Oct. 27, 2020

A Decade of Dodd‑Frank: Why and How the Regulations Brought Private Funds Into Compliance (Part One of Two)

On July 21, 2020, the Dodd-Frank Act, enacted in response to the 2008 global financial crisis, turned ten years old during another financial crisis – the global pandemic. Among other changes, Title IV of the Dodd-Frank Act removed the exemption under which most private fund managers had operated, requiring them to become registered investment advisers under the Investment Advisers Act of 1940. In addition, Title VI introduced the Volcker Rule to ban banks from proprietary trading and private fund ownership, forcing fund sponsors to adapt their products. In connection with the tenth anniversary of the seminal law, the Private Equity Law Report spoke with Arnold & Porter partners Stephen Culhane and David F. Freeman, Jr., about how the Dodd-Frank Act has changed the private funds industry. This first article in a two-part series discusses what drove the adoption of the Dodd-Frank Act; what new requirements it imposed; and how U.S. and non‑U.S. funds have responded to the changes. The second article will focus on enforcement efforts and areas of interest; the Volcker Rule’s effect on private funds; and the Dodd-Frank Act’s achievements in the private funds industry. See our two-part series “Reflections on the Tenth Anniversary of the Financial Crisis”: The Collapse and Aftermath (Oct. 11, 2018); and Changes to Compliance Programs, Regulation and Fund Strategies (Nov. 8, 2018).

The Ties That Bind: Non‑Competes and Principal‑Departure Parameters to Address in Management Company and GP Agreements (Part Two of Two)

Founders and principals of asset management firms often direct considerable attention to negotiating their economic arrangements, especially when their firms are successful. Many do not, however, consider what would happen if one of their co‑founders or principals voluntarily or involuntarily were to depart the firm. That can often force firms to scramble to consider those issues without the appropriate, pre-negotiated legal framework, often when the matters at stake and tension among the parties are at their peak. Lowenstein Sandler partner Eileen Overbaugh provides guidance in this two-part guest series regarding key terms principals at firms can incorporate in their respective management company and GP agreements to anticipate and mitigate those potential conflicts. This second article analyzes pressure points in negotiating restrictive covenants, departure scenarios and buy/sell arrangements for founders or principals to focus on when drafting management agreements. The first article reviewed the unique challenges inherent in bespoke and personal business arrangements, with particular attention paid to important governance and economic considerations that can arise. See our three-part series: “Why Fund Managers Must Review Their Positions on Succession Planning and CCO Outsourcing” (Apr. 14, 2020); “What Fund Managers Should Consider When Hiring and Onboarding CCOs; Determining CCO Governance Structures” (Apr. 21, 2020); and “A Succession‑Planning Roadmap for Fund Managers” (Apr. 28, 2020).

E.U. Sustainable Finance Initiatives: Preparing to Apply the Taxonomy Regulation and Other Proposed ESG Regulations (Part One of Two)

Several new laws and regulatory initiatives on sustainable finance will become effective in the E.U. as early as March 2021, including most notably the E.U. Sustainable Finance Disclosure Regulation (SFDR). It remains unclear whether the U.K. will adopt the same or similar changes, or whether the E.U.’s sustainable finance practices will become international standards over time. What is certain, however, is that the demand for, and growth of, investments driven by environmental, social and governance (ESG) factors is a strong trend, and the E.U.’s measures are designed to provide investors with accurate, detailed and comparable information. To inform the industry on those upcoming developments, Travers Smith recently hosted a webinar featuring partners Phil Bartram and Stephanie Biggs, as well as senior consultant Simon Witney. This first article in a two-part series provides an overview of some of the regulatory trends on sustainability in the E.U., along with details about the impending Taxonomy Regulation and other proposed regulatory updates. The second article will describe the multiple tiers of SFDR compliance and the corresponding requirements of each with which managers must comply. For additional commentary on ESG investing disclosures, see “SEC Officials Clarify the Commission’s Stance on ESG Investing and the Role of Disclosure” (Aug. 11, 2020); and “Preparing for the E.U.’s New Regulations for Disclosing Sustainability Risks and Negative Impacts From ESG Investing” (Jun. 9, 2020).

Timeline and Wrinkles of the SPAC Public Offering Process, and Factors to Weigh When Pursuing Target Companies for Acquisition (Part Two of Two)

In their rapid ascent to the top of headlines in 2020, special purpose acquisition companies (SPACs) – also known as “blank check companies” – have piqued interest in the private funds industry as a way for PE sponsors to raise capital to purchase private companies. There is another notable angle to SPACs, however, which is their use as vehicles to which PE sponsors can sell their existing portfolio companies. As those transactions happen much more rapidly than IPOs and allow a sponsor to retain a stake in the company, it can be an appealing option that warrants real consideration going forward. To assist sponsors with weighing the nuances of SPACs, Weil recently hosted a webinar featuring partners Alexander D. Lynch, Heather L. Emmel and Jackie Cohen. This second article in a two-part series outlines the timing and marketing issues of SPAC offerings as elements of acquisitions performed by SPAC vehicles, particularly in comparison to IPOs. The first article detailed the SPAC vehicle formation, capitalization and offering process, including how common shares and warrants in the vehicle are structured. For additional insights from Weil, see our two-part series: “Why and How Fund‑Level Preferred Equity Can Be Used As Rescue Capital” (Jul. 14, 2020); and “Potential Risks and Future Trends of Adoption of Fund‑Level Preferred Equity” (Jul. 21, 2020).

How Compliance Departments Have Responded to the Coronavirus Pandemic

In a short amount of time, the coronavirus pandemic has changed the world and forced companies – including fund managers – to rethink even the most basic assumptions about their businesses. For many, the initial reaction was a scramble to protect employees’ safety while keeping the business running. Now that most companies and fund managers have settled into these changed circumstances, the Private Equity Law Report reached out to in-house compliance professionals to see how their companies and their compliance programs are adjusting to the “new normal.” See “Former OCIE Private Funds Examiner Explores Compliance Issues Introduced by the Coronavirus Pandemic and Mitigation Tips (Part Two of Two)” (Apr. 21, 2020).