Oct. 17, 2019
Oct. 17, 2019
Navigating the Interpretation Regarding an Investment Adviser’s Standard of Conduct: What It Means to Be a Fiduciary (Part One of Three)
SEC Commissioners recently published an Interpretation Regarding Standard of Conduct for Investment Advisers (Interpretation), which was part of a collection of rulemakings and interpretations that also included the adoption of Regulation Best Interest and the Form CRS relationship summary, as well as the publication of an Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion From the Definition of Investment Adviser. For SEC-registered investment advisers that advise private funds and other institutional clients, the Interpretation is, by far, the most relevant to their businesses out of this package of regulations and guidance. This three-part series examines the practical implications of the Interpretation for private fund managers. This first article provides an overview of the Interpretation and explores six key takeaways for fund managers from the Interpretation. The second and third articles will explore how fund managers can adopt a more systematic approach to identify, mitigate and monitor their conflicts of interest in light of the SEC’s detailed discussion within the Interpretation regarding an adviser’s obligation to “make full and fair disclosure of all conflicts of interest which might incline an investment adviser . . . to render advice which is not disinterested.” See “SEC Chair Defends Regulation Best Interest and Investment Adviser Fiduciary Duty” (Sep. 19, 2019).
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Cayman Funds May Claw Back Redemption Payments to Investors Under Recent Decision
The received wisdom is that it is very difficult to mount a successful claim to claw back a redemption payment made to an investor in a Cayman fund. That view, which dates back to at least 2014 and the decision in Fairfield Sentry v. Migani (Fairfield Sentry), must now be revisited in light of a recent decision from the Cayman Islands courts. In a guest article, Peter McMaster QC and Mehreen Siddiqui, partner and associate, respectively, at Appleby, explain the most recent decision and examine why it undermines Fairfield Sentry, before discussing the possibilities that it opens up and its practical implications for fund managers. See “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” (May 17, 2018). For additional commentary from Appleby attorneys, see “How Fund Managers Should Prepare for the Cayman Islands Data Protection Law” (Sep. 12, 2019); and “Cayman Economic Substance Has Arrived: Steps In-Scope Fund Managers Must Take to Respond” (Jun. 27, 2019).
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Preparing for and Navigating Operational Due Diligence by Investors
An unsatisfactory operational due diligence (ODD) review can cause an investor to pass on an investment opportunity, regardless of the success of the manager’s investment team, cautioned the speakers at a recent Eze Castle Integration (ECI) seminar. The program examined the growing importance of ODD; ways advisers can prepare for ODD; certain ODD red flags; third-party management; and information technology and cybersecurity concerns. Olivia Munro, senior marketing specialist at ECI, moderated the discussion, which featured Mary Beth Hamilton, vice president of ECI, and Frank L. Napolitani, managing director at consulting firm Constellation Advisers, LLC. This article summarizes the key takeaways from the program. See “Perspectives on Operational Due Diligence From an Investor, Consultant and Manager” (Nov. 9, 2017).
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Survey Finds Widespread and Increasing Use of Alternative Data by Hedge Funds
More than four-fifths of hedge fund respondents in a recent Lowenstein Sandler survey indicated that their firms now use alternative data, and another seven percent expect to use alternative data in the next six to twelve months. Moreover, fund managers are seeking new types of alternative data and increasing their alternative data budgets. This article explores those and other key findings from the survey report. For additional insight from a partner at Lowenstein Sandler on the opportunities and risks presented by big data, see our three-part series: “Acquisition and Proper Use” (Jan. 11, 2018); “MNPI, Web Scraping and Data Quality” (Jan. 18, 2018); and “Privacy Concerns, Third Parties and Drones” (Jan. 25, 2018).
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Conversion of Voting Securities in a Merger May Trigger Hart‑Scott‑Rodino Notification Filing Requirement
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) requires an acquiring entity to notify the Federal Trade Commission and the DOJ when it proposes to make an acquisition that would result in the acquiring entity owning securities or assets of the target valued at more than a specified threshold. Daniel S. Loeb’s Third Point LLC (Third Point) and three funds that it manages learned the hard way that notification is also required when a fund that holds a position in a party to a merger – and that made the requisite HSR Act filings prior to taking that position – receives shares of the new entity that results from the merger. This article examines the DOJ’s complaint against Third Point and its funds, as well as the terms of the proposed final judgment settling the action. The case is an important reminder that an investor may be subject to HSR Act notification obligations in connection with a prospective merger, even if the investor made the requisite filings when taking a position in one of the constituent companies. See “Seward & Kissel Private Funds Forum Offers Practical Steps for Fund Managers to Address HSR Act Enforcement, Tax Reforms, Brexit Uncertainty, MiFID II, Cybersecurity and Side Letters” (Oct. 20, 2016).
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Dorsey & Whitney Adds Matthew J. Bromberg to New York Office
Matthew J. Bromberg has joined Dorsey & Whitney as a partner in the corporate group in its New York office. Having held various in-house roles and served in private practice, Bromberg has provided legal counsel relating to fund formation, registration and the day-to-day operation of investment advisers. He has expertise in exchange traded funds and mutual funds; separately managed account programs; and turn-key asset management platforms. See our three‑part series on mitigating conflicts arising from managed accounts: “Why Managed Accounts Present Conflicts of Interests” (Jul. 18, 2019); “Dealing With Enhanced Transparency and Liquidity” (Jul. 25, 2019); and “Dealing With Trade and Expense Allocations” (Aug. 1, 2019).
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