Aug. 17, 2023

Understanding the Fiduciary Exception to Attorney-Client Privilege

Hedge funds and private equity firms operate in a complex environment, with an interplay of – and often tension among – financial regulations, fiduciary responsibilities and investment decisions. Because of that, fund managers and executives rely heavily on in-house and outside legal counsel to navigate and manage risks associated with investments and fund operations. Fund principals may feel confident that communications with their attorneys are protected by the well-known attorney-client privilege, but that may not always be the case. In situations in which fiduciary duties are implicated, otherwise privileged communications may be disclosed to investors and partners during disputes, creating legal and reputational risks that are not anticipated or considered when counsel’s advice was sought. Better understanding the so-called fiduciary exception to attorney-client privilege can help investment management professionals identify ways to minimize the possibility and likelihood that communications with counsel will be disclosed to an adverse party and mitigate the impact of those communications in contested proceedings and relationships with partners. This guest article by Pryor Cashman partner David C. Rose addresses the limits to attorney-client privilege; explains the fiduciary exception and when it may apply; and warns that application of that exception may expose management processes to disclosure. For additional insights from Rose, see “How Fund Managers Can Mitigate the Impact of Litigation on Their Transactions and Relationships” (Apr. 4, 2019).

SEC and CFTC Continue to Penalize Firms for Electronic Communications Recordkeeping Violations

Since 2021, the SEC and CFTC have imposed approximately $2 billion in aggregate penalties on more than a dozen registered firms for failure to preserve records of business-related communications, particularly those made on unapproved devices or apps. The agencies continue to target such violations, recently resolving four parallel enforcement proceedings against the U.S. broker-dealer, swap dealer and futures commission merchant arms of two banks based on the firms’ failures to preserve records of electronic communications and associated supervisory failures. As in all of the other recent recordkeeping resolutions, each respondent has admitted the facts alleged in the respective settlement orders and acknowledged that it violated the federal securities laws. Notably, the respondents self-reported their violations to the SEC, took prompt remedial action and provided substantial cooperation to the agency, which is reflected in the relatively low penalties imposed. This article parses the four settlement orders. See “SEC Remains Focused on Off-Channel Communications” (May 11, 2023).

Investment Fund Survey Finds Growing Investor Bargaining Power

Barnes & Thornburg issued its inaugural Investment Funds Outlook Survey (Report), which was based on a survey of 125 investors (LPs), managers (GPs) and service providers. The Report covers the key concerns of both LPs and GPs; growing LP bargaining power; trends in fund structures and terms; concerns over succession planning and environmental, social and governance issues; and digital assets and other investment focus areas. This article discusses the key takeaways from the Report, with commentary from Scott L. Beal, partner at Barnes & Thornburg. “From what we’d seen in our own practice, as well as conversations with our clients’ peers, we went into 2023 expecting a private funds sector that would be rife with new tensions, dynamics, challenges and opportunities,” Beal told the Hedge Fund Law Report. His firm launched the study to obtain empirical data on those changing dynamics and hopes to continue conducting annual surveys. See “AIMA/KPMG Report Discusses Impact of the Hybrid Work Environment and Evolving Investor Relations” (Mar. 24, 2022); as well as our coverage of EY’s 2021 Global Alternative Fund Survey of managers and investors: Part One (Feb. 10, 2022); and Part Two (Feb. 17, 2022).

Current and Former Enforcement Staffs’ Tips for Litigating Against the SEC

It is not always possible to avoid SEC charges or enforcement action, and it may be advantageous for some registrants to litigate against the SEC in certain circumstances. An expert panel at the SEC’s Securities Enforcement Forum provided an overview of the SEC’s litigation program and examined some of the factors, tactics and approaches that potential defendants and their counsel should consider when litigation against the SEC is in the cards. The program was moderated by Terence Healy, partner at Hughes Hubbard and former SEC Senior Assistant Chief Litigation Counsel, and featured Olivia Choe, SEC Chief Litigation Counsel; Sarah Heaton Concannon, partner at Quinn Emanuel and former SEC Senior Trial Counsel; Claudius Modesti, partner at Akin Gump and former director of enforcement at the Public Company Accounting Oversight Board; and Matthew C. Solomon, partner at Cleary Gottlieb and former SEC Chief Litigation Counsel. This article highlights key takeaways from the program. For more commentary from former SEC staff, see “Former SEC Enforcement Official Looks Back at 2022 and Forward to 2023” (Jan. 5, 2023).

Central Bank of Ireland Report Discusses Key Risks and Regulatory Focus Areas

The Central Bank of Ireland (Central Bank) issued its annual Securities Markets Risk Outlook Report 2023 (Report). The Report covers the external risk environment; sustainable investing; market integrity; management of market conduct risks; delegation and outsourcing; cybersecurity; data quality; and digital innovation. This article reviews the key takeaways from the Report, with commentary from Carol Widger, partner in Dechert’s Dublin office. The Report does not break any new ground, according to Widger. “In my view, many of the areas covered have been already [addressed] by the regulator through industry speeches and communications, such as ‘Dear CEO’ letters,” she observed. The themes addressed in the Report are a continuation of what the Central Bank has been saying. See “Central Bank of Ireland Requires UCITS Managers to Review Liquidity Risk Management Frameworks” (Jun. 17, 2021).

Hedge Fund Team of Robert G. Leonard and Michael Mavrides Joins Dechert

Robert G. Leonard and Michael Mavrides have joined Dechert LLP as partners in the financial services and investment management practice in New York. Experts in the formation and operation of hedge funds on behalf of both domestic and international clients, Leonard and Mavrides have worked alongside one another for more than two decades. Together, they have provided fund formation and regulatory advice to a variety of private investment entities, including domestic and offshore hedge funds; funds of funds; family offices; institutional investors; investment advisers; private equity and real estate funds; and joint ventures. For insights from Leonard, see “Credit Suisse Survey Finds Greater Satisfaction With Hedge Fund Investments, Strong Demand for Equity Strategies and Growing Flexibility on Fee Structures” (Apr. 5, 2018). For commentary from Mavrides, see our two-part series “Lessons Learned From How Advisers Dealt With the October 2017 Amendments to Form ADV”: Part One (Feb. 7, 2019); and Part Two (Feb. 14, 2019).