Oct. 8, 2020

Ways to Approach the Process of – and Key Criteria to Consider When – Selecting Outside Counsel (Part Two of Three)

Just as fund managers compete to woo prospective investors to their respective funds, law firms naturally do the same when pursuing potential clients. Given the array of qualified attorneys in the industry, it can be daunting for GCs of fund managers to manage the selection process and discern meaningful differences among the candidates. Because of the stakes at play in the decision, however, it is imperative that particular care and attention be paid when selecting those relationships. The Hedge Fund Law Report interviewed several legal-expense consultants and GCs of fund managers on ways to optimize this process. This second article in a three-part series prescribes tips and criteria to assist fund managers when selecting outside counsel. The first article focused on how to reduce legal costs and negotiate outside counsel fees. The third article will recommend ways to allocate tasks efficiently among various legal experts. See “How Fund Managers Can Use Technology to Transform and Streamline Complex Legal Operations: One Manager’s Example” (Jul. 18, 2019).

New CFTC Rule Extends Bad Actor Bar to Exempt CPOs

A hedge fund that trades in commodity options and futures contracts may be required to register with the CFTC as a commodity pool operator (CPO) – unless it can rely on an exemption. For example, a hedge fund manager that conducts a de minimis amount of trading in commodity interests may rely on an exemption from registration under Rule 4.13(a)(3). The CFTC, however, recently approved a new requirement that may bar some managers from relying on those exemptions. Specifically, the CFTC published a new rule (New Rule) that recently took effect and that generally prohibits persons who have, or whose principals have, in their backgrounds any of the statutory disqualifications listed in Section 8a(2) of the Commodity Exchange Act from claiming a CPO registration exemption under Rule 4.13. The Hedge Fund Law Report spoke to David Slovick, partner at Barnes & Thornburg and former Senior Attorney at the CFTC and SEC, about the requirement of the New Rule, what CPOs need to do to comply with it and the implications for hedge fund managers that are also CPOs. For additional insights from Slovick, see “Supreme Court Scales Back SEC’s Disgorgement Remedy in Liu v. SEC” (Jul. 16, 2020).

DAC6: The Next Step in Automatic Exchange of Information

The international drive toward greater fiscal transparency has given rise to a range of tax information exchange regimes. Against that backdrop of global demand for greater tax transparency, the E.U. has issued Council Directive 2018/822 of May 25, 2018, which is widely referred to as “DAC6.” It is particularly important for fund managers to understand DAC6 because it requires compliance with various filing deadlines, which have been extended to fall over the next several months. In a guest article, Will Smith and Lily Teh, partner and associate, respectively, at White & Case, provide an overview of historical disclosure and exchange initiatives; describe recent developments in the disclosure and automatic exchange of information landscape; summarize DAC6; and discuss how DAC6 might impact investment managers and the investment funds industry. For more from Smith, see “Practical Tax Considerations Arising From Trends in European Fund Structuring” (Jun. 13, 2019).

Fund Managers Should Not Overlook Participating in Class Actions

Determining eligibility for, and participation in, class action lawsuits can be a time-consuming and difficult process for fund managers focused on executing their core strategies. As part of their fiduciary duty, however, managers must ensure that they participate in class action litigation when appropriate and maximize value for investors. Many managers are not even aware of pending cases, but they should be considering and taking advantage of all available sources of recovery for investors. A recent GAIM Ops Digital program provided an overview of the current class action landscape; explored how class action service providers can streamline the process of participating in class actions and help managers avoid leaving money on the table; and offered guidance on selecting an appropriate vendor. Cosimo Montagu, editor-in-chief of GAIM Ops Events, moderated the discussion, which featured Julio Garcia, founding partner of FLSV Fund Consulting Services, LLC, and Michael J. McCreesh, president of Battea Class Action Services. This article distills their insights. For more on class action litigation, see “Sidley Briefing Outlines Recent Regulatory and Enforcement Developments Relevant to Private Fund Advisers” (Apr. 23, 2020); “Fund Managers Must Evaluate Their Claims Policies to Avoid Breaching Fiduciary Duty” (Jan. 30, 2020); and “When Can a Hedge Fund Shareholder Opt Out of a Class Action Settlement to Pursue Its Own Remedies When a Court Has Certified the Class As a Non-Opt-Out Class?” (Jan. 17, 2013).

Hedge Fund Industry Remains Agile and Resilient, According to Recent KPMG/AIMA Survey

KPMG and the Alternative Investment Management Association (AIMA) recently released the 2020 edition of their annual Global Hedge Fund Survey (Survey), which covers staffing; remote operations; outsourcing; use of technology; cybersecurity; compliance and other risks; investor relations; and financial pressures. Despite the immense market and operational disruptions caused by the coronavirus pandemic, the Survey found that hedge fund managers successfully managed their operations, “almost seamlessly with little or no interruption,” commented Tom Kehoe, AIMA managing director and global head of research and communications. This article discusses the key findings from the Survey, with further commentary from Kehoe. For additional insights from KPMG, see our two-part coverage of its recent Evolving Asset Management Regulation Report: “Pandemic’s Effect on Regulation, Operational Resilience, AML and Fiduciary Duty” (Sep. 3, 2020); and “Fee and Expense Disclosure; Responsible Investing; and Market Access” (Sep. 10, 2020).