Jun. 13, 2024

Answers to Key Questions Raised by the FTC’s Final Rule Banning Non‑Compete Provisions

In January 2023, the Federal Trade Commission (FTC) circulated a draft rule proposing to broadly ban non-compete provisions. After weighing a plethora of public comments, the FTC issued a final rule (Rule) to officially forbid employers – subject to a limited exception – from imposing or enforcing “non-compete clauses” on April 23, 2024. Barring a court order in an ongoing legal challenge staying the Rule from going into effect, the Rule will become effective on September 4, 2024. The effective date is important because the Rule is retroactive and requires employers to inform employees in writing on or before the effective date that any non-competes previously imposed on them are unenforceable and will not be enforced. Failure to comply with those requirements can result in significant fines for employers. This guest article by Friedman Kaplan partner Lance J. Gotko offers answers to questions raised by private fund managers following the issuance of the Rule, including about its scope, timing and potential impact on existing and future employment arrangements. The article also provides an update on the status of the bill passed in New York – and ultimately vetoed by its governor – proposing to ban virtually all new non-compete provisions. See “What Fund Managers Should Know About the FTC’s Proposed Ban on Non‑Compete Provisions” (Jun. 1, 2023).

Recent SEC Enforcement Sweep and Risk Alert Highlight Weak Areas of Marketing Rule Compliance for Managers to Bolster

Compliance with Rule 206(4)‑1 (Marketing Rule) under the Investment Advisers Act of 1940 continues to be a clear focus for the SEC. The Commission recently settled five enforcement actions for alleged violations of the Marketing Rule, primarily in connection with advertising hypothetical performance on the advisers’ websites. Just a few days later, the SEC’s Division of Examinations issued a third risk alert on Marketing Rule compliance (Risk Alert). Together, the settlements and Risk Alert make it clear the Marketing Rule remains in the SEC’s spotlight. “This is very much a continuation of the effort to send advisers of all kinds a signal that the Marketing Rule is no longer the ‘new’ marketing rule. It’s been in place quite a while now and the staff expects it to be adhered to,” warned Morrison Foerster partner Derek N. Steingarten. This article summarizes relevant takeaways from the settlements and Risk Alert, with additional insights from Steingarten and other industry experts. For coverage of Marketing Rule FAQs, see “Marketing Rule FAQ Clarifies SEC Expectations for Calculating Net and Gross IRR When Using Subscription Credit Facilities” (Apr. 4, 2024); and our two-part series: “How to Present Individual Positions and Deal With Attribution Issues” (Apr. 6, 2023); and “Practical Implications and Special Q&A With CCOs” (Apr. 20, 2023).

Overcoming the Growing Challenges of ESG Data Collection, Monitoring and Optimization

As the understanding and importance of environmental, social and governance (ESG) factors in investing grow, so do the challenges. Inevitably, efforts become professionalized. In the early days, PE and private credit funds may have distributed broad questionnaires among their portfolio companies and been left with large amounts of unwieldy data that made it difficult to form conclusions and make decisions. More recently, software has been developed that gathers data per custom specifications, analyzes the data, organizes the data into coherent frameworks as needed for reporting purposes and integrates that data with a fund’s systems. To address issues with putting that type of data collection system in place, ACA Group hosted a webinar entitled “Tackling the Unique Monitoring Challenges in Private Equity and Private Credit” that featured Dan Mistler (partner), Luke Wilcox (partner) and Alyssa Briggs (managing director). The program explored the challenges of establishing an efficient ESG program, including generating impact performance reports for investors, putting processes in place to collect data; integrating publicly and privately obtained information; and parsing data to act responsibly and, as appropriately, swiftly. This article summarizes relevant takeaways from the webinar. See our two-part series “Opportunities and Challenges in ESG and Impact Investing for Alternative Asset Managers and Investors”: Part One (Aug. 24, 2023); and Part Two (Sep. 7, 2023).

Trends in Topics Targeted During Recent SEC Examinations of PE Sponsors (Part Two of Two)

As part of its 2024 Compliance Conference, the Investment Adviser Association recently hosted a panel focusing on the examination process and hot topics for PE fund advisers in SEC examinations. Moderated by Ropes & Gray partner Jason E. Brown, the program featured Letti de Little, CCO of Grain Management; Sean Murphy, CCO of EIG Partners; and Christopher Mulligan, then-Investment Adviser/Private Funds Senior Advisor and Co‑Coordinator of the Private Funds Specialized Working Group in the SEC’s Division of Examinations (Examinations). This second article in a two-part series highlights substantive topics that Examinations has focused on in recent exams of PE sponsors, including management fees after the commitment period; disclosures of affiliated service providers; accurate environmental, social and governance information; substantiation of claims in advertisements; and LP advisory committee approvals. The first article discussed important considerations during an SEC examination, including how the staff selects advisers, ways to prepare, how to select personnel to be interviewed and suggestions for handling disagreements with examiners. See “Up Next in SEC Examinations? Waterfall Calculations and Investment Decisions” (May 16, 2024); and “Deep Dive on Compliance Issues Targeted in SEC Examinations and the Agency’s Stance on CCO Accountability (Part Two of Two)” (May 18, 2023).

FCA’s Final Rules on Sustainability Disclosure Requirements and Investment Labels

In November 2023, the U.K.’s Financial Conduct Authority released policy statement PS23/16 on Sustainability Disclosure Requirements and investment labels. The rules cover a new “anti-greenwashing” rule; a voluntary labeling regime for products with a sustainability objective as part of their investment objective; product disclosure requirements; sustainability entity reporting; retail investor-specific requirements on naming and marketing; and consumer-facing product-level disclosures. This guest article by Goodwin Procter attorneys Ajay Pathak, Andrew Henderson, Danielle Reyes and Chris Ormond discusses the key elements set out in PS23/16; examines how those rules compare and contrast with the SEC’s proposed rules on environmental, social and governance investment practices and fund names, as well as the E.U.’s sustainable finance legislation; and concludes with practical action points for fund managers in scope, both now and in anticipation of the future expansion of the U.K. regime to overseas funds marketed in the U.K. and to portfolio management. See “Exploring the Current Status and Practical Difficulties of Implementing the E.U. Sustainable Finance Initiatives” (Jun. 7, 2022).