May 17, 2018

Ten Key Policies Fund Managers Should Include in Their Employee Handbooks (Part Two of Three)

In order for advisers to fully benefit from the advantages that employee handbooks can provide, the policies within those handbooks need to be well-drafted; tailored to the adviser; fairly and uniformly administered; and compliant with applicable law. This article, the second in our three-part series, reviews ten policies that advisers should consider including in their handbooks, including a statement on at-will employment as well as policies prohibiting discrimination and harassment in the workplace. The first article outlined the key benefits to fund managers of adopting employee handbooks, the laws that frequently inform the policies included in handbooks and the administration of employee handbooks. The third article will explain how advisers can avoid common mistakes when drafting their employee handbook policies. See “How Investment Managers Can Prevent and Manage Claims of Harassment in the Age of #MeToo” (Dec. 14, 2017).

In Madoff-Related Litigation, Cayman Court of Appeal Holds That a Liquidator May Not Adjust a Shareholder’s NAV, Even When Based on Fictitious Profits

Over a period of at least 17 years, Bernard L. Madoff operated what is likely the largest Ponzi scheme in history. The financial fraud has given rise to claims and litigation in various jurisdictions, including the Cayman Islands, where liquidators have been seeking to recover assets for distribution to investors. The Cayman Islands Court of Appeal (CICA) recently held that the relevant legislative provisions do not empower an official liquidator to go behind a contractually binding (but misstated) net asset value (NAV), even where it is based on fictitious profits, and substitute a correct NAV in its place. The CICA’s approach is in line with recent Privy Council authority, favoring certainty for investors over open-ended liability to repay redemption monies received. In a guest article, Nick Hoffman and Paul Madden, partner and senior associate, respectively, at Harneys, provide an overview of the history of the case and discuss the CICA’s holding that applicable law did not permit the liquidator of the fund to change the fund’s NAV. Viewed as a victory for investors in Cayman Islands funds, this decision serves as a reminder to advisers of the importance of understanding a fund’s formation and offering documents, which in many cases will be respected and enforced by the courts. For more on the Madoff fraud, see “Can the Madoff Trustee Recover Disbursements of Fictitious Investment Returns Made to ‘Remote’ Transferees?” (May 27, 2009); “Certain Madoff Investors May Find Themselves in an Unusual Dual Role – As Potential Lawsuit Plaintiffs or SIPA Claimants, but Also As Potential Clawback Defendants” (Mar. 4, 2009); and “Involvement of Funds of Funds in Alleged Madoff Fraud Reemphasizes Importance of Due Diligence” (Dec. 24, 2008).

Funds and Managers Must Be Wary of State, in Addition to Federal, Regulatory Scrutiny of ICOs

On March 27, 2018, the top securities regulator in Massachusetts issued consent orders halting five initial coin offerings (ICOs) based on allegations that the tokens constituted unregistered securities in violation of state law. While there has been increased federal scrutiny of ICOs by the SEC and the CFTC, these orders suggest that cryptocurrency market participants should also be wary of state regulators. This article examines the recent Massachusetts orders; reviews actions taken by other state securities regulators against those involved in the ICO and cryptocurrency markets; and discusses recent legislation adopted by certain states to regulate, or, in some cases, exempt from state regulations, ICOs and virtual currencies. For more on the position of federal regulators as to cryptocurrencies, see “Virtual Currencies Present Significant Risk and Opportunity, Demanding Focus From Regulators, According to CFTC Chair” (Feb. 8, 2018); and “SEC Cyber Unit Files Charges Against Allegedly Fraudulent ICO” (Jan. 11, 2018).

Luxembourg Remains a Significant Point of Entry for Non-E.U. Managers to Raise Capital in the E.U.

