Understanding the Legal Obligations of Fund Directors

Introduction

Gibraltar has cemented its position as a thriving financial hub, offering a sophisticated and well-regulated environment for investment funds. Its strategic advantages, including a competitive tax regime, direct access to the UK market post-Brexit, and a regulatory framework aligned with international standards, make it a jurisdiction of choice for fund managers and investors alike.

However, beyond the jurisdiction’s structural benefits, the integrity and success of its funds industry rest heavily on strong governance. At the heart of this governance framework lies the role of fund directors, who must navigate a web of fiduciary duties. The duties owed by directors to the company and the fund alike ensure that the appointed individuals holding the office of director act diligently and in the best interests of investors while upholding regulatory compliance and ethical standards.

Gibraltar’s Regulatory Framework for Fund Directors

Gibraltar’s funds sector is underpinned by a robust regulatory framework that imposes stringent obligations on directors. The Financial Services Act 2019 (FSA 2019) provides the overarching legal structure, while the Gibraltar Financial Services Commission (GFSC) oversees compliance and governance within the industry. Additionally, directors of funds structured as Experienced Investor Funds (EIFs) are subject to specific requirements under the EIF Regulations, reinforcing their fiduciary responsibilities.

Directors of Gibraltar-regulated funds are expected to possess the requisite knowledge and experience to oversee fund operations effectively. They are also responsible for ensuring compliance with international best practices, including those derived from the Alternative Investment Fund Managers Directive (AIFMD) and other global regulatory standards.

General Legal Duties of Directors

Generally, the duties owed by the directors to a company are derived from both common law and statutory principles. Director and officer duties in Gibraltar are not codified under the Companies Act 2014. Instead, they are imposed by virtue of English common law and the equitable and fiduciary duties that were in place prior to the introduction of the UK Companies Act 2006. The main duties owed by directors are the following:

(a)     to act bona fide/in good faith in the best interests of the company;

(b)     to act for proper purposes and not act for collateral or improper purposes;

(c)     to exercise independent judgment;

(d)     to avoid conflicts of interest; and

(e)     to exercise reasonable skill and care.

Key Duties of Fund Directors

1. Duty to Act in Good Faith in the Best Interests of the Company

Fund directors are obligated to act bona fide in the best interests of the company and its investors. This means making decisions with honesty, integrity, and a focus on long-term sustainability rather than short-term gains. Directors must ensure that their actions align with the fund’s objectives and serve the collective interests of the fund and its investors, rather than personal or third-party benefits.

2. Duty to Act for Proper Purposes

Directors must exercise their powers for legitimate business purposes and not for any collateral or improper motives. This means ensuring that every decision made aligns with the commercial objectives of the fund and does not serve personal interests or those of a particular individual at the expense of the fund. Misuse of directorial powers, such as issuing shares to entrench control rather than raise capital, would be an example of such a breach of this duty.

3. Duty to Exercise Independent Judgment

A fundamental requirement of a fund director is to exercise independent judgment when making decisions. While directors may seek advice from fund managers, administrators, or legal professionals, they must not simply follow instructions without applying their own critical thinking. Independent decision-making ensures that directors act in the best interests of the fund rather than being influenced by dominant investors or external pressures.

4. Duty to Avoid Conflicts of Interest

Directors must be vigilant in identifying and managing conflicts of interest. This includes disclosing any financial or personal interests that may compromise their impartiality. Best practices dictate that directors should implement robust conflict management policies and recuse themselves from decisions where a conflict arises.

5. Duty to Exercise Reasonable Skill and Care

Directors must carry out their responsibilities with the level of skill and diligence that would reasonably be expected from someone in their position. This duty encompasses:

• Understanding the fund’s investment strategy and risk profile to make informed decisions.

• Supervising delegated functions to ensure service providers such as administrators and custodians perform their roles effectively.

• Maintaining compliance with regulatory requirements by keeping up-to-date with evolving laws and best practices.

A failure to exercise reasonable skill and care can lead to legal consequences, including regulatory sanctions and personal liability.

Industry-Led Best Practices

Gibraltar Funds and Investments Association launched its Corporate Governance Code of Conduct back in 2013. This was further developed in 2022 with a specific addendum for Crypto Funds ensuring directors understand the nuances of the asset class.

The focus on strong governance in Gibraltar has remained with the launch of a wider Corporate Governance Code by the Gibraltar Association of Compliance Officers on the 20th March 2025.

Enforcement and Liability

Directors found to be in breach of their obligations may face:

• Financial penalties and regulatory sanctions under the FSA 2019.

• Disqualification from serving as directors of regulated entities.

• Civil claims from investors seeking redress for losses incurred due to mismanagement or breaches of duty.

Given these potential liabilities, directors must remain proactive in governance, risk management, and compliance oversight.

The Evolving Landscape of Director Responsibilities

The regulatory environment in Gibraltar continues to evolve, adapting to global trends such as sustainable finance, digital assets, and enhanced investor protection measures. Directors must stay ahead of these changes, ensuring that funds operate in line with best practices and emerging regulatory expectations.

Notably, the rise of Environmental, Social, and Governance (ESG) considerations is reshaping the role of fund directors. Investors are increasingly demanding greater transparency on ESG factors, and directors may soon find themselves responsible for overseeing ESG disclosures and sustainability risks.

Conclusion

The duties of fund directors in Gibraltar are multifaceted and crucial to the effective governance of investment funds. By acting in good faith, for proper purposes, exercising independent judgment, avoiding conflicts of interest, and demonstrating reasonable skill and care, directors can uphold the integrity of the fund industry.

As Gibraltar’s financial sector continues to adapt to global trends, fund directors must remain diligent in fulfilling their obligations, thereby ensuring investor protection and maintaining Gibraltar’s reputation as a premier jurisdiction for investment funds.