Exploring the new landscape

Campbells have brought together fund experts from Cayman and overseas to discuss the new landscape for fund structures and their service providers, at their annual Cayman Fund Focus conference, which takes place on 9 October at The Ritz-Carlton.  Business Editor, Lindsey Turnbull takes a look at what attendees can expect to learn from this key one-day event and reports.
Now in its seventh year, the Cayman Funds Focus produced by attorneys Campbells has become an essential part of any fund practitioner’s calendar. This year the spotlight is on Cayman’s fund business and how it has been affected by the economic recession.
Alistair Walters, Managing Partner with Campbells and chairman of the conference outlines specific areas of interest to be discussed: “The dust has started to settle following the economic chaos which has engulfed the world over the last 12 – 18 months. The anniversary of the collapse of Lehman Brothers has just passed. Our seventh annual funds conference will examine in the state of the Cayman funds industry and the extent to which the economic crises has affected the structure and operation of offshore investment funds. We will also consider where this has left Cayman as the premier jurisdiction for fund domicile.”
Walters continues: “As well as our experienced local and overseas experts, delegates will also hear from Leader of Government Business, McKeeva Bush, who will be giving a keynote speech over lunch, and from Cindy Scotland, Managing Director of the Cayman Islands Monetary Authority who will give the opening address. We expect that the conference will be very well attended as in previous years and hope to have lively discussion during the course of the various presentations.”
Campbells have assembled a panel of experts – from overseas: Harry Davis and Kelli Moll from Schulte Roth & Zabel; Keith Miller from Paul Hastings, Janofsky & Walker; Boris Onefater from Constellation Investment Consulting Group; Matthew Morris from Lovells LLP; Mark Lowndes from Cooper Gay & Co Ltd and Colin Masson from Beazley Group plc. Locally, experts include Gary Linford from DTMC Group; Colin Nicholson from KPMG Cayman Islands; Stu Sybersma from Deloitte Cayman Islands and Ross McDonough, Robert Searle, Guy Manning and Ian Dillon, all from Campbells.
Liabilities and responsibilities of service providers

