Sep. 27, 2022

PE in a Recession: Fortify Existing Funds in Accordance With Fund Terms, Obtain Liquidity and Manage Skittish Investors (Part Two of Three)

Early in the coronavirus pandemic when society was turned completely upside down, fund managers were scrambling to figure out different levers they could pull to prolong their funds, retain their assets, obtain liquidity to fortify investments and soothe their LPs’ angst. Given the ongoing Ukraine/Russia war, rampant inflation and other macroeconomic factors, fund managers should dust off the lessons and tactics learned during the pandemic to effectively navigate a potential recession in the coming months. This second article in a three-part series details ways fund managers can bolster their existing funds to endure a recession, including key terms to review, amendments to seek, liquidity avenues to pursue and investor dynamics to monitor. The third article will identify different workforce management issues to consider when preparing for potential layoffs while also retaining critical employees. The first article summarized the industry’s views on a potential recession, necessary modifications to managers’ fundraising efforts and the prominent role the secondary market will likely play. See “How the Financial Climate and SEC Rulemaking Is Affecting the PE Industry and GP‑LP Negotiating Dynamics” (Jun. 7, 2022).

DOL Proposes Significant Changes to the QPAM Exemption for Managing ERISA Assets

The U.S. Department of Labor (DOL) recently released a proposal (Proposal) to amend the Prohibited Transaction Class Exemption 84‑14, known as the qualified professional asset manager (QPAM) exemption. Managers of pension and welfare funds – including managers of PE funds and hedge funds that are or may be deemed to have “plan assets” under the DOL’s plan asset regulations – should begin evaluating the possible impact of those revisions and assess what changes to processes and procedures will be required for continued reliance on the QPAM exemption if the Proposal becomes final. In a guest article, Lowenstein Sandler partners Andrew E. Graw and Megan Monson lay out significant changes contemplated by the Proposal, including an increase in minimum capitalization and asset under management requirements to qualify as a QPAM; new rules regarding notification, registration and recordkeeping; and additional terms for management agreements. In addition, the article offers an overview of the QPAM exemption, its significance to the private funds industry and suggestions for how fund managers can prepare for potential adoption of the changes in the Proposal. For more on issues affecting pension funds, see “DOL Proposes Rule Favoring Inclusion of ESG Factors in Pension Plan Investment Decisions, Further Negating Contrary Trump‑Era Guidance” (Nov. 30, 2021); and “Marketing to Public Pension Plans: Municipal Advisors; Pay to Play Laws; and Gift and Entertainment Rules (Part One of Two)” (May 28, 2019).

State and Federal Legal Considerations and Complications for PE Sponsors Contemplating Cannabis Investments (Part One of Two)

Although cannabis remains illegal at the federal level, it is a growing industry that is likely to accelerate as awareness and social acceptance increases. Market segments for both medicinal and recreational cannabis are considered emerging areas of the industry. To assist PE sponsors that may be contemplating investing in cannabis companies, Seward & Kissel hosted a webinar that featured partners Jaimie L. Nawaday and Kevin Neubauer. This first article in a two-part series assesses the current relationship between private funds and the cannabis industry, along with evaluating state and federal legal complications. The second article will identify compliance and fundraising considerations for fund managers entering the cannabis space, as well as forecast the future of cannabis legislation. For additional commentary from Seward & Kissel, see our two-part series on its study of key terms in seed deals: “Structuring the Seeder’s Interest, Key Person Covenants and Lock-Ups” (Oct. 12, 2017); and “Consent Rights, Indemnification and Manager Buyout Rights” (Oct. 19, 2017).

Key Compliance Issues for Advisers and Funds Arising From the SEC’s 2022 Exam Priorities (Part One of Two)

It is important for fund managers to periodically revisit annual SEC examination priorities to measure the adequacy of those managers’ compliance programs, as well as to forecast relevant issues on the horizon. Toward that end, the Practising Law Institute hosted an expert panel that examined key focus areas in the SEC’s Division of Examinations’ (Examinations) 2022 priorities (2022 Priorities). The panel was moderated by Maria Gattuso, principal at Deloitte, and featured Richard Gorman, CCO of Jackson National Asset Management, LLC; Paulita A. Pike, partner at Ropes & Gray; and Maurya C. Keating, Associate Regional Director of the SEC’s New York Regional Office, Co‑Head of the New York Regional Office’s Investment Adviser Investment Company Unit and Co‑Acting Regional Director. This first article in a two-part series evaluates the SEC’s examination trends through 2021, as well as key items in the 2022 Priorities such as fees and expenses; valuations and conflicts of interest; special purpose acquisition companies; and environmental, social and governance offerings and disclosures. The second article will detail the panel’s insights on compliance program resilience; cybersecurity; standards of conduct and Regulation Best Interest; financial technologies; and CCO liability. For more from Keating, see our two-part series on Examinations’ 2020 priorities: “Tips for Fund Managers to Navigate an Examination” (Apr. 7, 2020); and “Potential Impact of the Proposed Advertising Rules and Other Recent SEC Regulatory Reforms” (Apr. 14, 2020).

Sanctions 101: How to Comply With Them (Part Three of Three)

The need to have policies and procedures to ensure compliance with government-imposed sanctions is nothing new for private fund managers. In fact, according to a 2016 ACA Group (ACA) compliance survey of alternative fund managers, 89 percent of respondents conduct checks of investors or separate account clients against lists of sanctioned individuals and entities maintained by the Office of Foreign Assets Control (OFAC) of the U.S. Treasury Department. In light of the latest sanctions against Russia, however, OFAC and the Financial Crimes Enforcement Network have both issued alerts advising financial institutions to be vigilant about potential Russian sanctions evasion. Therefore, it would be prudent for private fund managers to review their sanctions compliance policies and procedures now to ensure they are up to snuff – and for managers without a sanctions compliance regime to implement one. This final article in a three-part series explores what managers should do to ensure they comply with sanctions and have sufficient protections in their fund documents. The first article explained how sanctions regimes work, and the second article discussed how sanctions can impact a private fund manager’s investors and investments. For more results from the ACA survey, see our two-part series: “SEC Exams; Compliance Staffing and Budgeting; Annual and Ongoing Compliance Reviews; and AML/Sanctions Compliance” (Jan. 19, 2017); and “Custody; Fee Policies and Arrangements; Safeguarding of Assets; and Personal Trading” (Feb. 2, 2017).