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    Sep. 7, 2023

Changes Brewing for Enforceability of Non‑Compete Provisions

Due to centuries of common law jurisprudence and periodic legislative adjustments, courts in most American jurisdictions typically uphold reasonable non-competition agreements related to employment matters. However, there are a handful of outlier jurisdictions where non-competes are flatly banned. Like most states, New York has developed rules that protect employers’ legitimate interests and employees from unreasonable restrictions on their ability to earn a living. So, New York non‑competes are enforceable if necessary to protect employers’ legitimate business interests rather than impose an undue hardship on the employee. Raw prevention of competition is not a legitimate business interest, but protecting trade secrets, confidential information and close client relationships built on the employer’s time and dime can provide the basis for enforceable non-competes. Until recently, the rules seemed settled. However, the New York State legislature has passed a bill that would ban virtually all employment-related non-competes (New York Bill), and the Federal Trade Commission has announced its intention to promulgate a rule broadly banning non-competes (Proposed Rule). Those proposals represent a fundamental shift in the law governing restrictive covenants in New York. This guest article by Friedman Kaplan partner Lance J. Gotko analyzes the New York Bill and the Proposed Rule; raises questions about their implications; and explores how they might impact different aspects of non‑compete agreements. It highlights the potential impact of these changes on the enforceability of non‑competes, including their effect on various agreements and legal relationships. See “What Fund Managers Should Know About the FTC’s Proposed Ban on Non‑Compete Provisions” (Jun. 1, 2023).

SEC’s Proposed Conflicts Rules for AI Erode Primacy of Disclosure and Investor Consent Principles

On July 26, 2023, the SEC proposed new rules under the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 (Proposed Conflicts Rules) to eliminate or neutralize the effect of specific conflicts of interest associated with a sponsor’s interactions with investors through technologies that optimize for, predict, guide, forecast or direct investment-related behaviors or outcomes. The Commission also proposed requirements to adopt and implement policies and procedures and create and maintain certain records in connection with the proposed rulemaking. The Commission seeks comments on or before October 10, 2023. This article explains the rationale behind the Proposed Conflicts Rules, the scope of their application; key definitions; core requirements such as evaluation, identification, testing, conflict of interest management and amendments to recordkeeping rules. It also covers responses from industry experts, including Dechert partner Mark Perlow and Akin Gump partner Brian Daly. For coverage of other recent developments in SEC rulemaking, see our two-part series on the proposed safeguarding rule: “Parameters and Requirements of the Long Overdue Update to the Custody Rule” (Mar. 23, 2023); and “Concerns About the Scope and Specific Items for Closed-End Fund Managers to Monitor” (Apr. 6, 2023).

Upper-Tier Structures and Key Considerations

The Practising Law Institute (PLI) recently hosted a program to examine common features and relevant considerations when forming upper-tier entities in open- and closed-end fund complexes. The panel featured Sidley Austin partner Joshua S. Cohen, who also moderated, and Schulte Roth & Zabel partner Jennifer M. Dunn and Fried Frank partner Rebecca Neuschatz Zelenka. The discussion focused on structuring entities, economics, management and governance, and also highlighted areas of convergence and divergence between closed-end and open-end fund complexes. The panel, consisting of legal experts, delved into structuring entities; management and governance; economics; and more. This article discusses the considerations and standard features when forming upper-tier entities in open- and closed-end funds and highlights the similarities and differences between closed-end and open-end funds in structuring, tax implications, vesting arrangements and other vital aspects relevant to upper-tier structures in the PE industry. For coverage of previous PLI panels, see our two-part series: “Latest Trends in GP Removal Provisions, Investment Limitations and Other PE Fund Terms” (Jul. 26, 2022); and “Recent Status of Negotiations of Co-Investment Access, Management Fees and Other PE Fund Terms” (Aug. 2, 2022).

New York Updated Its Model Sexual Harassment Policy and Training Materials

On April 11, 2023, New York Governor Kathy Hochul announced that the New York State Department of Labor, in collaboration with the New York State Division of Human Rights, had revised the state’s Sexual Harassment Prevention Model Policy and associated training materials, which it first adopted in 2018. The revisions broaden the concept of harassment to cover gender identity and expression; address the remote work environment; offer additional examples and guidance; and provide more comprehensive training. “New York State is taking a tremendous step in modernizing our Sexual Harassment Prevention Model Policy to ensure that every worker has equitable access to resources that will foster safe and inclusive work environments,” said Hochul in the press release announcing the revisions. “Now, thanks to the efforts of the Department of Labor and feedback from countless New Yorkers, these policy changes and resources will help businesses adapt their policies to the modern workplace and solidify New Yorkʼs standing as a national leader for worker protection.” This article discusses the most significant changes to the policy and training materials, with commentary from Evandro C. Gigante, partner at Proskauer. See “New York State Releases Final Anti-Sexual Harassment Model Policy and Training Materials” (Nov. 15, 2018).

Opportunities and Challenges in ESG and Impact Investing for Alternative Asset Managers and Investors (Part Two of Two)

The popularity of funds that address environmental, social and governance (ESG) issues in some way continues to rise. Still, there are many challenges for alternative asset managers and investors in the space. Preqin recently hosted a webinar to present key findings from its ESG in Alternatives 2023 report and to provide insights from industry experts on the issues raised in the report. The program commenced with summative insights from Rachel Dabora, research insights analyst at Preqin, and the panel discussion was moderated by Soojin Kim, assistant vice president and head of ESG research at Preqin. The panel comprised experts with a range of roles and responsibilities, including Jaclyn Bouchard, executive vice president, head of ESG solutions and corporate responsibility at Preqin; Yovanka Bylander, head of sustainability, TimesSquare Capital Management; Kirkland & Ellis partner Jennie Morawetz; and Michael Viehs, global head of sustainable investing, Partners Capital. This second article in a two-part series discusses the rising popularity of ESG funds and impact investing in the alternative asset management industry. It explores issues such as greenwashing, regulatory developments, reporting challenges and the evolving landscape of ESG investing, including the potential clash with anti-ESG movements and the regulatory efforts to address these concerns. The first article explores the intricacies of fundraising and pivotal themes shaping the ESG landscape, including the dominance of PE; the impact of the Inflation Reduction Act of 2022; and considerations such as climate adaptation, biodiversity, human rights and diversity, equity and inclusion within the ESG environment. For additional insights from Morawetz, see our two-part series on mitigating climate risk: “Advantages to PE Firms Pursuing Climate Risk Programs and Pitfalls to Avoid” (Jun. 30, 2020); and “Solutions for PE Firms to Develop a Physical Climate Risk Program” (Jul. 14, 2020).

Dechert Welcomes New Private Equity Partner in London

Dechert has announced the addition of leading private equity fund lawyer Sam Kay as a partner in its financial services and investment management practice in London. He specializes in fund formation, representing private funds and asset managers throughout the private equity, private debt/credit, infrastructure and real estate industries. For insights from Dechert, see “What Fund Managers Should Know About the FTC’s Proposed Ban on Non‑Compete Provisions” (Jun. 1, 2023).

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