The Association of the Luxembourg Fund Industry (ALFI) recently organized a seminar that offered a current look at the state of cross-border fund marketing in the E.U. and opportunities for non-E.U. managers to gain access to that market through Luxembourg. The seminar, which was hosted by Anouk Agnes, deputy general director of ALFI, featured a keynote address from H.E. Pierre Gramegna, Luxembourg’s Minister of Finance, as well as panel discussions with representatives from financial services, legal and accounting firms, in addition to asset managers. This article summarizes Gramegna’s address and highlights the key points from the portions of the seminar that covered marketing funds in the E.U. and setting up an E.U. alternative investment fund manager. See “Six Common Misconceptions U.S. Fund Managers Have About Marketing in Europe” (Mar. 9, 2017).

SEC Settles Three Additional Enforcement Actions for Inadequate Share-Class Disclosures

In connection with the SEC’s continued focus on the selection of mutual fund share classes by investment advisers, the agency recently settled three separate enforcement proceedings with investment advisers. In an effort to maximize the 12b‑1 fees it collected, each respondent allegedly failed to purchase the lowest-cost mutual fund share class for its advisory clients and failed to disclose the conflict of interest presented when purchasing mutual fund share classes for advisory clients. These actions evidence the SEC’s continued focus on conflicts of interest, particularly in connection with share class selection and investor protection. This article details the SEC’s allegations in each of the three proceedings, the alleged compliance failures of the respondents and the terms of the three settlements. For other recent enforcement actions involving mutual fund share class recommendations, see “Ameriprise Settlement Reflects Continued SEC Focus on Conflicts of Interest and Retail Investors” (Apr. 19, 2018); “Recent SEC Settlement Evidences Agency’s Continued Aggressive Enforcement of Conflicts of Interest” (Sep. 21, 2017); and “Advisers Investing Client Assets in Affiliated Funds Could Face SEC Scrutiny for Conflicts of Interest” (Oct. 13, 2016).

FCA Chief Executive Offers Perspectives on the Importance of Asset Management

Andrew Bailey, Chief Executive of the U.K. Financial Conduct Authority (FCA), recently offered his thoughts on the asset management industry, including the role of – and risks resulting from – the growth of fund involvement in market finance; challenges faced by the U.K. asset management industry; and E.U. regulatory developments, including recent legislation and the growth of technological innovations. Bailey’s remarks provide fund managers with valuable insight into the FCA’s perspectives on the asset management industry and its importance to the global economy. This article highlights the key points from his speech. For additional commentary from Bailey, see “FCA Chief Executive Touts Senior Managers Regime and Remuneration Restrictions As Important Incentives to Promote Good Culture at Fund Managers” (Apr. 12, 2018).

Upcoming HFLR Webinar to Explore Financing Options Available to Private Funds

Please join the Hedge Fund Law Report on Tuesday, May 22, 2018, at 10:00 a.m. EDT, for a complimentary webinar entitled “An Introduction to Fund Finance Structures.” The panelists will discuss the main features of the key financing options available to private funds, as well as recent developments in the fund finance market. The webinar will be moderated by Kara Bingham, Associate Editor of the Hedge Fund Law Report, and will feature Jeff Johnston, managing director at Wells Fargo Securities, LLC; Fabien Carruzzo, partner at Kramer Levin; and Matthew K. Kerfoot, partner at Dechert. To register for the webinar, click here.

Former Investment Management GC and CCO Joins Stroock As Partner in New York

Michael S. Emanuel has become a partner in the private funds group in Stroock’s New York office. Emanuel was most recently in-house as the general counsel, chief compliance officer and co-chief operating officer of an asset management firm. For coverage of another recent hire at Stroock, see “Stroock Adds Private Funds Partner in New York” (Oct. 12, 2017). For commentary from another Stroock partner, see “Becoming a Plan Assets Fund May Limit Hedge and Other Private Funds’ Abilities to Charge Fees” (Apr. 21, 2016); and “Recent Developments Affect Classifications of Control Groups and Fiduciaries Under ERISA” (Apr. 14, 2016).