Double full stop
A sure sign a document has had a tortured gestation, during which it was feasted on by legal eagles from all quarters but — critically — before all was said and done deal fatigue set in, most of them lost interest, and someone said, “O.K., hang it, let’s just sign the damn thing.”
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Towards more picturesque speech™
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What is left is a tract with all the usual tedious legal tropes but improbably strewn with unextinguished blobs, square brackets and miscellaneous harmless typos, the most feckless of which is the double full stop..
The double full stop — a fossil record indicating the insertion, and then removal, of a sentence of which no other trace remains, but that you can be sure started, “for the avoidance of doubt, ...” is unusually acute in its bathos. It says, “this mattered to me once, gravely, but now I am past caring. I hate you all. Just deliver me from this godforsaken project. Let me go. I don’t even want a tombstone.”
This may, but does not have to, arise during the end game of a vigorously-negotiated deal. Regulators are prone to it, too.
The Cayman double full stop
A celebrated example comes from the Cayman Islands Monetary Authority’s recent, bished, attempt to update its rules on asset segregation for investment funds. Yes, yes: I know what you are thinking: be still, my beating heart. But ride along with us for a while.
Now you can imagine, as no doubt CIMA did, that such a project was not calculated to attract world-wide attention. Perhaps they assigned it to their newest member, by way of initiation ritual, as a practical joke, or as an earnest means of learning the ropes. We speculate. In any weather, the new rules started off brightly enough:
- “5.2. The Portfolio must be segregated and accounted for separately from any assets of any Service Provider.”
So far, so unobjectionable. But it did not take long for things to take a darker turn. Just a few paragraphs further on, the rules provided, almost by way of parenthetical note:
- 5.5. The overriding requirement of Rule 5.2 is that a Fund must ensure that none of its Service Providers use the Portfolio to finance their own or any other operations in any way.
We do not need to pause for long to observe that, on its face, this bears scant relation to the “overriding goal” of Rule 5.2, which says nothing of the kind. Rule 5.2 asks custodians not to commingle their clients’ assets with their own; an entirely workaday affordance that, to any half-competent trust and agency professional, would hardly need being said. But within a couple of paragraphs, our CIMA ingénue overreaches her tepid lagoon and seems to pry into the famously private affairs of her hedge fund constituents. Rule 5.5 seems to bar one such as a prime broker from rehypothecating a Cayman fund’s assets.
Now in a business as dependent on margin lending as is the Cayman Islands’ hedge fund industry, this is quite the intrusive bolt from the blue. The industry, and its professional advisers, rose up as one. “What,” they enquired, “on Earth do you think you are playing at?”
Of course, this was not what CIMA meant at all. There followed a hasty “reverse ferret”. But in that fascinating way of modern life, wherein it will no longer do to just admit to a cock-up and fix it properly, websites were updated, correspondence reissued, and the guidance was clarified. “For the purposes of Rule 5.5,” the amended circular carried on, “the following shall not in itself, constitute the financing of the Service Providers own operations:
- use or transfer of assets as consented to by or on behalf of the Fund, provided that the possibility of use or transfer is disclosed ... to investors.
Thus, a contractually binding right of rehypothecation, provided it is disclosed, is okay. To reach this conclusion, one must assemble the logical components of Rules 5.5, 5.6 and 5.6.5 into a single juridical proposition. It runs like so:
- A Fund must not allow its Service Providers to use the Portfolio to finance their own operations. However, allowing Service Providers to use the Portfolio to finance their own operations doesn’t count as “financing the Service Providers’ own operations” as long as the Fund tells its investors they are doing this.
In world more apt to admit its own mistakes this might read, “a fund must tell its investors when it allows its Service Providers to use its assets to finance their operations.”
But there wouldn’t be much to write about if the world were like that, would there?