ELECTRONIC BOARD MATERIALS: BEST PRACTICES FOR DIRECTORS

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1 ELECTRONIC BOARD MATERIALS: BEST PRACTICES FOR DIRECTORS March 10, 2016 Fabio Battaglia Joseph T. Kelleher This presentation is for educational purposes only. It should not be construed as legal advice or opinion or as a substitute for the advice of counsel.

2 Introduction 2 Many fund groups have adopted web-based portals for delivering and accessing electronic board materials. Electronic board materials can offer significant benefits. Some of the risks presented by electronic board materials are different than the risks presented by traditional printed board materials.

3 General Considerations for Directors 3 Directors should engage in a thoughtful process about whether and how to use electronic board materials. Directors should consult with counsel as to legal issues, including security and discoverability of information. Consider enlisting the help of technology staff and experts. Tailor appropriate policies and procedures to fit the board s operations and needs.

4 Effective Oversight Practices 4 Provide directors with appropriate training and education regarding the use of electronic board materials. Directors should consider whether the electronic board material provider should be subject to periodic review by the board. This could be part of the board s annual selfassessment or delegated to a governance committee. Directors should consider adopting guidelines regarding the use of electronic board materials. Examples of areas that may be addressed include: taking notes and the use of other functions; printing board materials; and destroying materials. As with any service provider, consider the terms of the contract with the portal provider.

5 Information Captured by Portals 5 Many electronic board portals offer tools for note-taking, annotating, bookmarking or highlighting materials. Portals also may have features that track when and for how long a director accessed the portal or viewed a specific item of information on the portal. Plaintiffs attorneys and regulators may ask for this information in a litigation context. Directors should understand how information on the portal may be preserved or destroyed, and whether there are specific settings on the portal that can be modified.

6 Cybersecurity Matters 6 Cybersecurity has been a major area of focus for the SEC and its staff for some time. Board materials may not immediately come to mind when directors identify cybersecurity or data security risks. Develop an appropriate understanding of the security features used by electronic board portals.

7 Books and Records Requirements 7 Various books and records requirements apply to board materials (e.g., Rules 31a-2 and 38a-1 under the 1940 Act). The use of electronic board materials can be a helpful tool in complying with books and records requirements. Consider a procedure that calls for materials distributed at meetings to be collected and preserved along with the electronic board materials.

8 Using a Different Medium May Impact Discovery 8 Utilizing an electronic board portal does not necessarily change the litigation risk profile for directors, but it can impact the scope of discovery directed to directors. Directors using electronic board materials receive and review the materials and, often highlight and annotate the materials, just as they would with hardcopy board materials. However, the board materials are maintained in a different medium, which may or may not contain metadata that would not be available for hardcopy materials.

9 What Information Is Preserved and Tracked through the Electronic Board Material Portal? 9 Are the directors notes, annotations, highlighting, etc. preserved or destroyed? How long are the electronic annotations preserved before destruction? Can the destroyed data be recovered? Does the platform track how the directors access information? whether directors viewed certain materials (and, if so, for how long) whether directors downloaded or printed the materials whether directors highlighted or annotated the materials

10 Discovery Directed to Fund Directors 10 First-party discovery (i.e., requests for production of documents) directed to directors as defendants in litigation. Third-party discovery (i.e., document subpoenas) directed to directors in connection with litigation where the directors are not parties. Regulatory inquiries (formal and informal) directed to directors (e.g., SEC investigative subpoenas).

11 Examples of Recent Cases Impacting Fund Directors 11 Derivative and direct shareholder actions against directors involving state law claims, such as claims for breach of fiduciary duty (e.g., Northstar). Excessive fee litigation against investment advisors under Section 36(b). Section 15(c) investigations and enforcement actions (e.g., World Funds).

12 Document Preservation Requirements 12 You have a legal duty to preserve relevant information and documents when civil litigation or a regulatory action is reasonably anticipated. While often triggered by service of a complaint or a subpoena, the duty to preserve can arise earlier, even where the party is not the target of the litigation or investigation. A party must continue to preserve relevant information and documents until the litigation is fully and finally resolved. A non-party, on the other hand, is required to preserve relevant information and documents only until it has fulfilled its discovery obligations.

13 Preserving Electronic Board Materials 13 When directors have a duty to preserve documents and information in connection with litigation, the directors, in consultation with counsel, should consider whether electronic board materials are subject to preservation. This includes determining whether the directors notes and annotations in their electronic board materials must be preserved. If so, appropriate instruction must be given to the portal provider to refrain from destroying the annotations.

14 New Discovery Rules May Streamline Discovery 14 The recent amendments to the Federal Rules of Civil Procedure attempt to streamline discovery and emphasize the need for proportionality between the burden imposed by the requested discovery and the needs of the case. The amendments establish standards for sanctions where a party fails to take reasonable steps to preserve electronically stored information and prejudices the opposing party.

15 Practical Tips 15 Be consistent; develop a defensible routine and stick to it. Assume that anything you write (handwritten or electronic) can be discoverable. Be thoughtful and measured in written notes and communications, particularly with regard to issues that are subject to debate. Avoid hyperbole, sarcasm, or other types of language that can easily be taken out of context. Do not mix personal and business communications.

16 Fabio Battaglia 16 Fabio Battaglia focuses his practice on counseling investment companies and investment advisers in connection with various regulatory, compliance and transactional issues. Fabio advises clients on a range of investment management and securities law matters, including the formation, registration and ongoing operations of registered investment companies; the preparation of regulatory filings; and the drafting of compliance procedures and corporate policies. He also has extensive experience dealing with multimanager and sub-advised mutual funds, exchange-traded funds and closed-end funds. In addition, Fabio works with investment advisers and sponsors on the formation of private investment funds, including domestic and offshore hedge funds.

17 Joseph T. Kelleher 17 Joe Kelleher represents public companies, privately-owned businesses, financial institutions, government agencies, and religious and nonprofit organizations. He has served as lead counsel in jury and non-jury trials, arbitration proceedings and appeals. Joe s practice focuses on securities and investment management litigation, complex commercial litigation, and intellectual property litigation.