The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: Offering Documentation

  • From Vol. 9 No.35 (Sep. 8, 2016)

    Flawed Disclosures to Avoid – and Policies and Procedures to Adopt – for Managers to Reduce Risk of SEC Scrutiny of Fee and Expense Practices (Part Two of Three)

    Since early 2015, when it announced that private fund fee and expense allocation practices would be an enforcement priority, the SEC has pursued actions against managers for an array of improper fee and expense allocations. These enforcement actions frequently alleged inadequate disclosure or deficient policies and procedures. This article, the second in a three-part series, examines inadequacies in disclosures that often lead to SEC enforcement actions and provides guidance for how managers should disclose fee and expense allocations going forward. For more on disclosure to investors, see “Growing SEC Enforcement of Hedge Fund Managers Requires Greater Focus on Cybersecurity and Financial Disclosure” (Jul. 7, 2016); and “Are Hedge Fund Managers Required to Disclose the Existence or Outcome of Regulatory Examinations to Current or Potential Investors?” (Sep. 16, 2011). This article also summarizes the types of allocation scenarios and other recommended features managers should include in their written expense allocation policies and procedures. For additional coverage of manager compliance programs, see “Four Essential Elements of a Workable and Effective Hedge Fund Compliance Program” (Aug. 28, 2014). The first article in this series detailed trends in the types of expense allocations most aggressively scrutinized by the SEC. The third article will describe practices managers should adopt to prevent violations, as well as remedial actions to take upon discovering the improper allocation of a fee or expense. For additional coverage of expense allocations, see “Dechert Global Alternative Funds Symposium Highlights Trends in Hedge Fund Expense Allocations, Fees, Redemptions and Gates” (May 21, 2016); and “Barbash, Breslow and Rozenblit Discuss Hedge Fund Allocations, Restructurings and Advisory Boards” (Apr. 7, 2016).

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  • From Vol. 6 No.35 (Sep. 12, 2013)

    When Are the Personal Legal Disputes of a Hedge Fund Manager Principal “Material” and Therefore Required to Be Disclosed in Fund Offering Documents?

    Massachusetts’ highest court, the Supreme Judicial Court (Court), recently handed down a ruling in a case in which Jack Welch, the legendary former CEO of GE, sued the founder of a hedge fund manager after suffering nearly $7 million in losses in one of the manager’s funds.  Welch claimed that the principal failed to disclose his involvement in housing-related litigation that occurred several years before Welch invested in the fund.  Welch claimed he made his investment, nearly all of which he subsequently lost, based in large part on the principal’s character.  Had he known that the principal “had made threats to people and their property, I would have run so far from a character like this, and I would not put a dollar in there.”  The case raises an interesting question recently explored by academics and financial commentators: How relevant are an executive’s personal legal disputes to issues like securities fraud, or, in legal terms, are such personal disputes material to an investor’s consideration of a fund investment?  The Court’s decision sheds some light on this question, which in turn is relevant to investors in hedge funds.  Accordingly, this article summarizes the Court’s decision as well as a New York Times article describing the results of an academic study on whether executives who are willing to violate non-securities laws in their day-to-day lives are more likely to violate securities laws.  For a discussion of materiality in a different but related context, see “Are Hedge Fund Managers Required to Disclose the Existence or Outcome of Regulatory Examinations to Current or Potential Investors?,” The Hedge Fund Law Report, Vol. 4, No. 32 (Sep. 16, 2011).

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  • From Vol. 4 No.16 (May 13, 2011)

    What Is the Legal Effect of a Side Letter That Contains Specific Terms More Favorable Than a Hedge Fund’s General Offering Documentation?

    A question that has arisen in the current climate of hedge fund investor caution in the approach to the terms of investment, and managers being more ready to negotiate the offering terms, is: What is the legal effect of side letters entered into between an investor and the fund (usually through the investment manager) following negotiations as to the terms of a specific investment, which provide for terms more favorable than those offered generally by the fund’s offering documentation?  In a guest article, Christopher Russell and Rachael Reynolds, Partner and Managing Associate, respectively, at Ogier in the Cayman Islands, provide a detailed answer to this question, including a discussion of four principles that should be borne in mind when preparing a side letter to ensure that the letter has legal and binding effect.

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  • From Vol. 4 No.15 (May 6, 2011)

    What Are the Legal and Practical Effects of a Discrepancy between the Provisions of a Cayman Hedge Fund’s Articles of Association and Offering Documentation?

    Before the recent global economic crisis impacted the hedge fund world, it was not uncommon for even sophisticated investors to subscribe for shares in corporate offshore vehicles without having first scrutinized in detail the offering memorandum, the Articles of Association and the other governing documentation of the fund.  The change in the economic climate has given rise to a heightened awareness of the need to review carefully, and in some cases to seek to negotiate, the terms of subscription.  It has also caused those who have suffered investment losses to scrutinize subscription terms carefully in order to consider whether, based on the terms upon which they invested and the terms of the Articles of Association of the fund, they have grounds for bringing proceedings to recover damages from the fund or its directors, or other service providers.  A number of the disputes that have arisen in the last few years between Cayman funds and their investors have been caused by apparent material differences in key provisions in fund documents, in particular the offering memoranda and the Articles of Association – for example, the fund’s rights to suspend redemptions, delay payment of redemption proceeds, side-pocket illiquid positions and to set aside reserves for contingent liabilities post declaration of net asset value.  The question arises: What is the effect of a provision in the offering documentation which appears to be inconsistent with the wording of the Articles?  Does the provision in the offering documentation constitute an enforceable right of the fund (for example, to suspend payment of redemption proceeds if such a provision is not provided for in the Articles) or a shareholder (for example, to require adherence by the fund to an investment policy specified in the offering document but not contained within the Articles)?  Or does such an inconsistency constitute a misrepresentation of the terms of the Articles, which may give rise to a cause of action against the fund or its directors at the suit of an investor who relied on the misrepresentation in deciding to invest or remain invested in the fund?  In a guest article, Christopher Russell and Rachael Reynolds, Partner and Managing Associate, respectively, at Ogier in the Cayman Islands, address the foregoing questions and others, and discuss relevant guidance provided by the UK Privy Council in an important recent decision.

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