Oct. 1, 2020

How Fund Managers Can Control Legal Costs and Negotiate Outside Counsel Fees (Part One of Three)

Under constant pressure from investors to reduce their management fees, fund managers are always on the lookout for ways to cut costs. This burden is often shifted to GCs of fund managers, who are then forced to scrutinize ways to squeeze improved cost efficiencies out of their own legal departments and their outside legal counsel. Trimming expenses goes beyond the actual fees and costs charged, however, and extends to how the tasks and participants in a full legal program are managed to ensure optimization. For this three-part series, the Hedge Fund Law Report interviewed several fund manager GCs and legal-expense consultants for their insights about the best ways to manage those efforts. This first article focuses on ways fund managers can reduce legal expenses by examining the charges levied by their outside counsel and negotiating favorable fee rates. The second article will detail considerations for GCs to weigh when selecting outside counsel. The third article will suggest ways to allocate legal work between in-house attorneys, outside counsel and compliance consultants. See “The Importance of Exercising Due Diligence When Hiring Auditors and Other Vendors” (Jun. 21, 2018); and “How Fund Managers Can Develop an Effective Third-Party Management Program” (Sep. 21, 2017).

Cayman Islands Administrative Fines: How the Regime Applies to Cayman Funds (Part Two of Two)

In December 2017, the Cayman Islands implemented an administrative fines regime (Regime) in the wake of the introduction of the Monetary Authority (Administrative Fines), Regulations 2017 (as amended, the Regulations). In June 2020, the Regulations were amended to endow the Cayman Islands Monetary Authority with the power to impose administrative fines for a wide variety of breaches of Cayman laws, regulations and rules – whether the breach is an offence under the relevant law and, on occasion, over and above any other penalty that may be applied. In a guest article, the second in a two-part series, Mourant partner Sara Galletly and associate Alastair Lagrange outline the key considerations relevant to open-end Cayman funds and their managers, identifying some of the more common breaches that can result in fines, so that those breaches can be avoided. The first article reviewed the current scope of the Regime and looked briefly at the nature of the Regime and the procedures for imposing and appealing fines. For additional commentary from Mourant partners, see "Despite Fiduciary Duty Questions, Cayman LLCs Can Offer Savings and Other Advantages to Hedge Fund Managers" (Jul. 21, 2016); and “Redeemed Investors Have Priority With Respect to Payment from Liquidating Cayman Islands Hedge Fund” (Sep. 10, 2015).

SEC Continues to Emphasize Strict Compliance With Custody Rule

Investor protection is one of the SEC’s three fundamental missions. To that end, Rule 206(4)‑2 under the Investment Advisers Act of 1940, commonly known as the “custody rule,” is designed to ensure that investment advisers take appropriate care of client assets. The recent SEC settlement with a registered investment adviser is an important reminder of the need for strict compliance with the custody rule. By failing to timely complete and deliver to investors audited financial statements for two of its funds, the adviser failed to satisfy all of the criteria needed to avail itself of the exception to the custody rule’s surprise examination requirement, the SEC charged. This article reviews the alleged violations, the terms of the settlement order and common ways advisers may violate the custody rule. See our two-part discussion of the custody rule with Proskauer partner Robert Plaze: “History and Possible Amendments” (Dec. 19, 2019); and “Compliance Challenges, Common Issues and Tips” (Jan. 16, 2020).

Expert Panel Delves Into Key Employment, Staffing and Diversity Issues Faced by Fund Managers in 2020

What is the right size for a fund manager’s legal and compliance department? How has the market for in-house legal and compliance support compensation changed in recent years? What are best practices fund managers can use to address diversity issues in the current climate? How has the coronavirus pandemic affected – and, in some cases, helped – the above? These questions are only a few of the ones tackled during the recent webinar, entitled “Legal and Compliance Employment Trends in 2020: Staffing, Recruitment, Compensation and Diversity,” cohosted by the Hedge Fund Law Report (HFLR) and its sister product, the Private Equity Law Report (PELR). The program was moderated by William V. de Cordova, Editor-in-Chief of the HFLR and PELR, and featured Jennifer J. Pearson, head of human resources and employment counsel at Deerfield Management; David Claypoole, president and founder of Claypoole Executive Search; and Julie Siegel, executive managing director, chief administrative officer and deputy chief legal officer at Sculptor Capital. To access a complimentary recording of the webinar, click here.

Hedge Fund Manager Accused of Fraud for Attempting to Manipulate Bankruptcy Bidding Process

The DOJ recently unsealed a criminal complaint filed in the U.S. District Court for the Southern District of New York against a manager whose hedge fund was an unsecured creditor in the Neiman Marcus bankruptcy. The hedge fund sought to purchase certain assets in the proceeding. The manager, who co‑chaired the Official Committee of Unsecured Creditors, allegedly pressured an unnamed New York-based global investment bank with which the fund did business to withdraw a competing bid for those assets and then attempted to cover up his actions. This article details the government’s allegations and the associated securities fraud, bribery and obstruction of justice charges. For other considerations in bankruptcies, see “How Claim Traders Can Pursue Reclamation and Administrative Expense Claims in Retail and Other Insolvencies” (Jan. 26, 2017); and “BakerHostetler Event Highlights Investment Strategies, Considerations and Uncertainties of Distressed Debt Investments by Hedge Funds” (Apr. 9, 2015).

Linklaters Adds Brad Caswell to New York Investment Funds Practice

Linklaters announced that Brad Caswell has joined the firm’s New York office as a partner in the investment funds group. Caswell is an accomplished funds lawyer who counsels hedge, private equity, credit and real estate funds on operational, regulatory, compliance and fund formation matters. For additional commentary from Caswell, see our three-part series “How Should Hedge Fund Managers Approach the Identification, Prevention, Detection, Handling and Correction of Trade Errors?”: Part One (Mar. 7, 2013); Part Two (Mar. 14, 2013); and Part Three (Mar. 21, 2013).