May 11, 2021

FINRA Mandate of GIPS‑Compliant IRRs for Unrealized Investments: How Broker‑Dealers and PE Sponsors Are Complying (Part Two of Two)

PE funds have largely avoided adopting CFA Institute’s Global Investment Performance Standards (GIPS), but new guidance issued by FINRA may nudge some funds over the line. FINRA Regulatory Notice 20‑21 (Notice) issued in mid‑2020 states that internal rates of return (IRRs) for unrealized investments in marketing materials used by FINRA members in retail communications to retail investors should be calculated in accordance with GIPS. Broker-dealers that are FINRA members are beginning to require PE funds that use IRRs for unrealized investments to comply with the Notice, typically by asking for a representation of compliance. Fund managers subject to the Notice are not required to become GIPS compliant on a firmwide basis, but they must review their calculation methodologies to ensure consistency with GIPS as to specific funds in question. Some managers are also voluntarily going the extra mile, however, to attain firmwide GIPS compliance. This second article of a two-part series discusses how broker-dealers and fund managers have responded to the Notice; how funds can prepare GIPS‑compliant IRRs; and when funds should consider achieving GIPS compliance firmwide. The first article described the Notice’s expectations and to which funds they apply; the intent and market reaction to the expectations; and the possible implications of non-compliance. See our two-part series on the impact of the SEC’s new marketing rule: “What Constitutes an ‘Advertisement’ and How to Adhere to Principles-Based Standards” (Mar. 23, 2021); and “Disclosures in Non‑Standard Calculations and Requirements When Using Promoters” (Mar. 30, 2021).

Breaking Up Is Hard to Do: A Guide to Types of Litigation That Frequently Follow Broken Deals and Associated Risks (Part One of Two)

Even the most promising joint business ventures can fall apart. If they do, parties that once saw each other as partners can quickly find themselves as adversaries. To that end, the term “broken deals” is intentionally broad – designed to capture not just failed mergers but also other types of disputes that can arise from a transaction. Even completed transactions can lead to serious litigation risk from dissatisfied stakeholders. Fund managers need to watch carefully for those risks and guard against them in any transaction they undertake. In this first article in a two-part series, MoloLamken LLP attorneys Justin M. Ellis and Caleb Hayes‑Deats survey different types of claims that can arise after broken deals and provide practical lessons for fund managers from caselaw, including those arising from material adverse changes or material adverse effects; misrepresentation claims; or breaches of non-disclosure agreements. The second article will examine risks associated with deals falling apart due to a breach of fiduciary duties; situations involving distressed companies; and where parties are charged with aiding and abetting conduct in connection with a broken deal. For coverage of allocating fees resulting from broken deals, see “Primer on Deal‑by‑Deal Funds: Balancing Deal Uncertainty Against Attractive Carry Opportunities (Part Three of Three)” (Mar. 3, 2020); and “SEC Enforcement Action Involving ‘Broken Deal’ Expenses Emphasizes the Importance of Proper Allocation and Disclosure” (Jul. 9, 2015).

Subscription Credit Facility Fraud Highlights Limitations of Fund Finance Due Diligence Process

Subscription credit facilities are generally recognized as a useful tool for PE funds to navigate complicated timing issues when making investments while also potentially improving their internal rates of return. Due to those benefits, subscription facilities have become increasingly popular over the last few years and are now nearly ubiquitous among PE funds. Recently, however, subscription credit facilities have been in the spotlight for less favorable reasons following the alleged fraud by the managing director of a PE sponsor. A complaint (Complaint) filed in the U.S. District Court in the Southern District of New York accuses the managing director of wire fraud and aggravated identity theft based on his use of falsified documents to improperly prompt a bank to advance millions of dollars under the fund’s subscription credit facility. Despite being only the second incident of fraud involving a fund financing facility, the circumstances have raised concerns in the industry that a new set of bank or LP restrictions may be imposed on the facilities to prevent future misconduct. This article summarizes the Complaint and provides insights from attorneys about the potential implications of the case for PE sponsors. See our two-part series on trends in the use of subscription credit facilities: “Advantages for PE Investors and Sponsors Have Led to Adoption by Some Hedge Funds and Credit Funds” (Jan. 24, 2019); and “Structuring Considerations Negotiated With Lenders and Important LPA and Side Letter Provisions” (Feb. 7, 2019).

Overview of Global Regulatory Enforcement on Conflicts, Fees, AML and Operational Resiliency in Key Jurisdictions (Part Two of Two)

The SEC is widely regarded as one of the most of aggressive and, in some senses, intimidating regulators across the global private funds market. Other regulators across the globe are taking notice, however, and incrementally increasing their scrutiny of local fund managers in an attempt to crack down on bad conduct. To that end, Clifford Chance recently hosted a webinar to highlight those trends by focusing on regulatory enforcement measures in the U.S., U.K., Europe, Singapore and Hong Kong. The program was moderated by Clifford Chance partner Dorian Drew and featured fellow attorneys Donna Wacker, Kabir Singh, Antonio Golino, Ellen Lake and Benjamin Berringer. This second article in a two-part series highlights regulators’ efforts in each jurisdiction in certain high-risk areas, including anti-money laundering; fees and expenses; conflicts of interest; and operational resiliency. The first article outlined the general regulatory trends in each jurisdiction. For other coverage of global enforcement actions, see “Minority Stakeholder PE Sponsor Held Liable by ECJ for Portfolio Company’s Antitrust Violations Based on Its 100% Voting Rights” (Apr. 20, 2021); and “Emerging From Abraaj’s Shadow: Current Status of Litigation and Responses From LPs and Regulators (Part One of Two)” (Jul. 21, 2020).

Critical Employment Law Considerations for Office Reopenings

With the continuing rollout of vaccines and more widespread adoption of preventive measures, there appears to be some light at the end of the coronavirus tunnel. Employers considering bringing employees back into physical office environments face a disparate array of federal, state and local rules and guidance affecting workplace safety and operations. To help navigate those treacherous waters, a recent Seward & Kissel program examined the current federal, state and local legal landscape; screening, testing and response protocols; vaccinations; employees’ reluctance to return to the office; and workplace claims and litigation. The program featured partners Mark D. Kotwick and Anne C. Patin, along with counsel Julia C. Spivack. This article outlines the key takeaways from their presentation. See “How to Facilitate a Privacy Compliant Return to Work: Contact Tracing and Fund Manager Considerations (Part Three of Three)” (Oct. 20, 2020).