November 19, 2015 Reducing Your Litigation Profile Practical Guidance for Mutual Fund Directors Andrea G. Hood
Agenda I. Litigation And Regulatory Risk For Fund Directors 3 II. Discoverable Information In Litigation And Regulatory Actions 9 III. Practical Guidance What You Can Do 13 IV. Privilege Issues For Fund Directors 24 2
SECTION 1 Litigation and Regulatory Risk for Fund Directors 3
Litigation and Regulatory Risk for Fund Directors Civil Litigation Risk Fund directors as defendants Fund directors as witnesses (Section 36(b) cases) Regulatory Risk Fund directors as named parties in regulatory investigations Fund directors as witnesses (interviews, voluntary testimony, subpoenas) 4
Litigation and Regulatory Risk for Fund Directors (cont d) Civil Litigation Risk Fund Directors as Defendants Northstar Fin. Advisors Inc. v. Schwab Investments, No. 11-17187 (9th Cir. Apr. 28, 2015) Shareholder class actions based on common law theories of liability Disclosure cases under federal securities laws Section 11 of Securities Act of 1933 Section 12(a)(2) of Securities Act of 1933 Section 10(b) of Securities Exchange Act of 1934 5
Litigation and Regulatory Risk for Fund Directors (cont d) Civil Litigation Risk Fund Directors as Witnesses Recent wave of subadviser cases under Section 36(b) of Investment Company Act of 1940 Independent directors are not just witnesses in these cases they are the key witnesses Will be called upon to defend independence, qualifications, board process, and care and conscientiousness in approving the challenged fees 6
Litigation and Regulatory Risk for Fund Directors (cont d) Regulatory Risk for Fund Directors 15(c) deficiencies World Funds (June 2015) Distribution in guise First Eagle (September 2015) No fund directors (so far) Fair valuation Morgan Keegan (June 2013) Boilerplate disclosures and minutes / compliance manual approval Northern Lights (May 2013) 7
Litigation and Regulatory Risk for Fund Directors (cont d) Key takeaways... Northstar may have opened door to increased civil litigation against fund directors Fund directors face risk as potential defendants in disclosure cases Fund directors will be called upon as key witnesses in Section 36(b) cases SEC is increasingly willing to name fund directors in enforcement actions 8
SECTION 2 Discoverable Information In Litigation and Regulatory Actions 9
Discoverable Information What do we mean by discoverable information? Information that plaintiffs or regulators can obtain from parties or third-parties in litigation, informal/formal investigations or enforcement actions Scope of discoverable information is broad, especially in regulatory context What is the role of discoverable information in litigation/regulatory actions? Plaintiffs and regulators will use information they collect to support their claims Allegations versus facts supported by evidence 10
Discoverable Information (cont d) How is discoverable information obtained in litigation/regulatory actions? Testimony (depositions and sworn testimony before regulators) Interrogatories Documents requests and subpoenas How is discoverable information used in litigation/regulatory actions? Exhibits at depositions Pre-trial motions Trial Leveraging settlements 11
Discoverable Information (cont d) Key types of discoverable information that is produced to plaintiffs and regulators in response to document requests and subpoenas: Electronically Stored Information ( ESI ) Email communications Electronic board books Documents saved electronically Information on personal electronic devices Hard copy documents In home/office file cabinets Handwritten notes Notebooks Calendars Once litigation or regulatory investigation is commenced or reasonably foreseeable, seek advice from counsel about document retention responsibilities 12
SECTION 3 Practical Guidance What You Can Do 13
Practical Guidance Emails Plaintiffs have been seeking email discovery relating to directors in recent Section 36(b) cases Subpoenas to fund directors Document requests to advisers How emails might be used in litigation and regulatory actions Emails may be taken out of context Emails can lead to additional document requests Emails can increase likelihood of being deposed 14
Practical Guidance Emails (cont d) Understand that emails are discoverable Exercise caution with substantive discussions and debates Keep emails formal No joking Avoid spelling errors and sloppy grammar Exercise caution with requests for additional information Improvements to board materials versus deficiencies in board materials Does the information exist? Once requested, must follow-up 15
Practical Guidance Emails (cont d) Exercise caution with reply all Potentially raises privilege issues Exercise caution with forwards Potentially raises privilege issues Where appropriate, use privilege headers in emails Attorney-Client Privilege Common Interest Privilege or Joint Defense Privilege 16
Practical Guidance Handwritten and Electronic Notes Plaintiffs have been seeking directors handwritten and electronic notes in recent Section 36(b) cases Duplicate copies of board books with handwritten notes Electronic notes feature on electronic board book platforms (e.g., Diligent and BoardVantage) Directors questioned at depositions about note-taking practices As with emails, notes can be taken out of context Substantive notes Underlining, circling, asterisks, question marks Handwritten notes in document productions are difficult to locate with electronic searches 17
Practical Guidance Handwritten and Electronic Notes (cont d) Assume handwritten notes may be discoverable Assume annotations on electronic board books may be discoverable Avoid cryptic notes 18
Practical Guidance Electronic Board Book Platforms Plaintiffs in recent Section 36(b) cases have been seeking information pertaining to directors use of electronic board book platforms Subpoenas to Diligent and BoardVantage For example: What documents were uploaded and when Length of log-in time What documents were accessed How long was each document viewed What documents were printed What documents were downloaded What electronic annotations were made 19
Practical Guidance Electronic Board Book Platforms (cont d) Assume information about your use of electronic board materials may be discoverable Consider whether electronic board materials are being uploaded sufficiently in advance of meetings Access electronic board materials sufficiently in advance of meetings to allow for meaningful review Confine use of devices provided at board meetings (e.g., ipads) to accessing board books and other board-related materials 20
Practical Guidance Board Materials Board materials are key documents in Section 36(b) cases SEC has also scrutinized board materials in recent enforcement actions Evaluate substance of board materials periodically Sufficient information on each Gartenberg factor? Descriptions of services Institutional versus retail Economies of scale Cost allocation methodologies Any information that is just adding volume? Any information that could be presented more clearly? Consider having outside counsel/consultant conduct benchmarking exercise 21
Practical Guidance Board Materials (cont d) Evaluate process relating to board materials periodically Are you receiving materials sufficiently in advance of meetings? Are you receiving too many handouts at meeting itself? Is the board sufficiently involved in setting or approving the agendas? Any issues with accessing materials on electronic board platforms? 22
Practical Guidance Board Minutes Board minutes are key documents in Section 36(b) cases SEC has also has focused on minutes (e.g., Northern Lights) Receive draft minutes sufficiently in advance of approval meeting Carefully review before approving Consider whether level of detail is appropriate Record instances of board push back Record instances of reliance on consultants and describe their role Confirm minutes for annual fee approval meeting are consistent with annual disclosure to shareholders disclosing basis for approving fees Avoid boilerplate language Address individual funds where appropriate 23
SECTION 4 Privilege Issues For Fund Directors 24
Privilege Issues For Fund Directors Attorney-client privilege and related legal doctrines may protect certain communications from disclosure Attorney-client privilege Joint defense privilege Common interest privilege Fiduciary exception? Do not assume privilege will apply When in doubt about scope of privilege, seek advice from counsel 25
Questions? 26
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