While day-to-day control of a hedge fund is largely vested in the hedge fund’s manager, the relationship between manager and fund is marked by inherent conflicts of interest. See, e.g., “When and How Can Hedge Fund Managers Engage in Transactions with Their Hedge Funds?
,” Hedge Fund Law Report, Vol. 4, No. 45 (Dec. 15, 2011). Hedge fund investors generally look to three factors to mitigate those conflicts: law, practice and structuring. Legally, fiduciary duty and regulatory and private enforcement of securities laws are intended to mitigate conflicts. Practically, reputational considerations and basic canons of ethical behavior are expected to limit manager overreaching. And structurally, the boards of directors of certain hedge funds are intended to serve as a check on manager conflicts and other manager behavior contrary to the interests of investors. Prior to the credit crisis, investors looked primarily to the first two factors to police conflicts. After the credit crisis and the concomitant exposure of notable frauds, investors and regulators are paying increasing attention to the role of hedge fund boards as the investor’s internal advocate. In short, investors and regulators now expect directors to be informed, engaged and competent. This view was resoundingly echoed by the Grand Court of the Cayman Islands in the August 2011 Weavering Macro Fixed Income Fund Limited (In Liquidation)
decision, in which the Grand Court found hedge fund directors personally liable for losses caused by their willful failure to supervise fund operations. See “Corporate Governance Best Practices for Cayman Islands Hedge Funds
,” Hedge Fund Law Report, Vol. 5, No. 3 (Jan. 19, 2012). It is one thing to say that hedge fund directors need to be more informed, engaged and competent. It is another thing altogether to define with specificity what these concepts mean in practice. In an effort to do so, a session at the Regulatory Compliance Association’s Spring 2012 Regulation & Risk Thought Leadership Symposium will focus on hedge fund governance. That Symposium will be held on April 16, 2012 at the Pierre Hotel in New York. Subscribers to the Hedge Fund Law Report are eligible for discounted registration. As part and parcel of the RCA’s effort to define with specificity the role of hedge fund directors, the Hedge Fund Law Report recently interviewed Roel Campos, one of the anticipated participants in the fund governance session, a former SEC Commissioner and a current Partner at Locke Lord LLP. Campos’ high-level SEC experience gives him particularly useful insight into regulatory expectations with respect to hedge fund directors; and his regulatory experience is complemented by private legal practice and corporate experience. Campos, accordingly, has a uniquely well-rounded view of what hedge fund directors should do, and the practical constraints on what they can do. Our interview focused on: the key purposes and goals of hedge fund boards; how hedge funds can make their boards more effective and accountable; what constitutes an “independent” director; the role to be played by hedge fund boards in the valuation of assets and implementation of risk management policies; the maximum number of boards on which one director can serve; whether investors should talk to hedge fund boards during the due diligence process; and whether hedge funds should conduct background checks on prospective directors. This article contains the full transcript of our interview with Campos.