having a digital strategy—it’s about defining your business strategy in a digital world. Disruptive innovation will touch every aspect of our lives. It is the future of business, and the world. The accelerated pace at which everything is changing means that the industry has to look at things differently and think in new ways.”

References

When choosing a fund administrator, it is advisable to obtain referrals from other third parties such as lawyers, auditors, and brokers who deal with administrators on a daily basis and can attest to their performance. It is also a good idea to request client references from the administrator.

What really counts

Administrators need to be flexible, to be always developing their expertise and to ensure they make the grade on the key considerations outlined above. The real differentiator, however, is more about human qualities and attitudes than systems or the like. What really counts and makes a difference is an administrator’s attitude to prompt, efficient, professional servicing. Administrators need genuinely to care about the quality of service they provide, and that attitude is the cornerstone of a successful relationship between a fund and its administrator.

While the industry and the role of an administrator may have changed dramatically over the years, the prioritisation of client servicing should always be paramount.  

Susan Levy-Elliott is the deputy head of funds at Cayman National Fund Services. She can be contacted at: susan.levy@cnifs.com