Ian Dillon will be taking part in a panel discussion on the liabilities and responsibilities of service providers. He gives an overview as to what he believes will be the hot topics of the day: “Every third party service provider is taking a second look at what their duties and responsibilities are in respect of the funds they work with. Managers seem to be first in the firing line with investors claiming that some have significantly overstepped the negligence or even fraud thresholds which previously protected managers.”
Dillon says that other hot topics worthy of discussion may well include the extent to which administrators and custodians are likely to see claims made against them for failure to pick up on irregular trading patterns or even trading outside of the permitted policy for the fund – particularly considering that outside of the regulated retail fund space administrator and custodians typically disclaim any responsibility for in investment policy compliance. 
He says also, with the benefit of hindsight, there have been some cases where liquidators or other parties are seeking to have past NAVs re-calculated with the obvious effect that redeeming but unpaid investors or as yet un-redeemed investors may have suffered a loss. Dillon questions to what extent those investors will be able to recover losses (for example if they are a fund of funds) from the manager or whatever entity was responsible for the over-value initially struck.  
He also states that directors need to look at whether there has been an increase in the standard of care owed by them to companies and their investors over recent times given the recent activities of markets and managers and wonders: “Although most independent directors may be of the view that nothing has changed and they owe the same duty they owed two years ago, is that really the case? Given some of the lessons learned in the recent past about managers and markets, are directors now obliged to take a harder look at what’s going on?  Do they have to be permanently suspicious and always assume the worst?  Would the due diligence mechanisms employed a couple of years ago stand up to scrutiny now?”
Harry S. Davis, from Schulte Roth & Zabel is also a panelist on this section relating to liabilities and responsibilities of service providers. Davis says that in instances involving a fund ‘blow-up’, everyone from the fund manager to the administrator to the auditor to the prime broker to other investors and even sometimes the lawyers will be sued by investors in a ‘dash for cash’ and the ensuing litigation will be long and expensive.
“That has certainly been the case with past fund blow-ups and there is no reason not to expect more of the same in the future,” he states.
He continues that where the manager hasn’t simply ‘cooked the books’ and lied about investment returns but has lost money, there has not been that much by way of litigation against service providers.
Davis says: “The interesting question is whether this will change given the lag in investment returns and the invocation of gates, payments in kind, the use of liquidating SPVs, suspensions and hedge fund liquidations.”
He continues: “Among the issues that are likely to come under increasing scrutiny as investors look for creative theories to use as a means of seeking to recoup losses through litigation are whether the protective devices that have been invoked are authorised by the fund’s juridical documents, whether they have been invoked properly from a fiduciary perspective (or whether they are self-serving in their use), whether these devices should have been invoked earlier, whether there has been adequate disclosure of fund problems and redemption levels and whether style drift or other ‘misconduct’ has contributed to the liquidity problems and fund losses.  As investors search for liability theories, I expect all service providers to come under increasing pressure.”
Davis says that directors, administrators, prime brokers, auditors and even other investors will be most likely questioned as to what they know and when did they know it. he also believes investors will also likely pursue whether service providers should have seen problems develop earlier and blown the whistle, whether or not they had actual knowledge of problems that are ascertainable with the benefit of hindsight from information that was at the disposal of service providers, whether they were looking at the data and other information in this manner at the time or not. 
At the same time, Davis says, the question will be whether it really is the job of the administrator, prime brokers and other service providers to detect style drift, second guess investment decisions and more closely monitor the funds they do business with. Investors who press these issues need to also consider the potential for unintended consequences. If litigation causes service providers to engage in increased monitoring and self-protective actions, that is likely to result in increased costs for those services not to mention service providers erring on the side of conservatism, both of which may be to the detriment of investors in the long run.
Regulation and transparency
Davis is also the moderator on a panel looking at regulation and transparency and states: “Foremost on the minds of everyone in the alternative investment world is the anticipated regulation of the industry. That the SEC will require all investment managers to register is a foregone conclusion.  The question is when, not if it will happen.”
Davis says although he is far from convinced that registration will result in increased investor protection, he also does not believe that it will be a great burden on the industry (though it will add costs, he says). 
He confirms: “I doubt that the increased recordkeeping requirements and the OCIE examinations will uncover significant problems nor do I believe that fund of funds will be able to relax their due diligence efforts as a consequence. Additional significant issues include whether the credit default and derivatives markets will see greater regulation (I believe they will) and whether we will see a single financial services industry regulator (I believe the answer is no) as well as whether any of the myriad of tax proposals aimed at the industry will pass (again, I think the answer is no).”
He continues: “Another important issue is whether there will be a future for self regulation and best practices (I believe the answer is a resounding yes) as well as what form self-regulation and best practices will take. From an enforcement perspective, I am confident that the SEC, CFTC, Justice Department and state regulators will continue to pursue wrongdoing vigilantly. I do worry, however, that the current environment (together with the increased suspicion on the fund industry) may result in the regulators chasing too many marginal cases for too long and failing to prioritise properly.”
Global challenges and opportunities facing Cayman
Moderated by Gary Linford of DTMC Group Limited, this panel will be focusing on the global issues affecting the Cayman Islands and the opportunities for Cayman to differentiate itself from other offshore jurisdictions.
Linford states: “We hope to initially paint a picture of how the Cayman hedge fund industry has traditionally supported the manager /sponsor in setting up hedge funds.  However post Madoff, Bear Sterns, 4Q 2008 and 1Q 2009 liquidity crisis, etc. there is a need to look at what investors in Cayman hedge funds may require to retain confidence in our product.”
He continues: “We have no desire to do this through any form of prescriptive regulation as the key drivers for our past success must remain intact. We will very briefly reinforce what the key drivers are and then point out how we can use the data held by CIMA to provide more transparency to investors in Cayman funds with no material change to our successful model in Cayman.”
Linford says that his panel wants to point out the importance of CIMA implementing phase two of E-Reporting and focus on the importance of registration through automated delivery of MF1, etc. 
He says Cayman should be looking to woo business away from competitors: “In light of the tax changes in numerous jurisdictions we will look at what Cayman might do to capture more of the investment managers that previously operated under the exemptions afforded by SIBL (Securities Investment Business Law) Excluded Person and persuade more of these managers to set up some form of substance in our jurisdiction,” he confirms.


Alistair Walters at last year’s Campbell’s Fund Focus